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Questions Canadian Covered Bonds
I. STRUCTURE OF THE ISSUER
1. Who is the issuer?
  • Universal credit institution
(1) Comments: All issuers are regulated by OSFI (Office of the Superintendent of Financial Institutons), although one issuer is a cooperative financial institution in Canada that is subject to provincial regulation.
2. Does the bondholder have recourse to the credit institution?
  • Yes, direct
3. Who owns the cover assets?
  • SPE which guarantees the covered bonds
(2) Comments: The cover assets are sold to a bankruptcy remote, special purpose entity – the Guarantor.
4. Is the issuer the originator of the assets?
  • Yes
(3) Comments: Most of the mortgages in the pool would be originated by the issuer, however this is not a legal requirement. An issuer could purchase mortgages from another entity and include them in the pool if they meet the requirements. Also substitute assets (GoC bonds) can be included in the cover pool and they are not by definition originated by the issuer.
II. FRAMEWORK
1. Are the bonds governed by a special covered bond Legislation?
  • Yes
(4) Comments: The legal framework includes the statutory provisions of the National Housing Act as well as additional conditions and restrictions set out in the Canadian Registered Covered Bond Programs Guide.
2. What is the legal framework for bankruptcy of the issuer of covered bonds?
  • Specific legal framework superseding the general insolvency law
III. COVER ASSETS
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.)
(5) Comments: Only uninsured mortgages with maximum 80% LTV allowed. Exposure to public sector entities is limited to securities issued by the Government of Canada and only up to 10% of the cover pool.
2. What is the geographical scope for public sector assets?
  • USA, Canada, Japan
(6) Comments: Canada only.
3. What is the geographical scope for mortgage assets?
  • USA, Canada, Japan
(7) Comments: Canada only.
4. Are regular covered bond specific disclosure requirements to the public mandatory?
  • Yes
(8) Comments: Issuers are required to post all programme documents, transaction information and monthly investor reports on its website.
IV. VALUATION OF THE MORTGAGE COVER POOL & LTV CRITERIA
1. LTV is calculated using which valuation?[4]
  • Market value
(9) Comments: LTV is calculated based on indexed values for the ACT calculation.
2. Are there any special LTV limits used solely for calculating collateralisation rates for the cover pool (if yes, specify)?
  • Residential      
    Maximum indexed LTV: 80.
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)?
  • Residential      
(10) Comments: Mortgages higher than 80% LTV are not allowed to be added to the cover pool.
4b. Is there an LTV cap which would require a loan to be removed from the cover pool?
  • No
(11) Comments: However, the amounts in excess of the 80% (as a result of indexation) cannot be included for purposes of the Asset Coverage Test, Valuation Test and Amortisation Test.
5. Is there any additional LTV limit on a portfolio basis?
  • No
V. ASSET-LIABILITY GUIDELINES
. 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
(12) Comments: Market risk hedging is required by Law.
2. What is the primary method for the mitigation of market risk?
  • Use of derivative hedge instruments
(13) Comments: Balance guarantee swap and covered bond swap is used to hedge market risk.
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?
  • Not relevant
(14) Comments: Market risk is considered by the Rating Agencies in coming up with the required Asset Percentage level.
5. What is the frequency of coverage calculations?
  • Not relevant
(15) Comments: ACT is calculated monthly and disclosed in the monthly investor report.
6. What types of stress scenarios are applied?
  • Not relevant
(16) Comments: Market risk is fully hedged at the time of cover pool addition and at each issuance.
7. What is the frequency of stress test calculations?
  • Not relevant
. 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?
  • Contractual arrangements, e.g. a requirement to establish a reserve fund
(17) 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 as prescribed by rating agencies.
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
(18) Comments: Generally, Canadian Covered Bonds have soft bullet maturities, which allow for twelve month extension. In addition, the Canadian Registered Covered Bond Programmes Guide requires ratings triggers to be prescribed for pre-maturity tests to ensure covered bond collateral includes sufficient cash to satisfy all principal payments due under all series or tranches of hard bullet covered bonds maturing during a period described in the issuer's transaction documents together with all payments ranking in priority to repayment of such principal.
11. Is there any grace period in case of a breach of liquidity risk mitigants?
  • Lenght of period
    10 business days for principal and 30 business days for interest payments.
(19) 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.
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
. Monitoring of exposures to market and liquidity risk
13. Who monitors the maintenance of coverage tests?
  • Rating agency
  • Trustee/cover pool monitor
  • Other
(20) Comments: Cover pool monitor also monitors maintenance of coverage tests.
14. Are there any regular public reporting requirements for market and liquidity risk?
  • Yes
(21) Comments: Valuation calculation and ACT test is reported in the monthly investor report on Issuers website.
. Overcollateralisation
15. Is mandatory minimum overcollateralisation required?
  • By contractual obligation
16. What is the level of minimum mandatory overcollateralisation?

  • Varies for each issuer.
(22) Comments: Contractual overcollaterialisation is driven by rating agency requirements.
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
VI. COVER POOL MONITOR & BANKING SUPERVISION
1. Is a special license required for the issuing of covered bonds?
  • Yes with additional requirements compared to general banking supervision regulations
(23) Comments: Issuer needs to be registered with the CMHC, Canadian Covered Bond Administrator.
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
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)
  • To check minimum mandatory overcollateralisation requirements
(24) Comments: These roles are performed by the Covered Bond Administrator.
4. Is there a special role of banking supervision in crisis regarding covered bonds?
  • No specific role
(25) Comments: There would be roles but not necessarily those described above.
5. Is there a cover pool monitor independent from the issuer?
  • Yes
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
VII. SEGREGATION OF ASSETS & BANKRUPTCY REMOTENESS OF COVERED BONDS
1. Do covered bonds automatically accelerate when the credit institution goes insolvent?
  • No
(26) 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?
  • All assets transferred to SPE
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
  • Preferential claim by law
4. Is there recourse to the credit institution’s insolvency estate upon a cover pool default?
  • Yes, pari passu with unsecured creditors
(27) 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?
  • Yes
(28) Comments: 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?
  • Senior to covered bond holders
  • Pari passu to covered bond holders
(29) Comments: The interest rate swap is senior to covered bond holders. The exchange rate swap is pari-passu, once cash flows start flowing under this swap (following an Issuer Event of Default). Covered Bond swap payments rank pari passu to the claims of covered bond holders.
VIII. RISK WEIGHTING & COMPLIANCE WITH EUROPEAN LEGISLATION
1. Does the covered bond fulfil the criteria of UCITS 52(4)?
  • No
(30) Comments: Canadian covered bonds are a Level 2A liquid asset in relation to European liquidity regulations.
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
(31) Comments: The Euro denominated covered bonds are eligible to be used as collateral in repo transactions with the ECB and Canadian dollar denominated covered bonds are eligible for repo transactions with the Bank of Canada.
4. Are there any special investment regulations regarding covered bonds?
  • No
IX. ADDITIONAL INFORMATION
1. Link to National Association representing covered bond interests
  • Association
(32) Comments: http://www.cmhc-schl.gc.ca/en/hoficlincl/cacobo/cacobo_004.cfm
2. Link to national regulators and supervisors
  • List

    Royal Bank of Canada ("RBC"), Canadian Imperial Bank of Commerce ("CIBC"), Bank of Nova Scotia ("BNS"), National Bank of Canada ("NA"), La Caisse centrale Desjardins du Québec, Bank of Montreal ("BMO"), Toronto Dominion Bank ("TD"). 
(33) Comments: You can get link to individual Issuer website through the CMHC's Covered Bond registry link above.
3. Fact Book Country Chapter
  • Chapter
 
4. Hypostat Country Chapter
  • Chapter

Comments for your selection

  • 1: All issuers are regulated by OSFI (Office of the Superintendent of Financial Institutons), although one issuer is a cooperative financial institution in Canada that is subject to provincial regulation.
  • 2: The cover assets are sold to a bankruptcy remote, special purpose entity – the Guarantor.
  • 3: Most of the mortgages in the pool would be originated by the issuer, however this is not a legal requirement. An issuer could purchase mortgages from another entity and include them in the pool if they meet the requirements. Also substitute assets (GoC bonds) can be included in the cover pool and they are not by definition originated by the issuer.
  • 4: The legal framework includes the statutory provisions of the National Housing Act as well as additional conditions and restrictions set out in the Canadian Registered Covered Bond Programs Guide.
  • 5: Only uninsured mortgages with maximum 80% LTV allowed. Exposure to public sector entities is limited to securities issued by the Government of Canada and only up to 10% of the cover pool.
  • 6: Canada only.
  • 7: Canada only.
  • 8: Issuers are required to post all programme documents, transaction information and monthly investor reports on its website.
  • 9: LTV is calculated based on indexed values for the ACT calculation.
  • 10: Mortgages higher than 80% LTV are not allowed to be added to the cover pool.
  • 11: However, the amounts in excess of the 80% (as a result of indexation) cannot be included for purposes of the Asset Coverage Test, Valuation Test and Amortisation Test.
  • 12: Market risk hedging is required by Law.
  • 13: Balance guarantee swap and covered bond swap is used to hedge market risk.
  • 14: Market risk is considered by the Rating Agencies in coming up with the required Asset Percentage level.
  • 15: ACT is calculated monthly and disclosed in the monthly investor report.
  • 16: Market risk is fully hedged at the time of cover pool addition and at each issuance.
  • 17: 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 as prescribed by rating agencies.
  • 18: Generally, Canadian Covered Bonds have soft bullet maturities, which allow for twelve month extension. In addition, the Canadian Registered Covered Bond Programmes Guide requires ratings triggers to be prescribed for pre-maturity tests to ensure covered bond collateral includes sufficient cash to satisfy all principal payments due under all series or tranches of hard bullet covered bonds maturing during a period described in the issuer's transaction documents together with all payments ranking in priority to repayment of such principal.
  • 19: 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.
  • 20: Cover pool monitor also monitors maintenance of coverage tests.
  • 21: Valuation calculation and ACT test is reported in the monthly investor report on Issuers website.
  • 22: Contractual overcollaterialisation is driven by rating agency requirements.
  • 23: Issuer needs to be registered with the CMHC, Canadian Covered Bond Administrator.
  • 24: These roles are performed by the Covered Bond Administrator.
  • 25: There would be roles but not necessarily those described above.
  • 26: 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.
  • 27: Recourse for any shortfalls on outstanding covered bonds not covered by the Cover Pool.
  • 28: 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.
  • 29: The interest rate swap is senior to covered bond holders. The exchange rate swap is pari-passu, once cash flows start flowing under this swap (following an Issuer Event of Default). Covered Bond swap payments rank pari passu to the claims of covered bond holders.
  • 30: Canadian covered bonds are a Level 2A liquid asset in relation to European liquidity regulations.
  • 31: The Euro denominated covered bonds are eligible to be used as collateral in repo transactions with the ECB and Canadian dollar denominated covered bonds are eligible for repo transactions with the Bank of Canada.
  • 32: http://www.cmhc-schl.gc.ca/en/hoficlincl/cacobo/cacobo_004.cfm
  • 33: You can get link to individual Issuer website through the CMHC's Covered Bond registry link above.