Comments for your selection

• 1: The ‘special license’ is a registration by the Dutch Central Bank of the programme under the Dutch covered bond regulation. See question VI.1 below.
• 2: : Greek law provides for three structures for the issuance of covered bonds: (a) direct issuance by the credit institution which maintains ownership of the cover pool; (b) direct issuance by the credit institution and guarantee by an SPE which acquires ownership of the cover pool; (c) issuance by an SPE which acquires ownership of the cover pool, while the credit institution provides a guarantee. Currently all outstanding covered bonds are based on structure (a). All covered bonds issued under structure (b) have now been redeemed, and it is expected that the regulator will not consider favorably the use of structure (c).
• 3: Since the PfandBG 2005, the issuer does not need to be a specialised bank
• 4: Depending on which of the above structures is used: Yes, direct for structures (a) and (b) Yes, indirect for structure (c).
• 5: There is no direct legal link between cover assets and Pfandbriefe. All obligations from the Pfandbriefe are obligations of the issuing bank as a whole, to be paid from all the assets of the issuing bank. Only in the case of insolvency, the cover pool is isolated from the general insolvency estate, and is reserved for the claims of the Pfandbrief holders; but even then, Pfandbrief holders have still a claim against the general insolvency estate. See V. 1.
• 6: Legally the assets are owned by the SPE. From an accounting perspective the assets remain on the consolidated balance sheet of the issuer. Despite the legal transfer of the assets to the SPE, the issuer is still carrying the credit risk of the assets.
• 7: Depending on which of the above structures is used: The issuer directly for structure (a) SPE which guarantees the covered bonds for structure (b) and the credit institution guarantees the cover bonds for structure (c).
• 8: There may be additional originators from the issuer's group. In addition, the issuer and such additional originators may have acquired assets from other originators.
• 9: Depending on which of the above structures is used: Yes for structures (a) and (b) No for structure (c). As mentioned above the Greek legislative framework permits the issuance of covered bonds in the three ways set out above. In structure (a) the covered bonds are issued by a credit institution and the segregation of the cover pool is achieved through a statutory pledge over the cover pool assets. In structure (c) the covered bonds are issued by a special purpose entity being a subsidiary of a credit institution, which purchases the cover assets from the credit institution by virtue of the provisions of the Bond Loan and Securitization Law, and are guaranteed by the credit institution. Structure (b) is similar to structure (b) in that the cover assets are transferred to an SPE by virtue of the provisions of the Bond Loan and Securitization Law, but the covered bonds are issued by the credit institution based on a guarantee by the SPE. The reason for introducing structures (b) and (c) was that historically most Greek banks had issued a significant amount of notes under medium term note (MTN) programmes containing negative pledge covenants, which did not allow the creation of security over the cover pool, as is necessary for the direct issuance of covered bonds. All Greek banks having MTN programmes have now amended the terms of such programmes to carve out the security provided to holders of covered bonds from the scope of the negative pledge covenants. All covered bonds issued under structure (b) have now been redeemed and all others have used structure (a).
• 10: In Greece, the primary legal basis for covered bond issuance is article 91 of Law 3601/2007 “On the Undertaking and Exercise of Activities by Credit Institutions, Sufficiency of Own Funds of Credit Institutions and Investment Services Undertakings and Other Provisions”, which entered into force on 1 August 2007 (the “Primary Legislation”) and as amended by article 48 of law 3693/2008 and article 69 of law 2746/2009. The Primary Legislation supersedes general provisions of law contained in the Civil Code, the Code of Civil Procedure and the Bankruptcy Code. By way of implementation of the Primary Legislation and pursuant to an authorization provided by the latter, the Governor of the Bank of Greece has issued Act nr. 2598/2.11.2007, subsequently replaced by Act nr. 2620/28.8.2009 (the “Secondary Legislation”). Finally, the legislative framework in Greece is supplemented by Law 3156/2003 “On Bond Loans, Securitization of Claims and of Claims from Real Estate” (the “Bond Loan and Securitization Law”), to the extent that the Primary Legislation cross-refers to it.
• 11: This questionnaire reflects all Dutch covered bond programmes as registered by the Dutch Central Bank under the Dutch covered bond regulation, and as listed under question IX.2 below, as at the date of this questionnaire, being 18 February 2011. As the Dutch covered bond regulation is principles-based and the more detailed provisions can be found in the registered Dutch covered bond programmes themselves, this questionnaire reflects the position of the Dutch covered bond regulation as implemented by the registered Dutch covered bond programmes as at the date hereof.
• 12: The legal basis of German Pfandbriefe is the PfandbriefAct (Pfandbriefgesetz - PfandBG) from 22 May 2005, which came into force on 17 July 2005; this Act was amended in 2009 and 2010. Furthermore several regulations were made: Net present value Regulation (2005), Regulation on the Determination of the Mortgage Lending Value (2006), Cover Register Statutory Order (2006), Regulation on the Determination of the Mortgage Lending Values of Ships and Ships under Construction (2008), Regulation on the Determination of the Mortgage Lending Values of Aircraft (2009).
• 13: An insolvency of the issuer does not result in an insolvency of the SPE owning the cover pool.
• 14: Credit institutions are in theory subject to either bankruptcy under the Bankruptcy Code or special liquidation administered by the regulator (the Bank of Greece). The special liquidation regime takes precedence over the bankruptcy proceedings in the sense that even if a credit institution is declared bankrupt, the bankruptcy proceedings will stop if it is placed in special liquidation. In practice it is considered that the regulator would never permit a credit institution to become subject to bankruptcy under the Bankruptcy Code, but would submit it to special liquidation. The primary legislation on covered bonds deviates from both the provisions of the Bankruptcy Code and the provisions on special liquidation.
• 15: Not superseding, but additional to the general insolvency law
• 16: §§ 30 – 36 PfandBG
• 17: In case of a direct issuance (structure (a)) the cover assets are segregated from the remaining estate of the credit institution through a pledge constituted by operation of law (statutory pledge). In case of assets governed by a foreign law (which will typically include inter alia claims from derivative contracts) a security interest must be created in accordance with such foreign law. The statutory pledge and the foreign law security interest secure claims of the holders of covered bonds and may also secure (in accordance with the terms of the covered bonds) other claims connected with the issuance of the covered bonds, such as derivative contracts used for hedging purposes. The statutory pledge and any foreign law security interest is held by a trustee for the account of the secured parties.The claims constituting cover assets are identified by being listed in a document signed by the issuer and the trustee. A summary of such document is registered in the land registry of the seat of the issuer. Claims may be substituted and additional ones may be added to the cover pool through the same procedure.The Primary Legislation creates an absolute priority of holders of covered bonds and other secured parties over the cover pool. The statutory pledge supersedes the general privileges in favor of certain preferred claims (such as claims of employees, the Greek state and social security organization) provided for by the Code of Civil Procedure. Furthermore upon registration of the summary of the document listing the claims included in the cover pool, the issuance of the covered bonds, the establishment of the statutory pledge and the foreign law security interest and the entering into of all contracts connected with the issuance of the covered bonds are not affected by the commencement of any insolvency proceedings against the issuer. In case of structures (b) and (c) the cover pool assets are segregated from the estate of the credit institution by virtue of their sale to the special purpose entity. For such transfer the provisions of the Bond Loan and Securitization Law apply, which provide equivalent protection from third party creditors and insolvency to the one the Primary Legislation provides in case of direct issuance. It is worth noting that according to the Primary Legislation both in case of direct and of indirect issuance the cover assets may not be attached. This has the indirect result that the Greek law claims constituting cover assets are no longer subject to set-off, because according to article 451 of the Greek Civil Code claims which are not subject to attachment are not subject to set-off. This is important because under generally applicable law borrowers the loans to whom become cover assets would have had a right to set-off, which would reduce the value of the cover pool, for all counterclaims (including notably deposits) predating the creation of the pledge or the transfer of the claims, as the case may be. No specific provisions exist in relation to voluntary overcollateralisation. As a result the segregation applies to all assets of the cover pool, even if their value exceeds the minimum required by law. The remaining creditors of the credit institution will only have access to any remaining assets of the cover pool after the holders of the covered bonds and other creditors secured by the cover pool have been satisfied in full.
• 18: The Dutch covered bond regulation allows a range of assets to be included in the cover pool. In practice all cover pools consist of residential mortgage loans and allow for inclusion of substitution assets, meaning euro-denominated (i) cash and (ii) subject to minimum rating and maximum percentage requirements (this differs per programme), other assets eligible under the CRD to collateralise covered bonds.
• 19: Cover assets are primarily residential mortgage loans, loans secured by a mortgage on commercial properties, loans secured by a mortgage on ships and loans to or guaranteed by state entities and derivatives. The above assets form the basis of the cover pool. The cover assets may be substituted by certain tradable assets but only up to the amount by which the aggregate nominal value of the cover assets including accrued interest exceeds the nominal value of the outstanding covered bonds including accrued interest.
• 20: Point 1 and 3 for Public Pfandbriefe; Point 2 and 3 for Mortgage Pfandbriefe;
• 21: All Pfandbriefe must be fully secured by cover assets: loans to the public sector as well as land, ship or aircraft mortgages, § 4 I PfandBG. For each of these 4 asset classes, there is a specific class of covered bonds: Hypothekenpfandbriefe, Öffentliche Pfandbriefe, Schiffspfandbriefe and Flugzeugpfandbriefe. Up to 10% of the nominal volume of Pfandbriefe outstanding may consist of money claims against the European Central Bank or central banks in the European Union or against suitable credit institutions. For Hypothekenpfandbriefe, the part of those 10% that is not exhausted by these asset types and moreover another 10% may consist of cover assets suitable for Öffentliche Pfandbriefe (loans to the public sector), § 19 I 2. and 3. PfandBG. Similar provisions are regulated for mortgage lending values of ships and aircraft. Pfandbrief issuers can pursuit all business activities that are permitted for credit institutions. For the coverage of Pfandbriefe, assets from the four business areas: mortgage lending, public sector lending, ship finance and aircraft finance may be used. Exposures to credit institutions must fulfill the criteria of credit quality step 1.
• 22: The Dutch covered bond regulation allows a range of assets to be included in the cover pool. In practice all cover pools consist of residential mortgage loans and allow for inclusion of public sector assets as substitution assets if such public sector assets are eligible under the CRD to collateralise covered bonds.
• 23: Domestic and other EU public sector assets are eligible without further requirements. Assets of the following multilateral development banks are eligible: International Bank for Reconstruction and Development, International Finance Corporation, Inter-American Development Bank, Asian Development Bank, African Development Bank, Council of Europe Development Bank, Nordic Investment Bank, Caribbean Development Bank, European Bank for Reconstruction and Development, European Investment Bank, European Investment Fund, Multilateral Investment Guarantee Agency, International Finance Facility for Immunisation and Islamic Development Bank. The eligibility of non-EU public sector assets depends on the credit rating of the issuer and on the currency of the relevant asset.
• 24: Both the Dutch covered bond regulation and all covered bond programmes allow for inclusion of non-Dutch residential mortgage loans, subject to certain restrictions. In practice all cover pools consist of Dutch residential mortgage loans and, in one programme, also German residential mortgage loans.
• 25: Residential and commercial mortgage loans may only be included in the cover pool if the property subject to the mortgage is situated in Greece and hence is governed by Greek law. There is currently an ongoing discussion about permitting the inclusion of foreign mortgage loans.
• 26: Regarding land mortgage collateral, only mortgages on real estate located in the following countries are eligible for the cover: EU- or EEA-countries, Switzerland, USA, Canada and Japan. Public sector loans to these countries are eligible for the cover of Öffentliche Pfandbriefe (§ 20 PfandBG). Ship and aircraft mortgages can be granted worldwide under certain conditions, especially that there is a public register for these mortgages, and that these give a security comparable to German ship and aircraft mortgages (§ 22 V 1 / § 26 b IV 1 PfandBG). The issuer has to publish regularly the regional distribution of the cover assets (§ 28 PfandBG). Furthermore, the total volume of the loans in states (not belonging to the EU), for which it is not ensured that the preferential right of the Pfandbrief creditors extends to the cover assets, may not exceed 10 % of the total volume of the cover loans (§§ 13 I 2, 20 I 2 PfandBG) – 20 % for ship mortgages (§ 22 V 2 PfandBG) and aircraft mortgages (§ 26 b IV 2 PfandBG).
• 27: Under all covered bond programmes the issuer is obliged to frequently send out investor reports that contain detailed information about, among other things, the cover pool transferred to the SPE and the performance of the asset cover test. Each year the SPE is required to produce audited financial statements.
• 28: Credit institutions that issue (directly or indirectly) covered bonds must provide in their financial statements and on their websites information on the covered bonds including on the nominal value and net present value of the bonds and the cover pool, the net present value of derivatives used for hedging. More particulary, pursuant to part ΙV of the Secondary Legislation there are the following disclosure requirements to the Bank of Greece until the end of March of each year in relation to data as of end of December of the year preceding: a) The certified by chartered accountant / auditor results arisen following the audit conducted pursuant to the provisions of the Secondary Legislation and following the follow-up of processes and restrictions as set by the Secondary legislation. Any detailed presentation of data, methods and parameters used should also be mentioned. b) Detailed data of the cover pool assets that would confirm the restrictions set under the Secondary Legislation along with the information related to the real estate’s revaluation of the mortgages and other loans. c) The following data and information: (i) weighted average interest-rate per category of assets and weighted average interest-rate of all cover pool assets (ii) the real estate values of the mortgages and of the other loans, (iii) validation of the selected policy of risk hedging with detailed analysis of the degree of effectiveness of this (iv) table of corresponding maturities of the covered bonds and corresponding assets of the cover pool and the derivatives. Finally all the credit institutions have to communicate to the Bank of Greece, within 30 days from the expiry of each quarter, with data of 1st, 2nd and 3rd quarter end, concise information with regards to the results from the tests provided under the Secondary Legislation. In case the covered bonds are disposed by public offer, in such case law 3401/2005 is applicable (law 3401/2005 is the prospectus law which transposed the prospective Directive 2003/71/EC) along with the Commission Regulation 809/2004.
• 29: Yes, in details regulated in § 28 PfandBG. View VI.2. In 2009 § 28 (1) No. 2 PfandBG was amended so that now additionally the maturity structure has to be published in yearly bands from 1 to 5 years on a quarterly basis.
• 30: For the LTV cut-off percentages referred to in questions IV.2 and 3 below, all covered bond programmes use the market/indexed value. For the eligibility LTV cap referred to in question IV.4a below, all covered bond programmes use the foreclosure value at origination.
• 31: The valuation of properties must be performed by an independent valuer at or below the market value and must be repeated every year in relation to commercial properties and every three years in relation to residential properties.
• 32: The basis of this LTV calculation is the so called mortgage lending value (Beleihungswert), which has to be calculated in a different way compared to the market value, § 16 PfandBG. Details of the valuation procedure and the qualifications of the appraisers are regulated in a specific statutory order on mortgage lending value (Beleihungswertermittlungsverordnung, BelWertV), § 16 IV PfandBG. § 7 BelWertV requires personal and organisational independence of the valuer. Personal independence means that there must not be any connection between the valuer and the borrower. Organisational independence means that inhouse valuers must not be part of the credit division and must not be integrated in the credit decision. Organisational independence is assumed for external valuers. Similar provisions are regulated for mortgage lending values of ships and aircraft.
• 33: All covered bond programmes apply an 80% LTV cut-off percentage. Some covered bond programmes apply a 100% or different LTV cut-off percentage for residential mortgage loans that have the benefit of a Dutch National Mortgage Guarantee (Nationale Hypotheek Garantie) or of a credit risk insurance policy.
• 34: 60%
• 35: 60 % of the mortgage lending value. But there is no absolute lending limit, only a relative one: This means that mortgage loans may have a higher LTV than 60 %, but only the part of the loan up to 60 % LTV is part of the cover pool, § 14 PfandBG. For more details see VII.3.
• 36: (Residential, 125%). Under all covered bond programmes a Dutch residential mortgage loan is only eligible for the asset pool if its principal amount did not exceed 125% (subject to some exceptions) of the foreclosure value of the mortgaged property at origination.
• 37: In relation to residential and commercial mortgages only the amount exceeding the LTV cap is non-eligible, whereas in relation to shipping loans exceeding the LTV cap (60%), the entire loan appears to be ineligible. Thus by way of example a loan of 900.000 Euros secured through a residential mortgage over a property valued at 1.000.000 Euros may be included in the cover pool but will be deemed for the purposes of the calculation of the statutory tests to be equal to 800.000 Euros.
• 38: See IV.2.
• 39: Any surplus over the LTV cap referred to under question IV.2 above, qualifies as extra credit enhancement.
• 40: While the relevant provisions are not explicit on this point, it would appear that shipping loans that cease to be eligible, would no longer be taken into account in the calculation of the cover pool. However, to the extent that non-eligible assets are not removed from the cover pool, investors will have the benefit of such assets.
• 41: But there is a monitoring of the property value. § 26 BelWertV wants a review of the underlying assumptions of the mortgage lending value, if there are hints that these could have deteriorated. This has to be done especially, when the market prices have declined substantially in the respective region. For other real estate than owner occupied residential real estate an automatic review procedure is also necessary, when the loan has defaulted (arrears of 90 days). Furthermore, there are monitoring requirements resulting from Capital Requirements. For commercial real estate there has to be an annual monitoring. For residential real estate a review of the underlying assumptions every three years is sufficient. A change for risk weighting purpose could lead to apply § 26 BelWertV. The monitoring can be done by any qualified person. Statistical methods may be used. Similar provisions are regulated for mortgage lending values of ships and aircraft.
• 42: The valuation of properties must be performed by an independent valuer at or below the market value and must be repeated every year in relation to commercial properties and every three years in relation to residential properties.
• 43: The Secondary Legislation provides for tests that must be met for the full duration of the covered bonds. Such tests include inter alia a requirement that the net present value of the liabilities secured by the cover pool must at all times not exceed the net present value of the cover pool assets taking into account a parallel move of the yield curve by up to 200 basis points. Therefore in practice there is a legal requirement to provide for measures to mitigate such interest rate risk. In addition in practice both interest rate and (if such risk exists in the structure) currency risk is required by contract to be mitigated usually through appropriate derivative instruments.
• 44: § 4 II PfandBG stipulates that the total volume of Pfandbriefe outstanding must be covered at all times by assets of at least the same amount. This means that the nominal value of the cover assets must permanently at least be the same than the respective total value of the Pfandbriefe. In addition § 4 I PfandBG requires that Pfandbriefe are covered on a net present value basis even in case of severe interest rate changes. The issuer has to ensure that after the so called stress tests, which have to be carried out weekly, an over-collateralisation of at least 2% exists. Details on how to calculate the NPV and the stress tests are regulated in the statutory order on net present value (Pfandbrief-Barwertverordnung – PfandBarwertV) – On a quarterly basis, the stressed NPV of the Pfandbriefe outstanding, the structure of the cover pool and the over-collateralisation has to be published (§ 28 PfandBG). See V.6.
• 45: The use of derivatives hedging instruments is permitted, but to the extent the counterparties are credit institutions or investment services undertakings, the relevant exposures must not exceed 15% of the nominal value of the covered bonds. Consquently, both methods are used in practice. For instance currency risk has been avoided in the first covered bond issuance by denominating the covered bonds in Euros and including in the cover pool only loans denominated in Euros. However, in relation to interest rate risk it is difficult in practice to rely on natural matching (due to the variety of interest rates used by most Greek banks in relation in particular to residential mortgages) and therefore the use of interest rate swaps is unavoidable.
• 46: Pfandbrief issuers are allowed to use derivatives as additional mitigation of interest or currency risk.
• 47: A cover pool swap (total return swap) is entered into at inception of the covered bond programme. Covered bond series swaps (interest rate swaps and/or structured swaps) are entered into at the time of issue of the relevant series of covered bonds.
• 48: Typically hedging derivatives are entered into by the time of issuance, because otherwise there can be no assurance (to the extent there is no perfect natural matching) that the test of the Secondary Legislation, as described under V.1 above and any additional tests agreed by the parties will be satisfied. It is a commercial matter whether the derivative instruments are entered into from the beginning or upon rating downgrade.
• 49: PfandBG allows the use of derivatives for mitigation of market risks. In order to be eligible as cover pool assets derivatives have to be based on standardized master contracts in such way that a Pfandbrief bank’s insolvency does not lead to a termination or default of those derivatives registered in the cover pool register.
• 50: The Secondary Legislation provides for the following statutory tests: (a) The nominal value of the Covered Bonds including accrued interest may not exceed at any point in time 95% of the nominal value of the cover assets including accrued interest. (b) The net present value of obligations to holders of Covered Bonds and other creditors secured by the cover pool may not exceed the net present value of the cover assets including the derivatives used for hedging. This test must be met even under the hypothesis of a parallel movement of the yield curve by 200 basis points. (c) The amount of interest payable to holders of Covered Bonds for the next 12 months must not exceed the amount of interest expected to be received from the cover assets over the same period. For the assessment of the fulfillment of this test derivatives entered into for hedging purposes are taken into account. Tests (b) and (c) are performed on a quarterly basis. In case any of the tests is not met (either when performed on a quarterly basis, or if the credit institution becomes aware at any other time that the tests are not met), the credit institution is obliged to immediately take the necessary measures to remedy the situation. The results of the tests (a) to (c) above and the procedures used to monitor the compliance with such tests are audited on a yearly basis by an auditor independent of the statutory auditors of the credit institution.
• 51: Please refer to question V.1
• 52: Please see comment provided under answer V.4
• 53: The NPV cover and the liquidity buffer has to be calculated on a daily basis.
• 54: Under all covered bond programmes the asset cover test addresses the set-off risk.
• 55: See above under V1 on the calculation of the present value test under the hypothesis of a parallel movement of the yield curve up to 200 basis points and also please see comment provided under answer V.4 for the tests applicable.
• 56: A specific statutory order on net present value (PfandBarwertV) prescribes in detail how to calculate the net present value (procedure, stress scenarios, risk models etc.). This can be done by static or dynamic approaches or based on internal models.
• 57: The npv cover and the liquidity buffer has to be calculated on a daily basis. The npv stress test has to be performed weekly.
• 58: Liquidity risk in relation to interest payments is required to be mitigated for the next 12 months on a rolling basis in accordance with one of the tests provided in the Secondary Legislation (see above V4). Additional mitigation of the liquidity risk may be provided by contract.
• 59: With the amendment 2009 of the PfandbBG a liquidity buffer for the mitigation of short-term liquidity risk is introduced. The Pfandbrief issuer is obliged to cover the maximum liquidity gap within the next 180 days.
• 60: All covered bond programmes require the issuer to establish a reserve fund equal to 1 month’s or 3 months’ (this differs per programme) interest payments on the covered bonds plus certain costs and expenses for 1 month if the issuer's short term rating is or falls below P-1/F1/A-1 or A-1+ (this differs per programme).
• 61: The interest payable to covered bond investors over the next 12 months must not exceed the interest receivables from the cover pool assets taking into account derivative hedging instruments.
• 62: All covered bond programmes use either (a) a pre-maturity test 12 months or less before maturity if the issuer's short term rating is or falls below P-1/F1+/A-1+ or (b) a 12- or 18-months maturity extension. A breach of the pre-maturity test requires (i) the issuer to cash-collateralise hard bullet maturities or (ii) alternative remedies such as a guarantee of the issuer's obligations, a liquidity facility and/or a sale or refinancing of assets. In addition, most covered bond programmes provide for a ‘supplemental liquidity reserve’, being (1) additional residential mortgage loans that may be sold at the best price reasonably available if the issuer's short term rating is or falls below P-1/F1+/A-1+ or (2) the proceeds of such sale, as the case may be.
• 63: The covered bond legislation does not include requirements for the mitigation of the liquidity risk on principal payments.
• 64: In all covered bond programmes contractual arrangements are subject to grace periods generally lasting from 7 to 30 days. For example, a breach of the pre-maturity test must be remedied within 10 business days.
• 65: The statutory liquidity test referred to above under V.4 and V.8 provides for no grace period, as the credit institution must take immediately action to restore the test. Contractual mitigants may be subject to a grace period. In case test it is found during the quarterly that the requirement described under V.9 is not satisfied the credit institution must immediately rectify the situation.
• 66: All of the above are possible consequences of a breach, in addition to redirection of cash flows.
• 67: The breach of the covered bond legislation will lead to regulatory sanctions. The parties can also agree that the breach of the statutory tests constitutes an event of default. Moreover, since the Bank of Greece approves each issuance of covered bonds, it would not approve any issuance in case the statutory tests (including the liquidity test) are not met. Therefore a breach of the statutory (but not of any contractual) liquidity test would in practice lead to a Programme freeze. Also the failure to comply with the requirement to restore the statutory tests may lead to sanctions by the Bank of Greece. Apart from the sanctions provided by the Primary and the Secondary Legislation, the contracting parties may agree to additional sanctions, in particular to alternative administration or an event of default.
• 68: A breach of liquidity risk mitigants is not allowed as the liquidity buffer is stipulated by law. A violation of the legal reguirements could lead to a loss of the Pfandbrief license.
• 69: The compliance with statutory tests is audited by independent auditors. Such audit reports, as well as the quarterly compliance reports by the credit institution must be submitted to the Bank of Greece as regulator.
• 70: Please see above comment provided under question III.4
• 71: According to § 28 I PfandBG issuers are obliged to publish on a quarterly basis information regarding nominal and NPV coverage, stress test and the cover pool assets.
• 72: See above comment provided under question V.4.
• 73: For all covered bond programmes this is determined using an asset cover test with asset percentages ranging from approximately 70 to 80%.
• 74: The nominal value of the covered bonds plus accrued interest cannot exceed 95% of the value of the cover pool assets.
• 75: of the total volume of the bonds in circulation (Public and Mortgage Pfandbriefe)
• 76: The 2% have to be covered under stress assumptions.
• 77: All cover assets are subject to a pledge by operation of law in favour of the covered bondholders and therefore assets in excess of the mandatory overcollateralisation are still subject to such pledge.
• 78: German Bundestag, Publication reference 16/13823, 21. 07. 2009: "The excess cover stipulated in § 4 par. 1) of the Pfandbrief Act, to be calculated on a net present value basis, including the related stress tests, forms part of the statutory coverage. The following points apply to assets which a Pfandbrief bank holds in excess of the amount required by law to fulfil its coverage obligations, i.e. which it holds “voluntarily” in the cover pool: • § 30 par. 4) of the Pfandbrief Act stipulates that the insolvency administrator can only demand that assets are transferred to the insolvent estate if these assets will “obviously not be necessary” to service the Pfandbrief creditors on time. • However, the claim to release of the assets only applies in the case of a disproportionally high level of overcollateralization, as it must be “obvious” that the assets will not be necessitated to service the Pfandbriefe. • The wording used in the Act to the effect that the assets “will” obviously not be necessary means that this assessment cannot be based on the net present values at a particular cut-off date, but must pay due regard to future risks over the entire terms of all outstanding Pfandbriefe of the relevant Pfandbrief category. The court would ultimately have to rule on the forecast involved in this assessment. • The burden of demonstration and of proof that the conditions for the transfer of assets are met lies with the insolvency administrator (Bundestag publication reference 15/1853 of 29 October 2003)."
• 79: Programme freeze (neither sale of assets nor new issuance allowed) Other regulatory or rule-based actions. General Comment: Since the Bank of Greece approves each issuance of covered bonds, it would not approve any issuance in case the statutory tests (including the coverage test) are not met. Therefore a breach of the statutory (but not of any contractual) coverage test would in practice lead to a Programme freeze. Also the failure to comply with the requirement to restore the statutory tests may lead to sanctions by the Bank of Greece. Apart from the sanctions provided by the Primary and the Secondary Legislation, the contracting parties may agree to additional sanctions, in particular to alternative administration, redirection of cashflows or an event of default.
• 80: All of the consequences ticked above are possible consequences of a breach.
• 81: The breach of the covered bond legislation will lead to regulatory sanctions. The parties can also agree that the breach of the statutory tests constitutes an event of default.
• 82: A breach of liquidity risk mitigants is not allowed as the liquidity buffer is stipulated by law. A violation of the legal requirements could lead to a loss of the Pfandbrief license.
• 83: The ‘special license’ is the registration of the covered bond programme by the Dutch Central Bank. For that purpose the issuer will need to demonstrate to the Dutch Central Bank that the bonds qualify as ’covered bonds’ within the meaning of the Dutch covered bond regulation by submitting documents showing that the following requirements are met: a. the covered bonds (i) are issued by a bank having its registered office in the Netherlands and (ii) are covered by cover assets which will be used with priority towards payment of principal and interest on the covered bonds if the issuer defaults; b. the cover assets (i) have been safeguarded for the benefit of the covered bondholders by way of a transfer to an SPE and a pledge to a trustee, (ii) provide sufficient cover for the payment of principal and interest on the covered bonds and the cost of managing and administering the cover assets and (iii) are governed by the law of a Member State, the United States of America, Canada, Japan, the Republic of Korea, Hong Kong, Singapore, Australia, New Zealand or Switzerland; c. the issuer does not own or control the SPE or the trustee; d. the requirements set out in paragraphs a. and b. under question VI.2 below are met; e. the covered bonds must have a credit rating of at least AA- (Fitch or S&P) or Aa3 (Moody’s); f. there must be a healthy ratio between on the one hand the programme/issuance amount and on the other hand (i) the value of the cover assets; (ii) the value of the remaining assets of the issuer eligible and freely available for addition to the cover assets; and (iii) the consolidated balance sheet of the issuer (the latter to protect other stakeholders); and g. the issuer must have solid and effective strategies and procedures for verifying and procuring the sufficiency of the cover assets, taking into account the composition of the cover assets, the over-collateralisation and the applicable risks and stress tests.
• 84: According to the Primary Legislation, covered bonds may be issued (or in case of an indirect issuance guaranteed) by credit institutions having Greece as home member state. However, in case of issuance of covered bonds by a credit institution having as home state another member state of the European Economic Area (EEA) and provided that they are characterized as covered bonds in accordance with the law of such member state, the provisions of the Primary Legislation on the creation of a statutory pledge will apply in relation to claims governed by Greek law, as well as the tax exemptions which apply to Greek bonds. Therefore foreign banks established within the EEA having a significant loan portfolio in Greece may use the loans of such portfolio as part of the cover pool. The Secondary Legislation sets additional prerequisites for the issuance of covered bonds. Specifically the credit institutions issuing covered bonds: (a) must have certain minimum risk management and internal control requirements including suitable policies and procedures for the issuance of covered bonds, organizational requirements, IT infrastructure and a policy for the reduction and management of risks deriving from the issuance of covered bonds, such as interest rate risk, counterparty risk, operational risk, FX risk and liquidity risk; and (b) must have aggregate regulatory capital of at least 500 million Euros and a capital adequacy ratio of at least 9%.
• 85: The issuer is a fully equipped credit institution, which has a special licence to issue “Pfandbriefe”. § 2 I PfandBG sets minimum requirements to get and to keep this special licence: - core capital of at least 25 million euros, - general banking licence allowing to do lending business, - suitable risk management procedures and instruments, - business plan showing regular and sustainable issues as well as necessary organisational structure.
• 86: Once a covered bond programme is registered by the Dutch Central Bank, the issuer will have ongoing administration and reporting obligations towards the Dutch Central Bank: a. it must keep a record of all covered bonds issued and of all assets serving as cover assets; b. it must demonstrate at least quarterly that the covered bonds continue to meet the registration criteria, by granting the Dutch Central Bank access to the records referred to in a. above and for instance audit reports, credit rating reports and reports regarding the cover assets. This is without prejudice to the general authority of the Dutch Central Bank to request information from the issuer on the basis of its regular banking supervision powers; c. it must demonstrate at least annually to the Dutch Central Bank that it complies with the requirement set out in section paragraph VI.1 under g. above; d. annually, within six months of the close of its financial year, it must submit to the Dutch Central Bank the annual financial statements and the annual report of the SPE; e. it must immediately notify the Dutch Central Bank if, for as long as any covered bond is outstanding (i) changes occur in respect of the data, transaction documents or other submitted documents, as a result of which the outstanding covered bonds are or will no longer be compliant with the requirements for registration; or (ii) significant changes are made in the covered bond programme or the conditions of the covered bonds; and f. before it issues any further covered bonds, (i) it must ascertain that the requirements for registration are complied with and (ii) if the ratio between the total nominal value of the covered bonds and the consolidated balance sheet total of the issuer increases beyond what the Dutch Central Bank had determined to be a healthy ratio, the issuer must demonstrate to the Dutch Central Bank that the new ratio can be considered healthy.
• 87: See above comment provided under question III.4
• 88: Pfandbrief issuers have to send copies of the cover register to BaFin.
• 89: See question VI.1 above.
• 90: This is a “special” supervision (reference to UCITS Art. 22(4)), because the BaFin has to supervise Pfandbriefbanks much more intensive than banks in general. The former division on mortgage banks (Referat Hypothekenbanken) was transformed into the divison “Pfandbriefkompetenzcenter I - Grundsatzfragen”, which is responsible for all fundamental issues regarding the PfandBG, especially its interpretation and further development. In January 2006, the BaFin has set up a special division for cover pool checks (Pfandbriefkompetenzcenter II - Deckungsprüfungen). The German banking supervisory authority (BaFin) carries out the supervision on German Pfandbrief banks, § 3 PfandBG. It has the power to give any instructions which are appropriate and necessary to ensure that the Pfandbrief bank’s business complies with the PfandBG and all statutory orders based upon it. The BaFin has to check the cover pool on the basis of suitable random checks about every two years (§ 3 PfandBG). Herefore the BaFin appoints auditors with special know how. The supervisory authority also carries out the supervision of the cover register: It is supervising the bank (§ 3 PfandBG) as well as the cover pool monitor: It appoints the cover pool monitor and the appointment may be revoked by the supervisory authority at any time, provided that there is an objective reason, § 7 III PfandBG. Furthermore, according to the statutory order based on § 5 III PfandBG (Deckungsregister-Verordnung, DeckRegV), copies of the cover register automatically shall be transmitted regularly to the supervisory authority. So this authority will be able to check – as stipulated in § 3, 3 and 4 PfandBG - whether the cover of the Pfandbriefe can be affirmed. The authority carries out this supervision by an audit on the basis of suitable random checks every two years.
• 91: But see questions VI.1, VI.2 and VI.3 above.
• 92: The Bank of Greece will only appoint a servicer of the cover pool if the trustee fails to do so in an insolvency of the issuer.
• 93: This is regulated in details in §§ 32 - 36 PfandBG.
• 94: An independent auditor must provide an annual report on the compliance with the statutory tests and the eligibility of the cover pool assets.
• 95: § 7 II PfandBG says that the cover pool monitor (and his deputy) must possess the expertise and experience, which are necessary to fulfil all duties. The qualification as certified auditor assumes that the necessary expertise is given.
• 96: In addition, it is market practice under all covered bond programmes that the issuer procures annual pool audits to be carried out by an independent auditor.
• 97: The cover pool monitor (“Treuhänder”) supervises the cover register permanently. The cover pool monitor has to ensure that the prescribed cover for the Pfandbriefe exists at all times and that the cover assets are recorded correctly in the cover register, §§ 7, 8 PfandBG. Without his consent, no assets may be removed from the cover pool. The BaFin published a specific statutory order on details of the form and the contents of this cover register (Deckungsregisterverordnung – DeckRegV), § 5 III PfandBG.
• 98: If the issuer becomes insolvent, the trustee may or, if instructed by the covered bondholders, shall accelerate the covered bonds against the issuer (but not the SPE) and will have a claim against the issuer on an accelerated basis. Any proceeds received from that claim will be added to the cover pool for the SPE to make the originally scheduled payments of interest and principal on the covered bonds. Acceleration against the issuer therefore does not automatically result in acceleration against the SPE.
• 99: Covered bonds do not accelerate automatically. The Pfandbriefe will be satisfied according to the conditions of the issue and they will be repaid at the time of their contractual maturity. Only the opening of a specific insolvency procedure of a cover pool can cause acceleration of the respective covered bonds (§ 30 VI PfandBG).
• 100: Apart from their primary claim on the issuer, the covered bondholders have a claim against the SPE owning the cover pool. The claim against the issuer is an ordinary, unsecured claim which is guaranteed by the SPE. The claim against the SPE is secured (indirectly through the trustee) by a right of pledge on the cover pool.
• 101: Depending on the structure used for the issuance of covered bonds the assets are segregated either through the creation of a statutory pledge over assets owned by the issuer and specified in a register or through the transfer of assets to an SPE.
• 102: The cover pool is a part of the general estate of the bank as long as the issuer is solvent. If the insolvency proceedings are opened, by operation of law, the assets recorded in the cover registers do not form part of the insolvency’s estate (§ 30 I 1 PfandBG). Those assets will not be affected by the opening of the insolvency proceedings (§ 30 I 2 2. HS PfandBG). German Bundestag, Publication reference 16/13823, 21. 07. 2009: "After insolvency proceedings are opened over a Pfandbrief bank the cover assets and Pfandbriefe together form an integrated portion of the Pfandbrief bank’s estate, which is not included in the insolvency proceedings. This portion of the bank’s assets can be referred to – as in questions 3, 7 and 8 below – as the “separate portion of the Pfandbrief bank”. This is made clear, for example, in the provisions of § 30 par. 2 sentences 5 and 6 of the Pfandbrief Act, according to which the cover pool administrator represents the Pfandbrief bank in respect of the Pfandbriefe and the cover assets. This applies to each Pfandbrief category and the associated cover pool separately." The amendments 2010 introduced a new wording in § 30 I PfandBG to confirm this statement by parliamentary law. The cover assets being used to cover the Pfandbriefe as well as claims under derivatives shall be recorded in the cover register (§ 5 I 1 PfandBG). By means of a statutory order (DeckRegV), the details on form and necessary content of the cover register as well as details on the registrations are stipulated (§ 5 III 1 PfandBG). The bank carries out the administration of the cover register. It takes the appropriate measures to make sure that the prescribed cover is given at all times, § 4 IV PfandBG. The cover pool monitor supervises the prescribed cover und registration in the cover register, § 8 I, II PfandBG. The assets recorded in the cover register – as well as the deeds relating to such assets - are safeguarded by the cover pool monitor under dual control (so called “Treuhändermitverschluss”) with the bank, § 9 PfandBG.
• 103: The assets owned by the SPE are pledged to the trustee acting for the benefit of, amongst others, the covered bondholders.
• 104: Depending on the structure used for the issuance of covered bonds. The general principle is that the pledge by operation of law created in favour of the bondholders and other creditors (such as the trustee, hedging counterparties etc.) specified in the contractual documents constituting the covered bonds takes precedence over the claims of all other creditors, including preferred creditors.
• 105: Covered bond holders enjoy a preferential treatment in so far as the law stipulates the separation of the cover assets on the one hand and the insolvency’s estate on the other hand, § 30 I PfandBG. First of all, covered bonds shall be fully satisfied out of the assets recorded in the cover register. Only assets remaining after the Pfandbrief creditors are satisfied and the management costs are paid, those assets must be surrendered to the insolvency’s estate (§ 30 IV 2 PfandBG). For details see V. 17. The satisfaction of the Pfandbrief creditors is not limited to the cover assets. On the contrary, those creditors also participate in the insolvency proceedings in respect of the remaining Pfandbrief bank’s assets – there, of course, only up to the amount resulting from any default (§ 30 I 3 i.V.m. VI 4 PfandBG). German Bundestag, Publication reference 16/13823, 21.07.2009: "As stipulated in § 30 par. 2 of the Pfandbrief Act a cover pool administrator is appointed who manages the separate portion of the Pfandbrief bank. He may carry out all legal transactions in respect of the cover pools insofar as this is necessary for an orderly settlement in the interest of the full satisfaction of the Pfandbrief creditors. This sweeping clause should be interpreted comprehensively and is primarily aimed at ensuring that the Pfandbrief liabilities are duly and orderly repaid, i.e. on time as they fall due. In order to achieve this aim the cover pool administrator has several options to act, in particular the following: • He collects the claims on the cover pool and uses these to repay the Pfandbriefe (§ 30 par. 3 sentence 2 Pfandbrief Act). • He may sell assets from the cover pool in whole or in part, individually or in portfolios in accordance with the general transfer regulations in order to raise liquidity. The Pfandbrief Act does not contain any restrictions in respect of the potential purchasers of the cover assets. The proceeds from the sale replace the cover assets which have been disposed of and belong to the separate portion of the Pfandbrief bank. They are therefore under the power of disposition of the cover pool administrator, without having been registered in the Cover Register. • By the Act on the further development of the Pfandbrief law of 20 March 2009 (Federal Gazette I p. 607), hereafter the 2009 Amendment Act, it was clarified explicitly at § 30 par. 2 sentence 5, 2nd clause of the Pfandbrief Act that the cover pool administrator may take up a funding loan in order to raise liquidity. • The reasons to the 2009 Amendment Act make clear that the cover pool administrator may enter into funding operations with Deutsche Bundesbank (Bundestag publication ref. 16/11130 of 1 December 2008, p. 42). • As the cover pool administrator is permitted to sell assets from the cover pool, he is also permitted to use assets as collateral to provide security for any funding loans and transactions. • The cover pool administrator may also amend the terms of loans used for coverage purposes and conclude derivative transactions. This was already stipulated in the reasons to the Mortgage Bank Amendment Act of 2004 (Bundestag publication reference 15/1853 of 29 October 2003, p. 19). • The 2009 Amendment Act clarified in § 31 par. 8 of the Pfandbrief Act that the cover pool administrator can use the personnel and other resources of the Pfandbrief bank and is only obliged to reimburse the costs actually incurred to the insolvent estate. • The cover pool administrator collects all claims payable on the assets (§ 30 par. 3 sentence 2 Pfandbrief Act). This also applies to amounts relating to portions of assets that are not included in the cover pool; these are portions of loans in excess of the loan-to-value limit set out in § 5 par. 1a of the Pfandbrief Act (60 percent or a lower limit if specified) and which are therefore not part of the cover pool; if payments by a borrower should be insufficient to service both the portion of the loan included in the cover pool and that outside the cover pool, the portion within the cover pool takes precedence (§ 30 par. 3) in conjunction with § 5 par. 1a Pfandbrief Act). The cover pool administrator also collects the claims on those portions of the loan which the Pfandbrief bank holds in fiduciary for another bank in accordance with s. 5 (1a) sentence 4 and 5 Pfandbrief Act. • The cover pool administrator may be appointed before the insolvency proceedings over the Pfandbrief bank are opened (§ 30 par. 5) Pfandbrief Act)." The amendments 2010 modified the wording in § 30 I PfandBG in order to make clear that the cover pools would not be part of the insolvency estate ("insolvency-free assets"). Together with the respective Pfandbriefe they form the "Pfandbriefbank with limited business activity", for which the banking licence shall be upheld (§ 2 IV PfandBG) - including the licence to issue new Pfandbriefe. Furthermore there are specific regulations as to the sale and the transfer of mortgages respectively to other issuers. According to § 32 I PfandBG the cover pool administrator may transfer all or a part of the assets recorded in the cover register as well as liabilities from Pfandbriefe as an entirety to another Pfandbrief bank. This transfer requires the written approval of the supervisory authority. According to § 35 I PfandBG the cover pool administrator may agree with another Pfandbrief bank that the assets recorded in the insolvent Pfandbrief bank’s cover register may be managed in a fiduciary capacity by the insolvent Pfandbrief bank’s cover pool administrator for the other Pfandbrief bank: In that case, the other Pfandbrief bank assumes the liability for the covered liabilities of the insolvent Pfandbrief bank. This regulation could be important, because the legal transfer of mortgages in many jurisdictions needs registration producing costs and time lags. With these two modalities, particular provisions exist, according to which assets can be more easily “transferred” – which is in fact carried out outside the normally applicable provisions of civil law, e.g. the management in a fiduciary capacity of registered land charges (so called “Buchgrundschulden”) and foreign mortgages. Both forms require a written approval of the BaFin. In case of a partial transfer or a partial management in a fiduciary capacity, § 36 PfandBG will additionally – that means together with § 32 I or § 35 I PfandBG - be at issue: The proportion of the relevant cover pool which remains at the Pfandbrief bank must comply with the provisions concerning the cover for Pfandbriefe. In the case of over-indebtedness or illiquidity of the cover assets the BaFin could apply for a special insolvency procedure on the cover pool and the covered bonds, regulated by general insolvency law, § 30 VI PfandBG. Before starting this insolvency procedure, the BaFin could pronounce a “moratorium” according to § 47 of the German Banking Act (Kreditwesengesetz - KWG). Then, the supervisory authority may take its measures with respect to individual cover pools.
• 106: An insolvency of the issuer does not result in an insolvency of the SPE owning the cover pool. A default by the SPE in no way diminishes the full recourse against the issuer. As described in question VII.1 above, an insolvency of the issuer may well precede a default by the SPE.
• 107: There are no statutory provisions to this effect, but the parties can agree that the derivatives will continue, as they are part of the cover pool and hence outside the bankruptcy estate of the credit institution.
• 108: The derivatives, which are registered in the cover register, form a part of the separate legal estate. The insolvency procedure has the same consequences for them like for the Pfandbriefe and they profit of the same ranking like the Pfandbriefe. § 19 I 4 PfandBG stipulates that derivatives are eligible for the cover pool only if the insolvency of the Pfandbrief issuer has no impact on the derivatives. Accordingly, the German master agreements for cover derivatives stipulate that the bankruptcy of the Pfandbrief issuer does not mark a termination event. So far, there is no specific provision in the Pfandbrief Act, which regulates the legal situation of collateral, which is provided by the derivative counterpart or the Pfandbrief bank. But § 13 No. 6 DeckRegV regulates that such collateral has to be registered in the cover register; the consequence of this registration is that the collateral belongs to the separate portion of the Pfandbrief Bank.
• 109: Under all covered bond programmes payments of termination amounts due as a result of a default or downgrade of a swap provider rank junior to covered bond payments. Other payments under (i) the cover pool swap (total return swap) rank senior to covered bond payments and (ii) the covered bond series swaps (interest rate swaps and/or structured swaps) rank pari passu with covered bond payments.
• 110: The law permits claims of derivative counterparties to rank pari passu with covered bondholders. In theory it would be possible for such claims to also be subordinated, but this is contrary to market practice.
• 111: The risk weighting of covered bonds (both Greek and foreign) is regulated by Part B par. 8 2588/20.8.2007, transposing part of the Capital Requirements Directive into Greek law. According to this bonds falling within the provisions of art. 22 par. 4 of the UCITS Directive are considered to constitute covered bonds, provided that the cover pool consists of the assets enumerated in the Capital Requirements Directive. By way of exception, bonds issued before the 31st December 2007 and falling within the provisions of art. 22 par. 4 of the UCITS Directive are considered as covered bonds, even if the cover assets do not comply with the Capital Requirements Directive. covered bonds have a risk weighting of 10%, if openings to the issuing credit institution have a risk weighting of 20%, and a risk weighting of 20%, if openings to the issuing credit institution have a risk weighting of 50%. Directly issued Greek covered bonds comply with both the UCITS Directive and the Capital Requirements Directive and therefore have the reduced risk weighting mentioned above in Greece and should also have it in other EU member states. In relation to indirectly issued covered bonds it must be noted that they do not fall within the letter of art. 22 par. 4 of the UCITS Directive, because they are not issued by a credit institution.
• 112: (Answer is Yes and No). CRD-compliance is optional for covered bonds registered by the Dutch Central Bank. In practice all programmes are both UCITS- and CRD-compliant. In its public register the Dutch Central Bank indicates for each programme registered by it whether it has assessed the programme to be UCITS-compliant or both UCITS- and CRD-compliant.
• 113: The risk weighting of Covered Bonds (German Pfandbriefe and other Covered Bonds) is regulated by Article 20a Kreditwesengesetz (KWG) and the Solvabilitätsverordnung (SolvV), transposing the Capital Requirements Directive into German law. The CRD has been transposed literally, however without admitting MBS as eligible cover assets. According to these rules, German Pfandbriefe enjoy a 10 % risk weight as they fully comply with the CRD requirements (§ 20a KWG). If German Pfandbriefe are bought by foreign investors, the risk weighting depends on the investors’ home country rules, which in many European countries also apply 10 % risk weight. Foreign covered bonds enjoy a 10% risk weighting in Germany, provided that they comply with the requirements of Article 20a KWG.
• 114: In accordance with the relevant European Directives, as applicable, investing UCITS, insurers, investment firms and credit institutions can benefit from more relaxed investment limits, lower risk weightings, lower Loss Given Default Values and recognition of a counterparty's own covered bonds as collateral under repo's.
• 115: There are several regulations. For example, German investment legislation allows investment funds to invest up to 25% of the fund’s assets in Pfandbriefe and furthermore in Covered Bonds issued by credit institutions complying with the requirements of Art. 22 par. 4 UCITS Directive (Article 60 par. 2 German Investment Act).