CBIC responses to… …EC consultation on covered bonds …Harmonised Transparency Template Richard Kemmish Consulting Limited
EC consultation – key messages in CBIC response Key messages • Commission must be careful not to needlessly disrupt a well functioning market • Different covered bonds reflect different underlying risk characteristics and it is the job of the market to identify and price these risks appropriately • Only eliminate risk due to differences between regimes • not risks that are a function of the underlying assets or commercial models
Did pricing converge, is that a sign of market fragmentation? Fragmentation = failure? • Fragmentation between markets, not between different classes of covered bonds • Strength of covered bond regimes ..was a mitigant of widening sovereign risk • Weaknesses in covered bond regimes per se not a reason for spread widening
Are there borders… No. And no but there should be. • To cross border investment? • Largest barrier is client investment mandates • To cross border cover pools • Strong concerns about desirability of cross-border pools • Preference for one country – one pool model • Concerns about issuer ‘free option’
Should we have a more integrated framework Yes, with substantial concerns • There are potential benefits • But Commission shouldn’t water down existing frameworks • Stability of frameworks is important • There can be no balance between different measures either • Better liquidity is not a substitute for collateral. Or visa versa.
Which option is best for convergence? Opinions diverged • Opinion 1: voluntary non-legislative based measures • market forces would apply eg, adoption of EBA guidelines • investor side rules, would enhance convergence • Opinion 2: anything purely voluntary is too weak • Unanimous opinion: 29 th regime wouldn’t work • Directive specifying strong minimum standards? • Consultation paper contains too little information on the details of the two options for investors to make firm judgements
New legal definition? To replace UCITS 52(4) • Definitions should be bought into line wherever possible • Drop the ‘EEA - only’ criteria as long as • ‘equivalence’ (= EBA’s best practice guidelines, • comparability of the underlying assets with CRR 129(7) and • ease of valuation • emerging markets cb eligible subject to the quality of regime and supervision.
Do you agree with definitions of eligible assets Yes, with safeguards • Transparency is more important than a strict criteria • Loans in arrears shouldn’t be eligible at inception • but we should stuill have a claim over them • Impossible to have common valuation rules across Europe • But rules should conform to article 208 • Ships and aircraft – different opinions
Views on coverage and over-collateralisation rules Yes, with safeguards • National specificities important • Some investors expressed preference for nominal basis for coverage • Collateralisation tests ‘post - stress test’ create a potential double count with supervisory stress tests • Support for pool specific over-collateralisation to be set by regulator • Vital that regime recognises ‘voluntary’ over -collateralisation
Some other questions And also • Are market-led initiatives such as the "Covered Bond Label" sufficient? • Label is a very important step forward • Will only succeed with further help from regulatory bodies • Is treatment of other collateralised instruments fair? Different opinions, but kudos to STS initiative
CBIC responses to… …Harmonised Transparency Template
Strong support for harmonised transparency template Ongoing process since 2012 • Investors very supportive of harmonised transparency template • Used in initial decisions and due diligence • Accessibility, timeliness and integrity of information all commended • Not enough of them • Suggestions for HTT 2.0 • Greater transparency of definitions • Links / details on key contractual terms • Audit trail of changes to pool • More information on relatied counterparties (eg swap providers) • More information on substitute assets
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