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Parliament has spoken

21 August 2018
Richard Kemmish

With very fortuitous timing, the European Parliament has published their proposed amendments to the covered bond directive ahead of the Covered Bond Congress in Munich next month. It is going to be a major topic of discussion there.

According to friends in the securitisation market, the trilogue process for the STS directive was slow, painful and, quite possibly unsuccessful – the jury is still out on whether it will achieve its objective of restarting that market. In contrast, fortified by the knowledge that our market works very nicely, thank you very much, and by the support that we already have in Brussels we have always assumed that the covered bond directive’s trilogue will be a friendly, straightforward one characterised by minor technical details – how to measure liquidity, what should be left to the EBA. That sort of thing.

The publication yesterday of the European Parliament’s amendments to the Commission text slightly undermines that confidence (or smugness, as my securitising friends insist).  Yes, Parliament is committed to the plan, yes they agree with most of what Commission has said, but the few differences that they bring up are potentially significant. How easy will it be to agree a compromise? With European elections next May, we realistically have only a few months left to do that. If we fail the covered bond directive will have to wait until the next parliament – and who knows what that will look like or where covered bonds will be on their ‘to do’ list. Low, I expect.

Leaving aside some trivial and technical points (don’t get me started on the liquidity buffer operational requirements….), one of the main points of contention seem to be the ‘tiering’ of the covered bond market – premium and ordinary covered bonds. This was part of the original parliament text but, with the parallel discussion of European secured notes and with industry making quite clear it’s ‘keep it simple’ attitude, we had assumed that this proposal would be dropped. We assumed wrong. If the amendments are passed in their current form it is a fundamental change to what we understand as a covered bond. That needs to be discussed.

Another important point that will affect a lot of issuers is the worse treatment of soft-bullet covered bonds and the much worse treatment of conditional pass-throughs. The amendments to the trigger events are probably manageable. But the requirement to hold liquidity against the expected maturity rather than the legal maturity until the extension is triggered will be very expensive for a lot of issuers. We knew that are some MEPs in the ECON committee dislike pass-throughs in particular, but had assumed a greater disclosure requirement rather than a potentially higher capital charge. Ouch.

We can also discuss the things that the amendments don’t say. I’m personally disappointed that no-one has proposed that green loans should be eligible assets.

Now is not the time to get into the details of these, tempting though that is. Next month in Munich is the perfect time for that discussion – safe to say that the Congress agenda will give you plenty of opportunities to join in the debate. 

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