Covered Bonds : The final step of the CB framework harmonization

On April 1 st , the European Parliament’s ECON Committee voted the final compromise texts regarding the proposed regulation and Directive on a harmonized Covered Bond framework in the European Union, thus providing the approval of the council of the European Union. According to the ECBC (European Covered Bond Council), the Parliament will then consider the final text during the 15-18 April 2019 Plenary session. We understand that no further amendment shall be added to these texts. The Directive: Proposes a common definition of Covered Bond which will represent a consistent reference for prudential regulation purposes; Defines the structural features of the instrument; Defines the tasks and responsibilities for the supervision of covered bonds; Sets out the rules allowing the use of the “European Covered Bond” label. Transposition period: Member States have up to 18 months to transpose the Directive into national law and another 12 months to comply with this new law. Grandfathering: Covered Bonds issued before the publication of the Directive +1 day are not subject to the re quirements set out in the Directive and may continue to be referred to as covered bonds in accordance with this Directive until their maturity. Tap issues of Covered Bonds for which the ISIN is created before the date of the publication of the Directive for up to 24 months can be allowed subject to conditions (maturity max 5Y, issue size max €6bn, collateral assets located in the EU). The main changes that national frameworks have to implement are the following features: Liquidity Buffer : The cover pool must include at all times a liquidity buffer composed of liquid assets available to cover the net liquidity outflow of the covered bond programme. The cover pool liquidity buffer shall cover the maximum cumulative net liquidity outflow for 180 calendar days. Extendable maturity structures: With regard to covered bonds involving soft bullet and conditional pass through amortization structures, the Directive sets new rules and conditions. Overcollateralization: Covered Bonds shall be subject to a minimum level of 5% of overcollateralization. Member States may apply a lower level of OC (2%) under conditions. Labelling: Covered Bonds fulfilling the requirements of the directive can use the label “European Covered Bond” and the ones complying with the directive and the amended Article 129 of the regulation can use the label “European Covered Bond (Premium)”. Third country regime: By two years after the publication of the directive, the European Commission and the EBA shall submit a report on whether an equivalence regime could be introduced for third country credit institutions issuing covered bonds and for investors in those covered bonds. Spain: Most countries will be in line with the Directive and the Regulation with the exception of Spain, where the framework would need several changes once the Directive and regulation is implemented. We consider that the harmonization of covered bond frameworks in the European Union will definitely improve the quality of the covered bond product, increasing the transparency for covered bondholders.