Estionian Covered Bonds

1 Who is the issuer?
  • Universal credit institution with a special license
  Comments: Company, that has obtained authorisation of credit institution and additional license from Estonian Financial Supervision Authority (the EFSA) to issue covered bonds.
2 Does the bondholder have recourse to the credit institution?
  • Yes, direct
3 Who owns the cover assets?
  • The issuer directly
4 Is the issuer the originator of the assets?
  • Yes
  Comments: However, assets could also be obtained
1 Are the bonds governed by a special covered bond Legislation?
  • Yes
2 What is the legal framework for bankruptcy of the issuer of covered bonds?
  • Specific legal framework superseding the general insolvency law
  Comments: Segregation of cover assets from the other assets of the issuer - cover pool is not part of issuer's bankruptcy estate

Global comments for this chapter

In case the issuer is declared bankrupt a covered bond portfolio shall be considered to be separated from the other assets of the issuer. A cover pool shall not be part of the issuer’s bankruptcy estate and a moratorium shall not extend to a covered bond portfolio. After the separation of a covered bond portfolio, an independent pool of designated assets is formed, in which the cover pool and the proceeds received therefrom can only be used to satisfy the claims of the holders of the respective type of covered bonds and of the counterparty to the derivative instrument entered in the corresponding cover register and to cover the expenses related to the management of the covered bond portfolio.
1 What types of assets may be included in cover pools?
  • Mortgage loans (Mortgage loans for the purpose of this question are taken to include guaranteed real-estate loans.)
  Comments: Types of primary cover assets which may be included in cover pools depend on type of covered bond: it differentiates regarding mortgage cover bonds and mixed covered bonds. List of substitute collateral which may be included in cover pools is the same regardless of the type of covered bond.

Primary cover assets for mortgage covered bonds: issuer's claims arising from a credit granted to a natural person against a mortgage that is established on residential property situated in the territory of European Economic Area (EEA) country.

Primary cover assets of mixed covered bond: issuer's claims arising either from (i) mortgage credit; (ii) housing construction credit; (iii) commercial mortgage credit; (iv) credit granted to or debt securities issued by an EEA country; (v) credit granted to or debt securities issued by a regional government or local authority of an EEA country (vi) credit granted to or debt securities issued by an EEA country's legal person governed by public law; (vii) credit or debt securities guaranteed by an EEA country or a regional governemnt or local authority of an EEA country.

In addition to primary cover asset, there are list of collateral, which can be used as substitute collateral: (i) claims on or guaranteed by central banks within the European System of Central Banks, and central governments, public sector entities, regional governments or local authorities of the Member States of the EU; (ii) claims on or guaranteed by third-country central governments and central banks, multilateral development banks and international organisations that qualify for the credit quality step 1 ; (iii) claims on or guaranteed by third-country public sector entities, regional governments and local authorities, for which a risk weight has been assigned the same way as for claims on credit institutions and investment firms or central governments and central banks and which qualify for the credit quality step 1 according to the risk weight so assigned; (iv) claims specified in p-s 2) and 3), which qualify as a minimum for the credit quality step 2, provided that they do not exceed 20% of the nominal value of the outstanding covered bonds in the covered bond portfolio that they cover; (v) claims on credit institutions and investment firms, which qualify for the credit quality step 1, provided that they do not exceed 15% of the nominal value of the outstanding covered bonds in the covered bond portfolio that they cover; (vi) claims on credit institutions and investment firms in the EU with a term to maturity not exceeding 100 days, which qualify as a minimum for the credit quality step 2, provided that they do not exceed 15% of the nominal value of the outstanding covered bonds in the covered bond portfolio that they cover; (vii) net claims arising from derivative instruments that meet the conditions provided by law, which cannot be treated as the claims specified in p-s 5) or 6), provided that they do not exceed 12% of the nominal value of the outstanding covered bonds in the covered bond portfolio that they cover.
2 What is the geographical scope for public sector assets?
  • EEA
  • CH
  • USA, Canada, Japan
  • OECD
  • NZ AUS
  Comments: Certain types of collateral may originate from EU countries (e.g. claims on or guaranteed by central banks within the or, and central governments, public sector entities, regional governements or local authorities of the Member States of the EU.

Some substitute collateral may also originate from third countries. Such collateral types include: (i) claims on or guaranteed by third-country central governments and central banks, multilateral development banks and international organisations that qualify for the credit quality step 1 ; (ii) claims on or guaranteed by third-country public sector entities, regional governments and local authorities, for which a risk weight has been assigned the same way as for claims on credit institutions and investment firms or central governments and central banks and which qualify for the credit quality step 1 according to the risk weight so assigned; (iii) claims specified in p-s 2) and 3), which qualify as a minimum for the credit quality step 2, provided that they do not exceed 20% of the nominal value of the outstanding covered bonds in the covered bond portfolio that they cover.
3 What is the geographical scope for mortgage assets?
  • EEA
  Comments: Claims, which arise from mortgage that is established on a property situated in the EEA country.
4 Are regular covered bond specific disclosure requirements to the public mandatory?
  • Yes
  Comments: In addition to the disclosure obligation arising from other legislation, an issuer must disclose information about covered bond portfolios once a quarter. Information about the first 3 quarters of a year must be disclosed within 1 month of the end of the respective quarter. Information about the fourth quarter must be disclosed within 2 months of the end of the quarter. The disclosed information must be available on the issuer’s website about at least the last 5 years.
1 LTV is calculated using which valuation?[4]
  • Market value
2 Are there any special LTV limits used solely for calculating collateralisation rates for the cover pool (if yes, specify)?
3 Do bondholders get the benefit of that portion of the loan which exceeds the LTV cap?
  • Yes
4a Is there an LTV cap which makes the entire loan ineligible to be put in the cover pool (if yes, specify)?
  • No
4b Is there an LTV cap which would require a loan to be removed from the cover pool?
  • No
5 Is there any additional LTV limit on a portfolio basis?
  • No
Exposure to market risk
1 Is exposure to market risk (e.g. interest rate, currency risks) required to be mitigated by law or contract?
  • Yes
  Comments: """Natural"" matching
Derivative hedge instruments
Stress testing"
2 What is the primary method for the mitigation of market risk?
  • Use of derivative hedge instruments
  Comments: Derivative hedge instruments are entered into cover pool
3 If the answer to the above question on market risk mitigation is “Use of derivative hedge instruments”, please specify whether those instruments are entered into:
  • By the time of issue of covered bonds or entry of asset in the cover pool
4 What type of coverage test is applied?
  • Nominal cover
  • Present value cover
5 What is the frequency of coverage calculations?
  • Daily
6 What types of stress scenarios are applied?
  • Not relevant
  Comments: The internal rules of an issuer shall determine the procedure and methodology for stress testing of covered bond portfolios;
7 What is the frequency of stress test calculations?
  • Quarterly
Exposure to liquidity risk
8 Is exposure to liquidity risk required to be mitigated by law or contract?
  • Yes
9 What is the primary method for the mitigation of liquidity risk on interest payments?
  • “Natural” matching (matching without the use of off-balance sheet instruments) and stress testing (Natural matching is taken to include replacing CBs with new issues, as well as substitute assets.)
10 What is the primary method for the mitigation of liquidity risk on principal payments?
  • Natural matching (matching without the use of off-balance sheet instruments) and stress testing
11 Is there any grace period in case of a breach of liquidity risk mitigants?
  • No
12 What is the consequence of not fixing a breach of liquidity risk mitigants?
  • Other regulatory or rule-based action
Monitoring of exposures to market and liquidity risk
13 Who monitors the maintenance of coverage tests?
  • Supervisory authority
14 Are there any regular public reporting requirements for market and liquidity risk?
  • Yes
Overcollateralisation
15 Is mandatory minimum overcollateralisation required?
  • Other
16 What is the level of minimum mandatory overcollateralisation?
  Comments: The present value of the cover pool shall exceed the liabilities covered by at least two per cent or the nominal value of the cover pool shall exceed the nominal value of all the covered bonds of the same type by at least five per cent.
17 If mandatory overcollateralisation is required, are the amounts above the minimum OC level protected?
  • Yes
  Comments: All assets in the cover pool are protected in the same way.
18 Is there any grace period in case of a breach of the coverage test?
  • No
19 What is the consequence of not fixing a breach of the coverage test?
  • Other regulatory or rule-based actions
1 Is a special license required for the issuing of covered bonds?
  • Yes with additional requirements compared to general banking supervision regulations
2 Are there special reporting duties of the covered bond issuer to the supervision authority concerning covered bonds and the cover pool, which go beyond the regular banking supervision?
  • Periodic reporting required
3 What is the role of the banking supervision regarding covered bonds?
  • To check whether eligibility criteria are fulfilled and documented
  Comments: To check whether eligibility criteria are fulfilled and documented, checking quality of cover assets (real estate valuations, etc), monitoring of exposure to market risk and liquidity risk, evaluation of operational risk
4 Is there a special role of banking supervision in crisis regarding covered bonds?
  • Safeguarding ongoing management of the cover pool directly or via a special administrator
  Comments: Safeguarding ongoing management of the cover pool (e.g. making a proposal for appointment of cover pool administrator in case of insolvency of issuer, filing a bankruptcy petition in respect of a separated covered bond portfolio.
Involvement in transfer of cover assets and covered bonds to another credit institution
5 Is there a cover pool monitor independent from the issuer?
6 If there is an independent cover pool monitor, what are its duties?
  • Other, please specify:      
  Comments: The duties of the cover pool monitor include veryfying:
1) the compliance of stress testing of a covered bond portfolio and the changes introduced to the covered bond portfolio as a result of stress testing with requirements;
2) the existence of a sufficient cover pool and its compliance with requirements;
3) the compliance of the maintenance of the cover register with requirements;
4) the compliance of the valuation of immovable properties encumbered with a mortgage securing credit and included in the cover pool with requirements;
5) the compliance of the issuer’s risk management and reporting with requirements;
6) the compliance of the terms and conditions of covered bonds with requirements.

The monitor is required to notify the Financial Supervision Authority, immediately of any circumstances or decisions that have come to the knowledge of the monitor and that result or may result in:
1) a material violation of the laws and regulations governing the activities of the issuer;
2) a material violation of the conditions under which the additional authorisation was granted;
3) a situation, or the risk of a situation arising, in which the issuer is unable to meet its financial or other obligations arising from covered bonds and from the derivative instruments entered in the cover register.
1 Do covered bonds automatically accelerate when the credit institution goes insolvent?
  • No
2 What is the cover pool?
  Comments: The set of cover assets entered in the cover register for the coverage of covered bonds of the same type constitutes a cover pool. 
3 How are the covered bondholders protected against claims from other creditors in case of insolvency of the issuer?
  Comments: Cover assets entered into cover register are protected from claims of other creditors in case of insolvency of the issuer. A cover pool is not part of the issuer’s bankruptcy estate and a moratorium does extend to a covered bond portfolio. After the separation of a covered bond portfolio after the issuer of covered bonds have been declared bankrupt, an independent pool of designated assets is formed, in which the cover pool and the proceeds received therefrom can only be used to satisfy the claims of the holders of the respective type of covered bonds and of the counterparty to the derivative instrument entered in the corresponding cover register and to cover the expenses related to the management of the covered bond portfolio.
4 Is there recourse to the credit institution’s insolvency estate upon a cover pool default?
  Comments: Yes, to the extent that it is not possible to satisfy claims arising from covered bonds and from the derivative instruments entered in the cover register in the bankruptcy proceedings concerning the covered bond portfolio, a creditor shall have the right to file claims, to the extent not satisfied, against the issuer pursuant to the general procedure, including in bankruptcy proceedings.
5 Are there provisions that require derivatives to continue in case of insolvency of the credit institution?
  • Yes
  Comments: A cover pool shall not be part of the issuer’s bankruptcy estate. After the separation of a covered bond portfolio, an independent pool of designated assets is formed, in which the cover pool and the proceeds received therefrom can only be used to satisfy the claims of the holders of the respective type of covered bonds and of the counterparty to the derivative instrument entered in the corresponding cover register and to cover the expenses related to the management of the covered bond portfolio.
6 If derivatives are permitted in the cover pool, what is their ranking?
  Comments: Claims arising from covered bonds and derivative instruments shall have the same ranking and shall be satisfied before the claims of other creditors.
1 Does the covered bond fulfil the criteria of UCITS 52(4)?
  • Yes
2 For further information regarding the compliance to the criteria of Article 129 of the Capital Requirements Regulation (CRR), please see the following links: http://ecbc.hypo.org/Content/default.asp?PageID=504#position https://www.coveredbondlabel.com
3 Are listed covered bonds eligible in repo transactions with the national central bank?
  • Yes
  Comments: Yes. Estonian Investment Funds Act prescribes that the assets of a UCITS may be invested in covered bonds up to the extent of 25 per cent of the value of the assets of such fund provided that certain preconditions as stipulated in the law are being followed.
4 Are there any special investment regulations regarding covered bonds?
  • Yes
  Comments: Estonian Investment Funds Act prescribes that the assets of a UCITS may be invested in covered bonds up to the extent of 25 per cent of the value of the assets of such fund provided that certain preconditions as stipulated in the law are being followed.
1 Link to National Association representing covered bond interests
  • Association
2 Link to national regulators and supervisors
  • List

    https://www.fi.ee/en

3 Fact Book Country Chapter
  • Chapter
4 Hypostat Country Chapter
  • Chapter