Co-published Covered bonds guide: UK
treatment of liquid assets under the LCR, the outcome of which may determine whether covered bonds will ultimately be afforded Level 1 status (the preserve of sovereign debt and cash as things stand), and thereby obtain the 60% holding limit. The outcome of this consultation process is therefore hugely significant for the covered bond market, but uncertainty continues in the market while the consultation continues. In this context, it is also worth mentioning
the financial transaction tax, which as proposed will apply to secondary trading in securities, such as covered bonds. This is an example of two proposed regulations seemingly at odds with each other, at least as far as covered bonds are concerned. If one of the aims of the LCR has been to categorise certain assets as high quality liquid assets, it seems counterproductive to at the same time introduce a measure that will significantly hamper the liquidity of these assets. Recognising the impact to covered bonds,
the ECBC has duly called for all LCR-eligible assets to be exempt from this tax, pointing out the inconsistency of with one proposal encouraging the holding of highly liquid assets and, with another, potentially killing that liquidity. It remains to be seen how the regulators will respond.
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Asset encumbrance Asset encumbrance is an increasing concern for regulators, and a recent consultation paper issued by EBA has highlighted the potential risks, in particular in relation to the potential structural subordination of unsecured creditors and depositors. The EBA proposes to introduce ongoing reporting on asset encumbrance, with the ultimate aim of this being part of the national law of each member state.
Author biographies
Peter Voisey Clifford Chance
Peter Voisey, a partner in the structured debt group at Clifford Chance, specialises in international covered bond, asset securitisation and structured finance transactions including covered bonds (UK and international), RMBS, CMBS and CMBS restructurings, secured corporate bonds and portfolio sales. He is an active member of the European Covered Bond Council, a member of the board of advisors to the European Covered Bond label, and he is on the board of governors of the Commercial Real
Estate Finance Council. He has spoken at numerous conferences and seminars, as well as publishing regular articles and briefings on structured debt. Voisey has been a partner since 1994. Chambers & Partners describes him as “excellent” and says he “provides a very good service. He can translate legal documentation into practical language and deal with things in a commercial way” (Chambers UK 2013).
Will Sutton Clifford Chance
Will Sutton, a senior associate in the structured debt group at Clifford Chance, has experience in a wide variety of structured debt transactions, including covered bonds in different jurisdic- tions, securitisations involving a variety of asset classes including RMBS, CMBS and whole business, secured bonds and portfolio sales. He qualified in 2008 and has spoken on covered bonds at numerous conferences and seminars, as well as publishing a number of articles and briefings on structured debt transactions.
levels and their relatively long-term nature, covered bonds have attracted particular scrutiny. However, it is also true that other types of secured funding, in particular repo funding, have also been responsible, and many feel the focus placed on covered bonds to be unjustified. Indeed, in Europe between 2005 and 2011,
Some of the regulations seem to be in active conflict with others
It is certainly true that increased levels of
asset encumbrance in Europe have coincided with the popularity of covered bonds as an asset class and, with their overcollateralisation
72 IFLR/July/August 2013
asset encumbrance increased significantly in all sample countries except Germany, and the strongest correlation was between increased levels of asset encumbrance and countries with problematic public finances, such as Greece, Spain, Ireland, Portugal and Italy, which had the highest levels of repo funding with the ECB. The upshot of these and other proposed
regulations is that the market does not yet know where it stands with the regulators, and what the ultimate impact to the asset class will be. At the very least, it is to be hoped that greater clarity and consistency will emerge in the coming months.
What does the future hold? On a more positive note, there are a couple of possible areas of expansion for the UK covered bond market that are actively being explored. These are SME covered bonds and renewable energy, or green, covered bonds.
SME Covered Bonds In the UK, as in the rest of Europe, there is political focus on SME lending. In Europe this has had an active impact on the covered bond market thanks to the Commerzbank SME covered bond transaction in February. Some comments have been raised over the use of the term covered bond in a jurisdiction that is not used to giving labels to transactions involving such a structure (true sale) with such assets (SME loans). In the UK, where covered bond transactions all employ the true sale structure, there was perhaps less of a problem from a structural perspective in identifying the Commerzbank transaction as a bona fide covered bond (and in April 2013 the ECB may be said to have endorsed that view by elevating the Commerzbank transaction from liquidity category 4 to category 3 in its liquidity framework). Regardless of the semantics, there is no doubt that the Commerzbank transaction has helped to raise awareness on how covered bonds may be used to increase SME funding given the economic and political desirability of achieving this goal, and this is true of the UK as well.
Green covered bonds In December last year, a Renewable Energy Covered Bonds Roundtable met in London to
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