Canadian Covered Bonds
Canada Issuers - Legislation
| 1 | Who is the issuer? |
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| Comments: [Issuers are currently all OSFI (Office of the Superintendent of Financial Instituitons) regulated Canadian financial institutions] |
| 2 | Does the bondholder have recourse to the credit institution? |
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| 3 | Who owns the cover assets? |
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| Comments: The cover assets are sold to a bankruptcy remote, special purpose entity – the Guarantor. The Guarantor is typically consolidated on the Issuer's balace sheet |
| 4 | Is the issuer the originator of the assets? |
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| Comments: All issuers are required to publish rating agency and investor reports monthly or quarterly under their programme documents. |
| 1 | Are the bonds governed by a special covered bond Legislation? |
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| 2 | What is the legal framework for bankruptcy of the issuer of covered bonds? |
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| 1 | What types of assets may be included in cover pools? |
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| Comments: The Canadian covered bond programs can, and in certain cases currently do include either a portion or 100% Canadian government insured residential mortgages. Canadian dollar denominated residential mortgage backed securities and short term provincial and federal bonds and money market securities can form part of the cover pool as substitute assets / authorized investments, up to a maximum of 10% of the C$ equivalent of the outstanding Covered Bonds |
| 2 | What is the geographical scope for public sector assets? |
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| Comments: Canada only |
| 3 | What is the geographical scope for mortgage assets? |
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| Comments: Canada Only |
| 4 | Are regular covered bond specific disclosure requirements to the public mandatory? |
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| Comments: All issuers are required to publish rating agency and investor reports monthly or quarterly under their programme documents. |
| 1 | LTV is calculated using which valuation?[4] |
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| Comments: LTV calculated based on appraised market value at origination. Indexing is not factored into the ACT calculation |
| 2 | Are there any special LTV limits used solely for calculating collateralisation rates for the cover pool (if yes, specify)? |
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| Comments: For the purposes of the Asset Coverage Test a maximum of 80% LTV (uninsured mortgages) and 90% LTV (insured mortgages) is factored into the calculation of the Adjusted Aggregate Loan Amount |
| 3 | Do bondholders get the benefit of that portion of the loan which exceeds the LTV cap? |
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| 4a | Is there an LTV cap which makes the entire loan ineligible to be put in the cover pool (if yes, specify)? |
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| Comments: There is no LTV cap on loans that can be included in the pool, however the LTV cap applies when calculating the Asset Coverage Test |
| 4b | Is there an LTV cap which would require a loan to be removed from the cover pool? |
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| 5 | Is there any additional LTV limit on a portfolio basis? |
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| Exposure to market risk |
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| 1 | Is exposure to market risk (e.g. interest rate, currency risks) required to be mitigated by law or contract? |
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| Comments: By contract |
| 2 | What is the primary method for the mitigation of market risk? |
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| Comments: Interest rate and exchange rate swaps |
| 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: |
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| Comments: Both the interest rate and exchange rate swaps are signed at closing. Cash flows are exchanged under the interest rate swap immediately. Cash flows under the exchange rate swap are only exchanged following an Issuer Event of Default |
| 4 | What type of coverage test is applied? |
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| 5 | What is the frequency of coverage calculations? |
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| 6 | What types of stress scenarios are applied? |
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| 7 | What is the frequency of stress test calculations? |
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| Exposure to liquidity risk |
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| 8 | Is exposure to liquidity risk required to be mitigated by law or contract? |
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| Comments: By contract |
| 9 | What is the primary method for the mitigation of liquidity risk on interest payments? |
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| Comments: The issuer is required to stress test the cover pool in determining the Asset Percentage which ensures the cover pool is adequate, at all times, to cover all claims attaching to the outstanding covered bonds. The rating agencies ensure the Asset Percentage determined is adequate to maintain the current rating of the covered bonds In addition, a reserve fund is required to be funded by the Guarantor following a downgrade of the Issuer below A-1+(S&P), P-1(Moody’s), F1(Fitch) or R-1(middle)/A(high) (DBRS) |
| 10 | What is the primary method for the mitigation of liquidity risk on principal payments? |
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| Comments: The issuer is required to stress test the cover pool in determining the Asset Percentage which ensures the cover pool is adequate, at all times, to cover all claims attaching to the outstanding covered bonds. The rating agencies ensure the Asset Percentage determined is adequate to maintain the current rating of the covered bonds In addition, the outstanding Canadian covered bonds have soft bullet maturities, which allow for a twelve month extension. Hard bullet covered bonds can currently be issued under one program, which incorporates a pre-maturity test. This requires the issuer to cash-collateralise hard bullet maturities six months before maturity if a ratings trigger is breached |
| 11 | Is there any grace period in case of a breach of liquidity risk mitigants? |
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| Comments: If the Asset Coverage Test is not met on a calculation date, an ACT Breach Notice is served to the Issuer. If the Issuer fails to cure the ACT breach by transferring additional cover assets or cash to the Guarantor by the following calculation date, an Issuer Event of Default occurs. in addition, default by the Issuer on any other obligation under the covered bonds for more than 30 days constitutes an Issuer Event of Default |
| 12 | What is the consequence of not fixing a breach of liquidity risk mitigants? |
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| Comments: The above items are all possible consequences of a breach |
| Monitoring of exposures to market and liquidity risk |
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| 13 | Who monitors the maintenance of coverage tests? |
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| Comments: An independent audit firm (the Asset Monitor) will test the calculation of the ACT performed by the Issuer (as Cash Manager) on an annual basis. However, if the rating of the Cash Manager has been downgraded below the trigger level stipulated by the rating agencies or if an ACT Breach Notice has been served on the Issuer and not yet revoked, the Asset Monitor will test the calculation on a monthly basis, until the situation is resolved. In addition, if the test reveals an error in the ACT calculation, the Asset Monitor will test the calculation monthly for a period of six months. The rating agencies confirm that the asset percentage applied in calculating the ACT is adequate to maintain the rating of the covered bonds |
| 14 | Are there any regular public reporting requirements for market and liquidity risk? |
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| Comments: The investor and rating agency reports typically outline the calculation of the ACT and the level of coverage available |
| Overcollateralisation |
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| 15 | Is mandatory minimum overcollateralisation required? |
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| 16 | What is the level of minimum mandatory overcollateralisation? |
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| Comments: All four existing programs have stipulated a maximum Asset Percentage of 97%, which ensures a minimum overcollateralisation of at least 3% |
| 17 | If mandatory overcollateralisation is required, are the amounts above the minimum OC level protected? |
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| 18 | Is there any grace period in case of a breach of the coverage test? |
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| Comments: If the Asset Coverage Test is not met on a calculation date, an ACT Breach Notice is served to the Issuer. If the Issuer fails to cure the ACT breach by transferring additional cover assets or cash to the Guarantor by the following calculation date, an Issuer Event of Default occurs. |
| 19 | What is the consequence of not fixing a breach of the coverage test? |
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| Comments: The above items are all possible consequences of a breach |
| 1 | Is a special license required for the issuing of covered bonds? |
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| Comments: No specific license is required, however all the existing Issuers are regulated by OSFI and as such are required to comply with the maximum issuance limit stipulated by OSFI - currently 4% of total assets |
| 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? |
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| 3 | What is the role of the banking supervision regarding covered bonds? |
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| Comments: Issuers are currently limited by OSFI to issuance up to 4% of total assets |
| 4 | Is there a special role of banking supervision in crisis regarding covered bonds? |
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| 5 | Is there a cover pool monitor independent from the issuer? |
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| Comments: The Issuer’s audit firm typically acts as the Asset Monitor |
| 6 | If there is an independent cover pool monitor, what are its duties? |
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| Comments: Collateral audits are typically performed prior to filing the initial base shelf prospectus and may be performed on renewal of the programs erification of ACT performed annually unless a ratings trigger is breached or an error is made in the calculation, in which case calculations are checked monthly |
| 1 | Do covered bonds automatically accelerate when the credit institution goes insolvent? |
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| Comments: The Guarantor will continue to service the cover pool and make the required payments due under the covered bonds. The Guarantor may sell the assets in the covered pool as required |
| 2 | What is the cover pool? |
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| 3 | How are the covered bondholders protected against claims from other creditors in case of insolvency of the issuer? |
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| Comments: A legal true sale of the assets to the bankrupcy remote Guarantor. |
| 4 | Is there recourse to the credit institution’s insolvency estate upon a cover pool default? |
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| Comments: Recourse for any shortfalls on outstanding covered bonds not covered by the Cover Pool |
| 5 | Are there provisions that require derivatives to continue in case of insolvency of the credit institution? |
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| Comments: The SPE which holds the cover assets enters into all derivatives directly. The swap counterparty at closing is the Issuer. The Issuer is required to post collateral following downgrade below stipulated ratings levels. Upon further downgrade, the Issuer is required to be replaced as swap counterparty |
| 6 | If derivatives are permitted in the cover pool, what is their ranking? |
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| Comments: The interest rate swap is senior to CB holders. The exchange rate swap is pari-passu, once cash flows start flowing under this swap (following an Issuer Event of Default) |
| 1 | Does the covered bond fulfil the criteria of UCITS 52(4)? |
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| 2 | Does the covered bond legislation completely fall within the criteria of the Annex VI, Part 1, Paragraph 68 (a) to (f) of the Capital Requirements Directive (CRD)? |
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| 3 | Are listed covered bonds eligible in repo transactions with the national central bank? |
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| Comments: The Euro denominated Covered Bonds are eligible to be used as collateral in repo transactions with the ECB, however are not eligible for repo transactions with the Bank of Canada as they are not C$ denominated |
| 4 | Are there any special investment regulations regarding covered bonds? |
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| 1 | Link to National Association representing covered bond interests |
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| 2 | Link to national regulators and supervisors |
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| 3 | Fact Book Country Chapter |
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| 4 | Hypostat Country Chapter |
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