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Questions Australian Covered Bonds
I. STRUCTURE OF THE ISSUER
1. Who is the issuer?
  • Universal credit institution
  • Specialized credit institution
  • Special Purpose Entities (SPE)
(1) Comments: Universal credit institution = conventional, single-issuer structure; Specialized credit institution = Covered Bond Credit Institution (“CBCI”); Special Purpose Entities (SPE) = also for smaller-sized issuers to fund in aggregated structure but issuance is by an SPE rather than an APRA authorised and regulated CBCI.
2. Does the bondholder have recourse to the credit institution?
  • Yes, direct
(2) Comments: Pari passu with other secured ADI (The use of the term ‘ADI’ refers to an Authorised Deposit-taking Institution, which is the Australian equivalent of an EEA credit institution, or bank) creditors but subordinate to depositors of the ADI; only the segregated assets in the cover pool are exclusively for bondholders and available to them should the ADI be unable to meet their claim in the first instance.
3. Who owns the cover assets?
  • SPE which guarantees the covered bonds
(3) Comments: Acquired by the SPE/SPV through equitable assignment with an inter-company loan made by the issuing ADI.
4. Is the issuer the originator of the assets?
  • Yes
(4) Comments: Almost always this will be the case but there is no statutory prohibition on them having been originated by another entity provided they are assets in Australia legally on the balance sheet of the issuer.
II. FRAMEWORK
1. Are the bonds governed by a special covered bond Legislation?
  • Yes
(5) Comments: Through an Act amending the Banking Act 1959, and for related purposes, in the form of the Banking Amendment (Covered Bonds) Bill (No.1) 2011.
2. What is the legal framework for bankruptcy of the issuer of covered bonds?
  • Specific legal framework superseding the general insolvency law
(6) Comments: Banking Act 1959.
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.)
  • Exposures to credit institutions
(7) Comments: : An asset in a cover pool must be one of the following:
a)cash;
b)an at call deposit held with an ADI and convertible into cash within 2 business days;
c)a bank accepted bill or certificate of deposit that:
i.is eligible for repurchase transactions with the Reserve Bank; and
ii.was not issued by the ADI that issued the covered bonds secured by the assets in the cover pool;
d)a bond, note, debenture or other instrument issued or guaranteed by the Commonwealth, a State or a Territory;
e)a loan secured by a mortgage, charge or other security interest over residential property in Australia;
f)a loan secured by a mortgage, charge or other security interest over commercial property in Australia;
g)a mortgage insurance policy or other asset related to a loan covered by paragraph (e) or (f);
h)a contractual right relating to the holding or management of another asset in the cover pool;
i)a derivative held for the purposes of protecting the value of another asset in the cover pool;
j)an asset of a kind prescribed by the regulations for the purposes of this paragraph.
2. What is the geographical scope for public sector assets?
  • Other
(8) Comments: Only Australian “Commonwealth, State or a Territory” public debt.
3. What is the geographical scope for mortgage assets?
  • Domestic
  • Other
(9) Comments: AUS only.
4. Are regular covered bond specific disclosure requirements to the public mandatory?
  • No
(10) Comments: Not by legislation.
(11) Global comments for this chapter:“Commonwealth, a State or a Territory” refers to the Australian federal government (Commonwealth) or an Australian State or an Australian Territory.
IV. VALUATION OF THE MORTGAGE COVER POOL & LTV CRITERIA
1. LTV is calculated using which valuation?[4]
  • Market value
  • Mortgage lending value
  • Other
(12) Comments: Most recent valuation.
2. Are there any special LTV limits used solely for calculating collateralisation rates for the cover pool (if yes, specify)?
  • Residential      
    80%
  • Commercial      
    60%
3. Do bondholders get the benefit of that portion of the loan which exceeds the LTV cap?
  • No
(13) Comments: Not by law.
4a. Is there an LTV cap which makes the entire loan ineligible to be put in the cover pool (if yes, specify)?
  • No
(14) Comments: No prohibition on a loan being in the cover pool but may not, as a matter of contract, be attributed value.
4b. Is there an LTV cap which would require a loan to be removed from the cover pool?
  • No
5. Is there any additional LTV limit on a portfolio basis?
  • No
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
(15) Comments: Yes/No: contract-dependent; no statutory requirement
2. What is the primary method for the mitigation of market risk?
  • Use of derivative hedge instruments
3. If the answer to the above question on market risk mitigation is “Use of derivative hedge instruments”, please specify whether those instruments are entered into:
  • By the time of issue of covered bonds or entry of asset in the cover pool
4. What type of coverage test is applied?
  • Nominal cover
  • Not relevant
(16) Comments: None by law; likely by contract.
5. What is the frequency of coverage calculations?
  • Not relevant
(17) Comments: None by law; likely by contract.
6. What types of stress scenarios are applied?
  • Not relevant
(18) Comments: None by law; likely by contract.
7. What is the frequency of stress test calculations?
  • Not relevant
(19) Comments: None by law; likely by contract.
. Exposure to liquidity risk
8. Is exposure to liquidity risk required to be mitigated by law or contract?
  • No
(20) Comments: None by law; likely by contract.
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
10. What is the primary method for the mitigation of liquidity risk on principal payments?
  • Contractual arrangements, e.g. maturity extension or prematurity test
11. Is there any grace period in case of a breach of liquidity risk mitigants?
  • No
(21) Comments: None by law; likely by contract.
12. What is the consequence of not fixing a breach of liquidity risk mitigants?
  • Event of default of the issuer
(22) Comments: None by law; likely by contract.
. Monitoring of exposures to market and liquidity risk
13. Who monitors the maintenance of coverage tests?
  • Trustee/cover pool monitor
(23) Comments: An Approved Auditor or AFSL holder (Australian Financial Services Licenseholder) acting as Cover Pool Monitor – not required by law; likely as a matter of contract.
14. Are there any regular public reporting requirements for market and liquidity risk?
  • No
. Overcollateralisation
15. Is mandatory minimum overcollateralisation required?
  • By legislation/regulation
  • By contractual obligation
16. What is the level of minimum mandatory overcollateralisation?

  • 103%
17. If mandatory overcollateralisation is required, are the amounts above the minimum OC level protected?
  • Yes
(24) Comments: Between the statutory minimum and the contractual requirement but amounts in excess of the contractual (i.e. the ‘voluntary OC’ are not protected but instead serve as a management buffer for the issuer.
18. Is there any grace period in case of a breach of the coverage test?
  • No
(25) Comments: Not by law because there is no legislative ACT; likely by contract.
19. What is the consequence of not fixing a breach of the coverage test?
  • Event of default of the issuer
VI. COVER POOL MONITOR & BANKING SUPERVISION
1. Is a special license required for the issuing of covered bonds?
  • Yes, but no additional requirements
(26) Comments: No, additional requirements for single-issuer or CBCI issuance models; yes, with additional requirements (license/authorization) if multi-issuer SPE model.
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?
  • No
(27) Comments: Obligation rests with the Cover Pool Monitor; not the issuer.
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
(28) Comments: Noting footnote 8, the obligation rests with the Cover Pool Monitor; not the issuer.
4. Is there a special role of banking supervision in crisis regarding covered bonds?
  • No specific role
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
2. What is the cover pool?
  • All assets on the cover register
  • All assets transferred to SPE
(29) Comments: Equitable assignment in the case of mortgages but not in the case of cash, bonds or swaps.
3. How are the covered bondholders protected against claims from other creditors in case of insolvency of the issuer?
  • Transfer of assets to an SPE
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?
  • No
(30) Comments: Not by law; likely by contract.
6. If derivatives are permitted in the cover pool, what is their ranking?
  • Senior to covered bond holders
  • Pari passu to covered bond holders
(31) Comments: Not by law; likely by contract. In the case of total rate of return swaps, this is likely to be senior; in the case of currency and any basis swaps to address timing mismatches with respect to the intercompany loan, they are likely to be pari passu with covered bond holders).
VIII. RISK WEIGHTING & COMPLIANCE WITH EUROPEAN LEGISLATION
1. Does the covered bond fulfil the criteria of UCITS 52(4)?
  • No
(32) Comments: Australian credit institutions are not EEA entities and therefore cannot do so.
2. Does the covered bond legislation completely fall within the criteria of the Annex VI, Part 1, Paragraph 68 (a) to (f) of the Capital Requirements Directive (CRD)?
  • No
3. Are listed covered bonds eligible in repo transactions with the national central bank?
  • No
(33) Comments: Being listed is not relevant. See Reserve Bank of Australia website for eligible securities. http://www.rba.gov.au/mkt-operations/tech-notes/eligible-securities.html
4. Are there any special investment regulations regarding covered bonds?
  • No
IX. ADDITIONAL INFORMATION
1. Link to National Association representing covered bond interests
(34) Comments: Contact: Alex Sell, Chief Operating Officer, asell@securitisation.com.au
2. Link to national regulators and supervisors
  • List
(35) Comments: Legislation permitted covered bonds of any type (legislative or contractual) not permitted until legislation has been enacted (expected November 2011).
3. Fact Book Country Chapter
  • Chapter
 
4. Hypostat Country Chapter
  • Chapter

Comments for your selection

  • 1: Universal credit institution = conventional, single-issuer structure; Specialized credit institution = Covered Bond Credit Institution (“CBCI”); Special Purpose Entities (SPE) = also for smaller-sized issuers to fund in aggregated structure but issuance is by an SPE rather than an APRA authorised and regulated CBCI.
  • 2: Pari passu with other secured ADI (The use of the term ‘ADI’ refers to an Authorised Deposit-taking Institution, which is the Australian equivalent of an EEA credit institution, or bank) creditors but subordinate to depositors of the ADI; only the segregated assets in the cover pool are exclusively for bondholders and available to them should the ADI be unable to meet their claim in the first instance.
  • 3: Acquired by the SPE/SPV through equitable assignment with an inter-company loan made by the issuing ADI.
  • 4: Almost always this will be the case but there is no statutory prohibition on them having been originated by another entity provided they are assets in Australia legally on the balance sheet of the issuer.
  • 5: Through an Act amending the Banking Act 1959, and for related purposes, in the form of the Banking Amendment (Covered Bonds) Bill (No.1) 2011.
  • 6: Banking Act 1959.
  • 7: : An asset in a cover pool must be one of the following: a)cash; b)an at call deposit held with an ADI and convertible into cash within 2 business days; c)a bank accepted bill or certificate of deposit that: i.is eligible for repurchase transactions with the Reserve Bank; and ii.was not issued by the ADI that issued the covered bonds secured by the assets in the cover pool; d)a bond, note, debenture or other instrument issued or guaranteed by the Commonwealth, a State or a Territory; e)a loan secured by a mortgage, charge or other security interest over residential property in Australia; f)a loan secured by a mortgage, charge or other security interest over commercial property in Australia; g)a mortgage insurance policy or other asset related to a loan covered by paragraph (e) or (f); h)a contractual right relating to the holding or management of another asset in the cover pool; i)a derivative held for the purposes of protecting the value of another asset in the cover pool; j)an asset of a kind prescribed by the regulations for the purposes of this paragraph.
  • 8: Only Australian “Commonwealth, State or a Territory” public debt.
  • 9: AUS only.
  • 10: Not by legislation.
  • 11: “Commonwealth, a State or a Territory” refers to the Australian federal government (Commonwealth) or an Australian State or an Australian Territory.
  • 12: Most recent valuation.
  • 13: Not by law.
  • 14: No prohibition on a loan being in the cover pool but may not, as a matter of contract, be attributed value.
  • 15: Yes/No: contract-dependent; no statutory requirement
  • 16: None by law; likely by contract.
  • 17: None by law; likely by contract.
  • 18: None by law; likely by contract.
  • 19: None by law; likely by contract.
  • 20: None by law; likely by contract.
  • 21: None by law; likely by contract.
  • 22: None by law; likely by contract.
  • 23: An Approved Auditor or AFSL holder (Australian Financial Services Licenseholder) acting as Cover Pool Monitor – not required by law; likely as a matter of contract.
  • 24: Between the statutory minimum and the contractual requirement but amounts in excess of the contractual (i.e. the ‘voluntary OC’ are not protected but instead serve as a management buffer for the issuer.
  • 25: Not by law because there is no legislative ACT; likely by contract.
  • 26: No, additional requirements for single-issuer or CBCI issuance models; yes, with additional requirements (license/authorization) if multi-issuer SPE model.
  • 27: Obligation rests with the Cover Pool Monitor; not the issuer.
  • 28: Noting footnote 8, the obligation rests with the Cover Pool Monitor; not the issuer.
  • 29: Equitable assignment in the case of mortgages but not in the case of cash, bonds or swaps.
  • 30: Not by law; likely by contract.
  • 31: Not by law; likely by contract. In the case of total rate of return swaps, this is likely to be senior; in the case of currency and any basis swaps to address timing mismatches with respect to the intercompany loan, they are likely to be pari passu with covered bond holders).
  • 32: Australian credit institutions are not EEA entities and therefore cannot do so.
  • 33: Being listed is not relevant. See Reserve Bank of Australia website for eligible securities. http://www.rba.gov.au/mkt-operations/tech-notes/eligible-securities.html
  • 34: Contact: Alex Sell, Chief Operating Officer, asell@securitisation.com.au
  • 35: Legislation permitted covered bonds of any type (legislative or contractual) not permitted until legislation has been enacted (expected November 2011).