Finance Denmark responds to EC covered bonds proposals

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Finance Denmark, the trade association that includes the country’s investment fund sector, has stated that the European Commission’s proposals for covered bonds are “a very good starting point” for developing harmonised regulation of the asset class.

The view comes in response to the 12 March proposal on a covered bond framework, that is intended to complete Capital Markets Union.

In a letter to the EC, the association writes: “It is our assessment that the European Commission has succeeded with a balanced approach to harmonization and it is important to keep these features in the final framework. In our view, it is a good foundation on which to build a European covered bond framework.”

“It is important that the covered bonds legislation underpins the very high quality of covered bonds compared to other types of funding by setting requirements to the assets that can collateralize the issued covered bonds. Any dilution of the covered bonds by broadening the asset classes should be avoided. A broader asset base should be in a funding instrument like the European Secured Note (ESN) that is clearly distinguished from covered bonds. This approach will provide businesses with an additional tool e.g. ESNs to finance assets that are out of the scope for covered bonds financing. At the same time, the high quality of covered bonds can be maintained.”

“The proposal defines the core elements that characterize covered bonds and preserves the special public supervision of issuers of covered bonds. These requirements will help to provide a high degree of security for investors, which is the key in providing cheap and stable funding to homeowners and businesses.”

However, despite broadly welcoming the proposals, FD has also suggested some further improvements, including:

  • A risk based OC-requirement embracing specialized mortgage banks is needed
  • No limit is set on the principal amount on derivatives contracts used for hedging in covered bond cover pools
  • Reconsider Article 6 which refers to “other high quality assets”, as the definition is too broad
  • Reconsider coverage requirements in Article 15
  • Delete Article 10 referring to composition of cover pools
  • Reconsider rules in Article 8 on intragroup pooled covered bonds structures
  • Ensure Grandfathering is as smooth as possible
  • Clarification of certain paragraphs relating to technical aspects; eg, paragraph 1a (c) of Article 129