Regulated Covered Bonds
United Kingdom Issuers - Legislation
| 1 | Who is the issuer? |
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| Comments: Authorised Credit Institution |
| 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 transferred to an SPE; however they remain on the issuer’s balance sheet under IFRS. SPE is, generaly, a Limited Liability Partnership (LLP) |
| 4 | Is the issuer the originator of the assets? |
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| Comments: Nearly all Regulated cover pools are made up of UK residential mortgages originated by the issuer or a subsidiary. However the Covered Bond Law allows acquired assets to be included in the cover pool as well. |
| 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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| Comments: The Covered Bond Law amends certain provisions of the general insolvency law |
| 1 | What types of assets may be included in cover pools? |
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| Comments: RMBS are not allowed in the cover pool unless they are (a) AAA-rated and (b) they are originated by a UK credit institution which is an affiliate of the issuer |
| 2 | What is the geographical scope for public sector assets? |
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| Comments: “Other” refers to Channel Islands and Isle of Man |
| 3 | What is the geographical scope for mortgage assets? |
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| Comments: “Other” refers to Channel Islands and Isle of Man |
| 4 | Are regular covered bond specific disclosure requirements to the public mandatory? |
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| Comments: All issuers are required to publish investor reports monthly or quarterly under their programme documents. |
| 1 | LTV is calculated using which valuation?[4] |
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| Comments: All Regulated Covered Bond programmes use market value at origination, subject to partial indexation. If prices go up, the property value is increased by 85% of the increase. If they go down, the value is reduced by 100% of the decrease. |
| 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: Residential 60%, 75%, 80% Commercial 60%, 70% Ships 60% Residential LTV limits: The Covered Bond Law prescribes a maximum of 80% LTV, which is the limit under the CRD, however issuers may prescribe stricter limits in their programme documents. All Regulated Covered Bonds have prescribed a 75% LTV limit, with the exception of the Bank of Scotland, which has a limit of 60%. Commercial and Ship Mortgages: These are eligible assets under the Covered Bond Law and are subject to the LTV limits set out in the Capital Requirements Directive and listed above. Commercial and Ship mortgages are not eligible under any existing Regulated Covered Bond Programme. |
| 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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| 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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| 2 | What is the primary method for the mitigation of market risk? |
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| 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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| 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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| 9 | What is the primary method for the mitigation of liquidity risk on interest payments? |
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| Comments: Under the Covered Bond Law, the issuer is required to stress test the cover pool to demonstrate that the cover pool is capable, at all times, of covering all claims attaching to the covered bonds. Stress tests are conducted using a model agreed with the regulator. In addition, all Regulated Covered Bond programmes require the issuer to establish a reserve fund, equal to one month’s interest payments on the covered bonds plus one month’s cover pool administration expenses plus £600,000, if the issuer’s ratings fall below A-1+ / P-1 / F1+ |
| 10 | What is the primary method for the mitigation of liquidity risk on principal payments? |
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| Comments: Under the Covered Bond Law, the issuer is required to stress test the cover pool to demonstrate that the cover pool is capable, at all times, of covering all claims attaching to the covered bonds. Stress tests are conducted using a model agreed with the regulator. In addition, all Regulated Covered Bond programmes use either a pre-maturity test (requiring the issuer to cash-collateralise hard bullet maturities six months before maturity if the issuer is rated below A-1+ / P-1 / F1+) or a one-year maturity extension. |
| 11 | Is there any grace period in case of a breach of liquidity risk mitigants? |
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| Comments: All breaches must be notified to the regulator immediately and in writing, together with a proposal Detailing how the breach will be rectified. The grace period will be at the discretion of the regulator. Contractual arrangements are subject to grace periods generally lasting from 10 to 30 days. A breach of the pre-maturity test must be rectified within 10 business days, for example. |
| 12 | What is the consequence of not fixing a breach of liquidity risk mitigants? |
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| Comments: All of the above are possible consequences. In this case, “alternative administration” means that the administration of the cover pool may be taken over by a substitute servicer or trustee. |
| Monitoring of exposures to market and liquidity risk |
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| 13 | Who monitors the maintenance of coverage tests? |
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| 14 | Are there any regular public reporting requirements for market and liquidity risk? |
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| 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: The actual amount varies from programme to programme |
| 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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| 19 | What is the consequence of not fixing a breach of the coverage test? |
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| Comments: All of the above are possible consequences of a breach |
| 1 | Is a special license required for the issuing of covered bonds? |
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| Comments: The issuer must satisfy the regulator that its programme complies with the regulations before being admitted to the register of Regulated Covered Bond issuers. |
| 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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| Comments: The issuer must provide the regulator with cover pool data on a quarterly basis. It must also notify the regulator prior to each issue, and immediately upon the occurrence of any breach in the asset capability requirement stress tests. |
| 3 | What is the role of the banking supervision regarding covered bonds? |
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| 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 cover pool monitor is typically the issuer’s auditor] [is this the case for all UK issuers?] |
| 6 | If there is an independent cover pool monitor, what are its duties? |
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| Comments: The cover pool monitor does not have any obligation to report directly to the regulator, however the issuer is required to provide the regulator with the cover pool monitor’s pool audits and other reports |
| 1 | Do covered bonds automatically accelerate when the credit institution goes insolvent? |
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| Comments: If a covered bond issuer becomes insolvent, the covered bond trustee will have a claim against the issuer on an accelerated basis. Any proceeds received from this claim will be combined with the proceeds from the cover pool to make the originally scheduled payments of interest and principal on the bonds. |
| 2 | What is the cover pool? |
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| Comments: Under the Covered Bond Law, the assets in the cover pool are those which are (a) transferred to the SPE and (b) recorded on a list maintained by the issuer and provided to the regulator |
| 3 | How are the covered bondholders protected against claims from other creditors in case of insolvency of the issuer? |
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| 4 | Is there recourse to the credit institution’s insolvency estate upon a cover pool default? |
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| 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. |
| 6 | If derivatives are permitted in the cover pool, what is their ranking? |
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| 1 | Does the covered bond fulfil the criteria of UCITS 22(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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| Comments: Yes AND No. The Covered Bond Law allows covered bonds to be backed by certain assets (e.g. exposures to UK housing associations) which are not listed in the CRD. However, all of the UK Regulated Covered Bond programmes are backed by residential mortgages and are CRD-compliant. |
| 3 | Are listed covered bonds eligible in repo transactions with the national central bank? |
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| 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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