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Questions Hungarian Covered Bonds
I. STRUCTURE OF THE ISSUER
1. Who is the issuer?
  • Specialized credit institution
2. Does the bondholder have recourse to the credit institution?
  • Yes, direct
3. Who owns the cover assets?
  • The issuer directly
4. Is the issuer the originator of the assets?
  • Yes
II. FRAMEWORK
1. Are the bonds governed by a special covered bond Legislation?
  • Yes
(1) Comments: Act no. XXX of 1997 on Mortgage Banks and Mortgage Bonds
2. What is the legal framework for bankruptcy of the issuer of covered bonds?
  • Specific legal framework superseding the general insolvency law
(2) Comments: The Mortgage Bank Act contains the special insolvency rules.
III. COVER ASSETS
1. What types of assets may be included in cover pools?
  • Mortgage loans (Mortgage loans for the purpose of this question are taken to include guaranteed real-estate loans.)
(3) Comments: The outstanding mortgage bonds shall always be covered up to 80 per cent by loans secured by mortgages (“jelzálogjog”), independent mortgage liens (“önálló zálogjog”) or by joint and several surety assumed by the Hungarian State (“állami készfizető kezességvállalás”). In fact, the portfolios of Hungarian mortgage banks consist almost exclusively of residential mortgage loans.
2. What is the geographical scope for public sector assets?
(4) Comments: Public sector assets do not qualify as eligible assets.
3. What is the geographical scope for mortgage assets?
  • EEA
(5) Comments: No EEA country mortgage loans other than secured by a real property located in the territory of Hungary are yet granted, or included into the cover pools of Hungarian mortgage banks. This will be first an option after 1st of January 2010.
4. Are regular covered bond specific disclosure requirements to the public mandatory?
  • Yes
IV. VALUATION OF THE MORTGAGE COVER POOL & LTV CRITERIA
1. LTV is calculated using which valuation?[4]
  • Mortgage lending value
(6) Comments: Special mortgage lending value calculation methods are applicable for mortgage banks.
2. Are there any special LTV limits used solely for calculating collateralisation rates for the cover pool (if yes, specify)?
  • Residential      
    70%
  • Commercial      
    60%
  • Agricultural
    60%
(7) Comments: Based on “mortgage lending value”
3. Do bondholders get the benefit of that portion of the loan which exceeds the LTV cap?
  • Yes
(8) Comments: In the event of liquidating a mortgage bank the part of the ordinary cover in excess of the limit of 60/70% LTV and the portion of liquid assets held but not recognized as cover by the mortgage bank at the starting date of liquidation, which comply with the requirements set for supplementary cover, shall be used exclusively for the settlement of the liabilities towards mortgage bond holders - after paying of the fee of the administrator of cover and the costs incurred by the registration and satisfaction of particular claims. (Mortgage Bond Act, Section 20 - 5b)
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?
  • Yes (if yes specify)
    70% - Based on market value
(9) Comments: General rule - applicable to all Hungarian credit institutions
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
(10) Comments: Whenever a mortgage bond and its cover assets are not denominated in the same currency, the mortgage bank shall conclude derivative transactions to hedge against currency exchange risk. Section 14 - (5)
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
(11) Comments: Derivative transactions can be entered into the cover pool upon the consent of the derivative counterparty. Hence possible by law, no current practice.
4. What type of coverage test is applied?
  • Nominal cover
  • Present value cover
(12) Comments: Stress tests are used.
5. What is the frequency of coverage calculations?
  • Daily
(13) Comments: Mortgage Banks are required by the Mortgage Bank Act to possess cover surpassing the principal of outstanding mortgage bonds and the interest any time. Daily reporting is not obligatory.
6. What types of stress scenarios are applied?
  • Static
  • Dynamic
  • Model based (i.e. VaR)
(14) Comments: Static stress tests are required by the cover pool monitor.
7. What is the frequency of stress test calculations?
  • Daily
(15) Comments: The legal regulation requires stress test calculations on a quarterly basis.
. Exposure to liquidity risk
8. Is exposure to liquidity risk required to be mitigated by law or contract?
  • No
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.)
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
11. Is there any grace period in case of a breach of liquidity risk mitigants?
  • No
(16) Comments: There are no regulatory obligations for liquidity risk mitigation.
12. What is the consequence of not fixing a breach of liquidity risk mitigants?
(17) Comments: There are no regulatory obligations for liquidity risk mitigation.
. Monitoring of exposures to market and liquidity risk
13. Who monitors the maintenance of coverage tests?
  • Supervisory authority
  • Trustee/cover pool monitor
14. Are there any regular public reporting requirements for market and liquidity risk?
  • No
. Overcollateralisation
15. Is mandatory minimum overcollateralisation required?
  • By published voluntary commitments
16. What is the level of minimum mandatory overcollateralisation?
(18) Comments: No mandatory overcollateralization rules apply.
17. If mandatory overcollateralisation is required, are the amounts above the minimum OC level protected?
18. Is there any grace period in case of a breach of the coverage test?
  • No
(19) Comments: Both the mortgage bank and the cover pool monitor shall immediately notify the Hungrian Financial Supervisory Authority (HFSA) if the cover assets for outstanding mortgage bonds do not meet the requirements set forth in the Mortgage Bank Act. The HFSA has to take any necessary measurement or extraordinary measurement in the case when the mortgage bank fails to comply with regulations on ensuring liquidity and approximation of maturities of assets and liabilities - in order to avoid any possible insolvency situation.
19. What is the consequence of not fixing a breach of the coverage test?
  • Alternative administration
(20) Comments: In the case of breach of liquidity or asset-liability management provisions, a Supervisory Commissioner can be delegated to the mortgage bank or any credit institution upon the decision of Hungarian Financial Supervisory Authority (HFSA). The delegation of a Supervisory Commissioner to the mortgage bank is an extraordinary measurement to be effectuated by the HFSA prior to the commencement of any insolvency procedure. In this case both the rights of the owners and the rights of the management of the mortgage bank will be suspended in order to warrant the satisfaction of the claims of the mortgage bank’s creditors, e. g. bondholders. In this case the aim of the extraordinary measurement is to avoid a threatening insolvency situation – which has not yet occurred at the point of time when delegating the Supervisory Commissioner to the bank.
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
(21) Comments: Only specialized credit institutions, i.e. mortgage banks are entitled to issue mortgage bonds, based on a special legal framework.
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
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
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
(22) Comments: In the case of breach of liquidity or asset-liability management provisions, a Supervisory Commissioner can be delegated to the mortgage bank or any credit institution upon the decision of Hungarian Financial Supervisory Authority (HFSA). The delegation of a Supervisory Commissioner to the mortgage bank is an extraordinary measurement to be effectuated by the HFSA prior to the commencement of any insolvency procedure. In this case both the rights of the owners and the rights of the management of the mortgage bank will be suspended in order to warrant the satisfaction of the claims of the mortgage bank’s creditors, e. g. bondholders. In this case the aim of the extraordinary measurement is to avoid a threatening insolvency situation – which has not yet occurred at the point of time when delegating the Supervisory Commissioner to the bank. In the event of the transformation or liquidation of a mortgage bank, the mortgage bank may, with the permission of the HFSA, transfer its liabilities existing under mortgage bonds or derivative transactions recognized as cover to another mortgage bank.
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
(23) Comments: The cover pool monitor shall monitor and certify that:
a) the necessary collateral for mortgage bonds is available at all times as required;
b) the mortgaged objects recognized as cover assets for mortgage bonds have been recorded along with the related property registration data and mortgage lending value in the register of ordinary and supplementary cover assets.
The cover pool monitor shall immediately notify the HFSA in writing if the collateral coverage of outstanding mortgage bonds fails to meet the requirements set forth in the Mortgage Bank Act.
Mortgage Bank Act Section 17 - (1 & 2)
VII. SEGREGATION OF ASSETS & BANKRUPTCY REMOTENESS OF COVERED BONDS
1. Do covered bonds automatically accelerate when the credit institution goes insolvent?
  • No
2. What is the cover pool?
  • All assets on the cover register
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
4. Is there recourse to the credit institution’s insolvency estate upon a cover pool default?
  • Yes, senior to unsecured creditors
5. Are there provisions that require derivatives to continue in case of insolvency of the credit institution?
  • Yes
(24) Comments: If entered into the cover pool.
6. If derivatives are permitted in the cover pool, what is their ranking?
  • Pari passu to covered bond holders
VIII. RISK WEIGHTING & COMPLIANCE WITH EUROPEAN LEGISLATION
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?
  • Yes
(25) Comments: Higher investment limits apply: e.g. 25% investment limit for investment funds.
IX. ADDITIONAL INFORMATION
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
 

Comments for your selection

  • 1: Act no. XXX of 1997 on Mortgage Banks and Mortgage Bonds
  • 2: The Mortgage Bank Act contains the special insolvency rules.
  • 3: The outstanding mortgage bonds shall always be covered up to 80 per cent by loans secured by mortgages (“jelzálogjog”), independent mortgage liens (“önálló zálogjog”) or by joint and several surety assumed by the Hungarian State (“állami készfizető kezességvállalás”). In fact, the portfolios of Hungarian mortgage banks consist almost exclusively of residential mortgage loans.
  • 4: Public sector assets do not qualify as eligible assets.
  • 5: No EEA country mortgage loans other than secured by a real property located in the territory of Hungary are yet granted, or included into the cover pools of Hungarian mortgage banks. This will be first an option after 1st of January 2010.
  • 6: Special mortgage lending value calculation methods are applicable for mortgage banks.
  • 7: Based on “mortgage lending value”
  • 8: In the event of liquidating a mortgage bank the part of the ordinary cover in excess of the limit of 60/70% LTV and the portion of liquid assets held but not recognized as cover by the mortgage bank at the starting date of liquidation, which comply with the requirements set for supplementary cover, shall be used exclusively for the settlement of the liabilities towards mortgage bond holders - after paying of the fee of the administrator of cover and the costs incurred by the registration and satisfaction of particular claims. (Mortgage Bond Act, Section 20 - 5b)
  • 9: General rule - applicable to all Hungarian credit institutions
  • 10: Whenever a mortgage bond and its cover assets are not denominated in the same currency, the mortgage bank shall conclude derivative transactions to hedge against currency exchange risk. Section 14 - (5)
  • 11: Derivative transactions can be entered into the cover pool upon the consent of the derivative counterparty. Hence possible by law, no current practice.
  • 12: Stress tests are used.
  • 13: Mortgage Banks are required by the Mortgage Bank Act to possess cover surpassing the principal of outstanding mortgage bonds and the interest any time. Daily reporting is not obligatory.
  • 14: Static stress tests are required by the cover pool monitor.
  • 15: The legal regulation requires stress test calculations on a quarterly basis.
  • 16: There are no regulatory obligations for liquidity risk mitigation.
  • 17: There are no regulatory obligations for liquidity risk mitigation.
  • 18: No mandatory overcollateralization rules apply.
  • 19: Both the mortgage bank and the cover pool monitor shall immediately notify the Hungrian Financial Supervisory Authority (HFSA) if the cover assets for outstanding mortgage bonds do not meet the requirements set forth in the Mortgage Bank Act. The HFSA has to take any necessary measurement or extraordinary measurement in the case when the mortgage bank fails to comply with regulations on ensuring liquidity and approximation of maturities of assets and liabilities - in order to avoid any possible insolvency situation.
  • 20: In the case of breach of liquidity or asset-liability management provisions, a Supervisory Commissioner can be delegated to the mortgage bank or any credit institution upon the decision of Hungarian Financial Supervisory Authority (HFSA). The delegation of a Supervisory Commissioner to the mortgage bank is an extraordinary measurement to be effectuated by the HFSA prior to the commencement of any insolvency procedure. In this case both the rights of the owners and the rights of the management of the mortgage bank will be suspended in order to warrant the satisfaction of the claims of the mortgage bank’s creditors, e. g. bondholders. In this case the aim of the extraordinary measurement is to avoid a threatening insolvency situation – which has not yet occurred at the point of time when delegating the Supervisory Commissioner to the bank.
  • 21: Only specialized credit institutions, i.e. mortgage banks are entitled to issue mortgage bonds, based on a special legal framework.
  • 22: In the case of breach of liquidity or asset-liability management provisions, a Supervisory Commissioner can be delegated to the mortgage bank or any credit institution upon the decision of Hungarian Financial Supervisory Authority (HFSA). The delegation of a Supervisory Commissioner to the mortgage bank is an extraordinary measurement to be effectuated by the HFSA prior to the commencement of any insolvency procedure. In this case both the rights of the owners and the rights of the management of the mortgage bank will be suspended in order to warrant the satisfaction of the claims of the mortgage bank’s creditors, e. g. bondholders. In this case the aim of the extraordinary measurement is to avoid a threatening insolvency situation – which has not yet occurred at the point of time when delegating the Supervisory Commissioner to the bank. In the event of the transformation or liquidation of a mortgage bank, the mortgage bank may, with the permission of the HFSA, transfer its liabilities existing under mortgage bonds or derivative transactions recognized as cover to another mortgage bank.
  • 23: The cover pool monitor shall monitor and certify that: a) the necessary collateral for mortgage bonds is available at all times as required; b) the mortgaged objects recognized as cover assets for mortgage bonds have been recorded along with the related property registration data and mortgage lending value in the register of ordinary and supplementary cover assets. The cover pool monitor shall immediately notify the HFSA in writing if the collateral coverage of outstanding mortgage bonds fails to meet the requirements set forth in the Mortgage Bank Act. Mortgage Bank Act Section 17 - (1 & 2)
  • 24: If entered into the cover pool.
  • 25: Higher investment limits apply: e.g. 25% investment limit for investment funds.