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What’s different about Asia?

01 February 2019
Richard Kemmish

Ahead of the Euromoney Asian covered bond forum in Singapore next month some thoughts about what makes Asian covered bonds different.

Asia is so diverse that the question in the title is more or less meaningless. But as Asia is currently the centre of non-European covered bond development – with the exception of Brazil – the question that we will be asking at the Euromoney Asian covered bond forum in Singapore could easily be ‘what’s different about new jurisdictions?’

From my perspective, as someone who develops new covered bond jurisdictions for a living, one of the key points is that you really can’t rely on the things that exist in long established covered bond regimes.

Knowledge of the product is one of those things.  Anyone whose job is going to be largely about covered bonds can easily go on a training course and learn all about it. But you also have to rely on many people for whom covered bonds will only ever be a very minor part of their job – internal participants from operations to financial control, external participants such as insolvency judges or notaries. I spend quite a lot of my time explaining covered bond concepts to people who are very important to the model working but for whom covered bonds are at best a minor irritation. In an established jurisdiction such as Germany for example, everyone from the politicians who vote on the legal amendments to the branch manager who explains the small print in the mortgage contract knows what a Pfandbrief is.

Another key difference is that not everyone is convinced that covered bonds are the right model. Broadly speaking there are three very scalable, very cheap ways to fund a big chunk of a country’s mortgage market: national mortgage agencies, securitisations and of course covered bonds. They are not exclusive, many countries have two out of three. In America the agency and ‘private label’ securitisation models happily coexist. In Australia – for example – securitisations and covered bonds are both part of the overall picture. But when you have one model in place already, as in so many Asian countries with national mortgage agencies or China with a vibrant securitisation market, the justification for a covered bond law and it’s interaction with the existing alternatives is less obvious.

Not being of the European Union is another key difference, Asian covered bonds don’t get preferential treatment for EU investors. That raises a lot of questions – whether domestic investors should benefit from preferential treatment? whether covered bond laws should conform to European norms? Hopefully the combination of the third country rules in the new directive, that directive serving as a template for covered bond rule books elsewhere and the recognition of the concept of covered bonds by Basle will start to diminish this difference.

But there is one specific feature which is common to the new Asian covered bond jurisdictions –  sorry if this sounds facetious, it isn’t – time zones. In particular the lack of overlap between the issuer’s and the investor’s working day. In covered bond land where European books are frequently open and closed before lunchtime, how do syndicate desks manage the competing needs of the domestic investor base and Europe? Saying that a book is over-subscribed and closed for European investors, but will be kept open for Asian investors tomorrow morning is both clumsy and susceptible to manipulation. But domestic investors are very important to a market’s development. A new approach to syndication strategies is needed.

And an approach that satisfies both Asian and European investor needs is essential. One thing that does unite all of the Asian covered bonds is the intense interest that they generate from the older covered bond jurisdictions. As you will see in Singapore next month.  

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