Cypriot Covered Bonds

1 Who is the issuer?
  • Universal credit institution with a special license
  Comments: According to the provisions of the Law, the Issuer needs to be an "approved institution"; i.e. a credit insitution registered in the register of approved institutions in accordance with the provisions of Part II of the Law.
2 Does the bondholder have recourse to the credit institution?
  • Yes, direct
  Comments: According to Art.43(5) of the Law, in case where the claims of the cover pool creditors are not satisfied in full from the proceeds of disposal of the cover pool, those creditors are, with respect to the unsatisfied part of the their claims, unsecured creditors of the institution with covered bond obligations that is subject to dissolution proceedings.
3 Who owns the cover assets?
  • The issuer directly
  Comments: According to Art.23 of the Law, the cover assets are maintained in a cover pool register for each covered bond issue or programme, in the form, location and content determined by the competent authority.
4 Is the issuer the originator of the assets?
  • Yes
1 Are the bonds governed by a special covered bond Legislation?
  • Yes
  Comments: Law 130(I)/2010 of the Republic of Cyprus and the Central Bank of Cyprus Directive 526/2010.
2 What is the legal framework for bankruptcy of the issuer of covered bonds?
  • Specific legal framework superseding the general insolvency law
  Comments: Part VII of the Law, deals with the effect of dissolution proceedings on an institution with covered bond obligations (not affecting though the application of specific provisions of the Bankruptcy Law, the Companies Law and any other Law thatwould render any bond or contract void or voidable on the ground of fraud or misrepresentation - Art.45 of the Law).
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.)
  • Ship loans
  Comments: According to Art.14(d) of the Law, a cover pool may be composed of primary assets of one of the following categories:
(i) Public claims;
(ii) Residential loans;
(iii) Commercial loans;
(iv) Maritime loans; or
(v) Other asset that the competent authority may determine as primary asset (for now the only Primary Assets allowed for, are the ones listed in Art.14(d) of the Law (i) – (iv)).
2 What is the geographical scope for public sector assets?
  • Domestic
  • Multilateral development banks
  • EEA
  • CH
  • USA, Canada, Japan
  • Other
  Comments: Art.14 of the Directive outlines in detail the geographical scope for public sector assets (and in general the criteria, terms and conditions in relation to public claims). These are largely limited to local and member state public entities, as well as entities falling under Step 1 of Table 3 of Annex VI of the Directive 2006/48/EC.
3 What is the geographical scope for mortgage assets?
  • Domestic
  • EEA
  Comments: According to Art.13(3)(b) of the Directive, mortgage assets need to be created in accordance with the laws of the Republic of Cyprus, or in accordance with the laws of other member states.
4 Are regular covered bond specific disclosure requirements to the public mandatory?
  • Yes
  Comments: Accordng to Art.31 of the Law, an institution with covered bond obligations shall disclose in its annual and interim financial statements and publish at regular intervals determined by the competent authority information on the covered bonds issued by it and the cover assets registered in the cover pool register, as determined by the competent authority.
1 LTV is calculated using which valuation?[4]
  • Market value
  Comments: According to Art.13(10) of the Directive, the valuation of the underlying property for the purposes of calculating compliance with the LTV limits, shall be carried out by an independent valuer.
2 Are there any special LTV limits used solely for calculating collateralisation rates for the cover pool (if yes, specify)?
  • Residential      
    75%
  • Commercial      
    60%
  • Ships
    60%
  Comments: Residential loans: According to Art.13(8)(a), residential loans whose LTV exceeds 75% may be included in the cover pool, as long as the LTV does not exceed 100% and loans with an LTV above 75% do not exceed 25% of the value of the covered bonds secured on the cover pool and the weighted LTV of the cover pool does not exceed 80%.

Commercial loans: According to Art.13(8)(b), commercial loans whose LTV exceeds 60% may be included in the cover pool, as long as the LTV does not exceed 80% and loans with an LTV above 60% do not exceed 25% of the value of the covered bonds secured on the cover pool and the weighted LTV of the cover pool does not exceed 65%.

Shipping loans: According to Art.15(8), shipping loans whose LTV exceeds 60% may be included in the cover pool, as long as the LTV does not exceed 70% and loans with an LTV above 60% do not exceed 25% of the value of the covered bonds secured on the cover pool and the weighted LTV of the cover pool does not exceed 65%.
3 Do bondholders get the benefit of that portion of the loan which exceeds the LTV cap?
  • No
  Comments: Bondholders get the benefit of that portion of the loan above the "LTV limits" defined in IV.2 (i.e. 75% for Residential and 60% for Commercial and Ship loans) and below the "LTV cap" defined in IV.4a and IV.4b. For example:
- for a residential loan with an LTV of 90%, bondholders get the benefit of the portion of the loan between 75% and 90% LTV.
- for a residential loan with an LTV of 105%, bondholders don’t get any benefit, as the entire loan is ineligible.
4a Is there an LTV cap which makes the entire loan ineligible to be put in the cover pool (if yes, specify)?
  • Residential      
  • Commercial      
  • Ships      
  Comments: Residential: 100%
Commercial: 80%
Ships: 70%
4b Is there an LTV cap which would require a loan to be removed from the cover pool?
  Comments: If a loan exceeds the LTV caps (i.e. the ones provided in question IV.4a), it is not required to be removed from the cover pool; however, such loan would not count for the purposes of the statutory tests calculation.
5 Is there any additional LTV limit on a portfolio basis?
  • Yes (if yes specify)
  Comments: Residential loans: 80% / Commercial loans: 65% / Shipping loans: 65%.
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
  Comments: According to the provisions of Art.32 of the Directive.
4 What type of coverage test is applied?
  • Nominal cover
  • Present value cover
  Comments: According to the provisions of the Directive, various tests are used to determine the matching between assets and liabilities of the covered bond programme:
- Nominal Value Test
- Net Present Value Test
- Weighted Average Life Test
- Interest Cover Test
- Prematurity Test.
5 What is the frequency of coverage calculations?
  • Monthly
  Comments: According to Art.31(4) of the Directive, the Issuer must verify the adequacy of the cover pool at least on a monthly basis and submit to the Central Bank of Cyprus the form attached to the Directive as Appendix 3 on a quarterly basis.
6 What types of stress scenarios are applied?
  • Static
  • Dynamic
  • Model based (i.e. VaR)
  Comments: According to the provisions of Art.24(5) of the Directive, the NPV Test is stressed based on the following scenarios:
1. Parallel interest rate shift of +200 and -200 basis points
2. Interest rate shifts determined by 99%, 6-month confidence interval using daily changes for the last 250 business days
3. Exchange rate changes of 10% for Euro and member-state currencies, 15% for currencies of the United States, Canada, Japan, Switzerland, Australia and 25% for other currencies
4. Exchange rate shifts determined by a 99%, 6-month confidence interval using daily changes for the last 250 business days.
7 What is the frequency of stress test calculations?
  • Monthly
  Comments: According to Art.31(4) of the Directive, the Issuer must verify the adequacy of the cover pool (which includes the stress test claculations) at least on a monthly basis and submit to the Central Bank of Cyprus the form attached to the Directive as Appendix 3 on a quarterly basis.
Exposure to liquidity risk
8 Is exposure to liquidity risk required to be mitigated by law or contract?
  • Yes
  Comments: Art.27 of the Directive specifies the requirements for the maintenance of liquidity for servicing and repayment of the covered bonds.
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.)
  Comments: According to Art.27(1) of the Directive, the Issuer is required to reconcile cash inflows and outflows in relation to the covered bonds on a daily basis for the following 180 days period and to cover the highest net cash outflow that arises with complementary 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
  Comments: According to Art.27(2) of the Directive, the Issuer is required to maintain liquidity for the repayment of the principal amount of covered bonds:
(a) for the period 180 - 30 days before the repayment date, in an amount at least equal to 50% of the amount due for repayment, and
(b) 30 days to the repayment date, 100% of the amount due.
The liquidity may take the form of either complementary assets within the pool or liquid assets (as defined in the Directive) outside the pool.
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?
  • Programme freeze (neither sale of assets nor new issuance allowed)
  • Other regulatory or rule-based action
  Comments: According to the provisions of Art.22 of the Law, in case where an Issuer is in breach of any of the cover pool adequacy criteria,
(1) it shall take all necessary measures to rectify the breach within a period that the competent authority may, either determine in terms of a Directive, or, in exceptional and urgent cases, set with a decision, which the competent authority communicates to the Issuer.
(2) the Issuer shall not issue covered bonds until the necessary rectification measures are taken, without prejudice to the power of the competent authority to appoint a covered bond business administrator under Art.59(2)(j) of the Law.
Monitoring of exposures to market and liquidity risk
13 Who monitors the maintenance of coverage tests?
  • Trustee/cover pool monitor
  Comments: According to the provisions of Art.46(d) of the Directive, the Central Bank of Cyprus determines a duty of monitoring the cover assets by the Covered Bond Monitor, including the examination of compliance, on an on-going basis, with the cover pool adequacy criteria set in terms of Art.23 of the Directive.
14 Are there any regular public reporting requirements for market and liquidity risk?
  • Yes
  Comments: According to Art.31(4) of the Directive, the Issuer must verify the adequacy of the cover pool (which includes tests on market and liquidity risk) at least on a monthly basis and submit to the Central Bank of Cyprus the form attached to the Directive as Appendix 3 on a quarterly basis.
Overcollateralisation
15 Is mandatory minimum overcollateralisation required?
  • By legislation/regulation
  Comments: According to Art.25 of the Directive, the Issuer is required to enhance the cover pool with complementary assets, the value of which, after possible application of set-off, covers by 5% the outstanding amount of the covered bonds.
16 What is the level of minimum mandatory overcollateralisation?
  • 5%
17 If mandatory overcollateralisation is required, are the amounts above the minimum OC level protected?
  • Yes
  Comments: According to the provisions of Art.19(1) of the Directive, cover assets in excess of those required for complying with the basic or the supervisory overcollateralisation (i.e. the mandatory overcollateralisation) shall be counted in the the calculation of any contractual overcollateralisation only if their counting is necessary for the issuer’s compliance with the contractual overcollateralisation.
Such contractual overcollateralisation is recorded in the covered bonds register (according to the provisions of Art.7 of the Directive) and is protected.
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?
  • Programme freeze (neither sale of assets nor new issuance allowed)
  • Other regulatory or rule-based actions
  Comments: According to the provisions of Art.22 of the Law, in case where an Issuer is in breach of any of the cover pool adequacy criteria,
(1) it shall take all necessary measures to rectify the breach within a period that the competent authority may, either determine in terms of a Directive, or, in exceptional and urgent cases, set with a decision, which the competent authority communicates to the Issuer.
(2) the Issuer shall not issue covered bonds until the necessary rectification measures are taken, without prejudice to the power of the competent authority to appoint a covered bond business administrator under Art.59(2)(j) of the Law.
1 Is a special license required for the issuing of covered bonds?
  • Yes with additional requirements compared to general banking supervision regulations
  Comments: According to Art.5 of the Law, the Central Bank of Cyprus establishes and maintains a register of approved institutions. Art.6 of the Law, determines that only credit institutions established in the Republic of Cyprus and are supervised by the Central Bank of Cyprus may apply for registration as an approved institution.
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
  Comments: According to Art.39 of the Directive, the covered bond issuer is required to disclose, in addition to the statutory tests, on a quarterly basis, in a publicly accessible area, to which the notes of its annual and interim financial statements make a reference, information as at the end of each quarter, relating to:
- the total outstanding balance of covered bonds,
- the value of the cover pool
- the maturity structure of the outstanding covered bonds
- the total amount of the claims from hedging contracts
- the total amount of the complementary assets counted in the basic cover and their percentage to the total value of the basic cover.
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
  Comments: According to the provisions of Part VIII of the Law and Part V of the Directive, the covered bond monitor is required to:
- oversee the compliance of the Issuer with its obligations under the Law;
- prior to an application for the registration of any Covered Bonds in the covered bonds register, verify that the Issuer:
(a) fulfils the conditions for registration as an approved institution;
(b) complies with the provisions of Part IV of the Law in relation to every previous issue of
Covered Bonds that are outstanding; and
(c) complies with the provisions of Art.14(a)(d) and (e) of the Law without prejudice to the provisions of Art.14(2) and Art.14(3);
- perform any other duties that the Central Bank of Cyprus requires.
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
  Comments: According to the provisions of the Law and the Directive, upon the initiation of dissolution proceedings of a covered bond issuer,the Covered Bond Business Administrator:
- assumes control of the cover pool (in accordance with Art.40 of the Law) and is responsible to review the adequacy of the cover pool (in accordance with Art.19 and 23 of the Directive)
- performs cover pool adequacy assessment (in accordance with Art.18(6) of the Law) using solely those cover assets which are counted for the purposes of such assessment.

Art.40 of the Law outlines the effect of dissolution proceedings on covered bonds business and the role of the covered bonds business administrator.
5 Is there a cover pool monitor independent from the issuer?
  • Yes
  Comments: According to the provisions of Part VIII of the Law and Part V of the Directive.
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: According to the provisions of the Part VIII of the Law and Part V of the Directive, the covered bond monitor is required to:
- monitor the Cover Pool Assets included in a Cover Pool, including:
(a) verifying the accuracy and completeness of the information on the Cover Pool Assets included in
the Cover Pool Register;
(b) examining the valuation process in relation to the valuation of the Cover Pool Assets;
(c) measuring compliance, on an on-going basis, with the Statutory Tests; and
(d) examining the entries in and removals from the Cover Pool Register and confirming the correct
recording of the necessary information in the Cover Pool Register;
- where hedging contracts are included in a Cover Pool, verify that these contracts fulfil the criteria set out in Art.26 of the Law;
- perform any other duties that the Central Bank of Cyprus requires.
1 Do covered bonds automatically accelerate when the credit institution goes insolvent?
  • No
  Comments: Art.39 of the Law states that "the obligations of an institution with covered bond obligations towards the cover pool creditors continue to be in effect and are enforceable as provided for in this Part irrespective of the fact that the credit institution is subject to dissolution proceedings".

In addition Art.40(1) of the Law states that where an institution with covered bond obligations is subject to dissolution proceedings, all covered bonds issued by the credit institution remain in force, subject to the terms and conditions under which they have been issued.

Following dissolution proceedings being commenced in respect of the Issuer, the covered bond business administrator will be responsible for managing the cover pool in accordance with Part IX of the Law.

According to the provisions of Art.62 of the Law, the covered bond business administrator may, with the approval of the competent authority and of the covered bond holders as provided in the terms of the issue, require:

(a) the immediate settlement of the covered bonds; or

(b) the transfer of the covered bond business to another approved institution;

where he reasonably considers that following a potential initiation of dissolution proceedings the cover pool will not be adequate to fully cover the claims of the cover pool creditors.
2 What is the cover pool?
  • All assets on the cover register
  Comments: According to the Law, "cover pool" means the sum of assets and hedging contracts that secure, under Part III of the Law, covered bonds, subject to Art.40 of the Law.
3 How are the covered bondholders protected against claims from other creditors in case of insolvency of the issuer?
  • Preferential claim by law
  • Specific cover pool administration
  Comments: In accordance with Art.40 of the Law ("Effect of dissolution proceedings in covered bonds business").
4 Is there recourse to the credit institution’s insolvency estate upon a cover pool default?
  • Yes, pari passu with unsecured creditors
  Comments: According to the provisions of Art.43(5) of the Law, in case where the claims of the cover pool creditors are not satisfied in full from the proceeds of the sale or other form of disposal of the cover pool, those creditors are, with respect to the unsatisfied part of their claims, unsecured creditors of the institution with covered bond obligations that is subject to dissolution proceedings.
5 Are there provisions that require derivatives to continue in case of insolvency of the credit institution?
  • Yes
  Comments: According to Art.38(c) of the Law, if the Issuer is subject to dissolution proceedings, these do not affect the rights of a counterparty under a hedging contract which is included in the cover pool.
In accordance with Art.39(1), despite the dissolution, the obligations of the Issuer to covered bond creditors continue to be in effect and are enforceable.
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?
1 Link to National Association representing covered bond interests
  • Association
2 Link to national regulators and supervisors
3 Fact Book Country Chapter
  • Chapter
 
4 Hypostat Country Chapter
  • Chapter