Regulated Covered Bonds - RCB

1 Who is the issuer?
  • Universal credit institution with a special license
  Comments: Only deposit-taking institutions with headquarters in the UK can become issuers of Regulated Covered Bonds and the Special Purpose Vehicle SPV (SPE) holding the cover pool must also be based in the UK.
2 Does the bondholder have recourse to the credit institution?
  • Yes, direct
3 Who owns the cover assets?
  • SPE which guarantees the covered bonds
  Comments: The cover assets are transferred to an SPV (SPE); however they remain on the issuer’s balance sheet under IFRS. The SPV is, generally, a Limited Liability Partnership (LLP).
RCB regulations provide for the full segregation of the assetpool from the issuer in a separate legal entity (the SPV) on which bond holders have a priority claim if the issuer becomes insolvent.
4 Is the issuer the originator of the assets?
  • Yes
  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.

Global comments for this chapter

In the event that the issuer of the Regulated Covered Bond defaults on its obligations to covered bond holders or becomes insolvent, the asset pool becomes static and the SPV takes responsibility for administering the asset pool to continue to make payments to bondholders on the agreed dates.
1 Are the bonds governed by a special covered bond Legislation?
  • Yes
  Comments: The Regulated Covered Bond (RCB) regime is based on dedicated legislation i.e. the Regulated Covered Bond Regulations 2008 and subsequent amendments.

RCB issuers are subject to an extensive initial application process and regular stress testing and supervisory monitoring of their Regulated Covered Bond programmes by the Regulator (FCA),independent of issuer‘s own stress testing and any rating agency scrutiny.

The Regulator has a wide range of enforcement powers to ensure issuers comply with the Regulations, including the power to issue directions, for example to add assets into the asset pool, which are enforceable by the courts.
2 What is the legal framework for bankruptcy of the issuer of covered bonds?
  • General insolvency law
  • Specific legal framework superseding the general insolvency law
  Comments: The RCB legislation amends certain provisions of the general insolvency law.

Global comments for this chapter

Only eligible property, as defined in RCB legislation, can be used as collateral in Regulated Covered Bond asset pools.

Approval must be sought from the Regulator before any changes can be made to programme that it judges would have a material impact on the programme’s ability to meet the requirements under the Regulations.

RCB Regulations require the assets backing RCB programmes be maintained in a way that ensures “there will be a low risk of default in the timely payment” of the bonds.
1 What types of assets may be included in cover pools?
  • Exposures to public sector entities
  • Mortgage loans (Mortgage loans for the purpose of this question are taken to include guaranteed real-estate loans.)
  Comments: From January 2013 RCB asset pools are designated as being composed of either
(a) a single class of eligible assets or
(b) a mixture of eligible asset classes.
NB: Currently (January 2013) all RCB programmes are single-asset class programmes consisting of Class 2 assets (residential mortgage assets) only.

UK Regulated Covered Bond - Eligible Assets:
(Only eligible property, as defined in RCB legislation, can be used as collateral in Regulated Covered Bond asset pools).
• Class 1 - Public Sector Assets
• Class 2 - Residential Mortgage Assets
• Class 3 - Commercial Mortgage Assets

Securitised assets are not Eligible Assets and are prohibited from inclusion in an RCB asset pool.

Information found at http://www.fca.org.uk/firms/systems-reporting/register/use/other-registers/rcb-register gives details of which asset class an RCB Programme contains.
2 What is the geographical scope for public sector assets?
  • Domestic
  • EEA
  • CH
  • USA, Canada, Japan
  • NZ AUS
  • Other
  Comments: “Other” refers to Channel Islands and Isle of Man.
3 What is the geographical scope for mortgage assets?
  • Domestic
  • EEA
  • CH
  • USA, Canada, Japan
  • NZ AUS
  • Other
  Comments: “Other” refers to Channel Islands and Isle of Man.
4 Are regular covered bond specific disclosure requirements to the public mandatory?
  • Yes
  Comments: As a result of the December 2011 regulatory changes to the RCB regime, a number of public disclosures will be required from issuers from January 2013:
1)The designation of asset pools as composed of either a single class of eligible assets or, alternatively, a mixture of eligible asset classes.
2)The provision of the following information on a secure, subscription-only website:
a)key transaction documents;
b)a link to the latest programme prospectus; and(subsequent to any issuance from an RCB programme after 1st January 2013)
c)characteristics of the asset pool each month; and
d)loan-level information on the asset pool each quarter.
1 LTV is calculated using which valuation?[4]
  • Market value
  Comments: All Regulated Covered Bond programmes use market value at origination, subject to partial indexation. If prices rise, the property value is enhanced by a percentage of that increase. If property prices fall then the property value is diminished by the full amount of that decrease.
2 Are there any special LTV limits used solely for calculating collateralisation rates for the cover pool (if yes, specify)?
  • Residential      
  Comments: Residential LTV limits: The RCB regime 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 currently issued have prescribed a 75% LTV limit, with the exception of the Bank of Scotland, which has a limit of 60%.
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
2 What is the primary method for the mitigation of market risk?
  • Use of derivative hedge instruments
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?
  • Present value cover
  Comments: Also See - General Comment for this section about FCA stress testing.

• Asset Coverage Test;
• Interest Coverage Test; and,
• Overcollateralisation Test.
5 What is the frequency of coverage calculations?
  • Other
  Comments: Monthly, or more frequently.
6 What types of stress scenarios are applied?
  • Dynamic
  Comments: See - General Comment for this section about FCA stress testing.
7 What is the frequency of stress test calculations?
  • Other
  Comments: Also See - General Comment for this section about FCA stress testing.

The Regulator (FCA) monitors each Regulated Covered Bond programme’s ability to meet its obligations and regularly assess each issuer’s fitness to comply with its obligations under the Regulations:
• testing Regulated Covered Bond programmes once aquarter and when a new bond is issued; and,
• conducting stress tests as required, (e.g. to assess the impact of any significant changes made to a programme).

Stress testing results establish overcollateralisation requirements for each Regulated Covered Bond programme.
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.)
  • Contractual arrangements, e.g. a requirement to establish a reserve fund
  Comments: Also See - General Comment for this section about FCA stress testing.

As a requirement of Regulated Covered Bond legislation an RCB 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 (FCA).

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?
  • Natural matching (matching without the use of off-balance sheet instruments) and stress testing
  • Contractual arrangements, e.g. maturity extension or prematurity test
  Comments: Also See - General Comment for this section about FCA stress testing.

As a requirement of Regulated Covered Bond legislation an RCB 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 (FCA).

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?
  • Lenght of period
  Comments: All breaches must be notified to the Regulator (FCA) 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. For example: A breach of the pre-maturity test must be rectified within 10 business days.
12 What is the consequence of not fixing a breach of liquidity risk mitigants?
  • Programme freeze (neither sale of assets nor new issuance allowed)
  • Alternative administration
  • Other regulatory or rule-based action
  • Event of default of the issuer
  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
13 Who monitors the maintenance of coverage tests?
  • Supervisory authority
  • Rating agency
  • Trustee/cover pool monitor
14 Are there any regular public reporting requirements for market and liquidity risk?
  • Yes
  Comments: As a result of the December 2011 regulatory changes to the RCB regime, a number of public disclosures will be required from RCB issuers from January 2013 (subsequent to any issuance from the programme after that date) with provision of the following information on a secure, subscription-only website:
• characteristics of the asset pool each month; and,
• loan-level information on the asset pool each quarter.
Overcollateralisation
15 Is mandatory minimum overcollateralisation required?
  • By legislation/regulation
  • By contractual obligation
  Comments: Also See - General Comment for this section about FCA stress testing.

Legislation: Overcollateralisation requirements are set by the Regulator's (FCA) stress testing policy.The requirements are determined on a post-insolvency basis and based on the risk profile of each individual programme.

Contractual: Varies programme to programme.
16 What is the level of minimum mandatory overcollateralisation?
  • RCB Legislation - minimum is 8%
  Comments: See - General Comment for this section about FCA stress testing.

RCB Legislation: minimum is 8% (Regulatory stress testing results establish overcollateralisation requirements for each Regulated Covered Bond programme).

Contractually: The actual amount varies from programme to programme and most often exceeds the regulatory minimum.
17 If mandatory overcollateralisation is required, are the amounts above the minimum OC level protected?
  • Yes
18 Is there any grace period in case of a breach of the coverage test?
  • Length of period:
    one month
19 What is the consequence of not fixing a breach of the coverage test?
  • Programme freeze (neither sale of assets nor new issuance allowed)
  • Alternative administration
  • Other regulatory or rule-based actions
  • Event of default of the issuer
  • Redirection of cashflows
  Comments: All of the above are possible consequences of a breach.

Global comments for this chapter

See further details of FCA regulatory stress testing at
http://www.fca.org.uk/your-fca/documents/fsa-cbi-factsheet
1 Is a special license required for the issuing of covered bonds?
  • Yes with additional requirements compared to general banking supervision regulations
  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?
  • Periodic reporting required
  • Reporting on demand for special occasions
  Comments: The issuer must provide the regulator (and also publish on a secure website) information on a monthly basis.
See –https://fsahandbook.info/FSA/html/handbook/RCB/3/Annex3
3 What is the role of the banking supervision regarding covered bonds?
  • 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
  • To check minimum mandatory overcollateralisation requirements
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
  • Involvement in transfer of cover assets and covered bonds to another credit institution
5 Is there a cover pool monitor independent from the issuer?
  • Yes
  Comments: The cover pool monitor is typically the issuer’s auditor.
6 If there is an independent cover pool monitor, what are its duties?
  • Performing audits of the cover pool
  • Reporting duties to the supervision authority
  • Verification of coverage tests
  Comments: The Asset Pool monitor has an obligation to report directly to the regulator.

See - http://www.fsa.gov.uk/static/pubs/guidance/gc12-09.pdf
1 Do covered bonds automatically accelerate when the credit institution goes insolvent?
  • No
  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?
  • All assets on the cover register
  • All assets transferred to SPE
  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?
  • Sale of cover assets to an SPE
  • Transfer of assets to an SPE
4 Is there recourse to the credit institution’s insolvency estate upon a cover pool default?
  • Yes, pari passu with unsecured creditors
5 Are there provisions that require derivatives to continue in case of insolvency of the credit institution?
  • Yes
  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?
  • Pari passu to covered bond holders
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
4 Are there any special investment regulations regarding covered bonds?
  • No
1 Link to National Association representing covered bond interests
2 Link to national regulators and supervisors
3 Fact Book Country Chapter
  • Chapter
 
4 Hypostat Country Chapter
  • Chapter