Covered bonds: elements outside the issuance regulations The ICMA - PowerPoint PPT Presentation

9 June 2016 | Frankfurt Covered bonds: elements outside the issuance regulations The ICMA CBIC & The Covered Bond Report Conference 2016 Rodrigo Buenaventura, Head of Markets Department, ESMA

9 June 2016 | Frankfurt Issuance and outstanding volumes of securitised products Issuance of securitised products in the Outstanding volume of securitised EU – placed and retained (Mio €) products in the EU (bln €) => Since 2008, the issuance of securitised products in Europe has fallen by 88%. Outstanding amounts have declined accordingly 2

9 June 2016 | Frankfurt Covered bond: German market Covered bond outstanding in EUR Mio Covered bond issuance in EUR Mio Source: European Covered Bond Council 3

9 June 2016 | Frankfurt Covered bonds’ annual issuance volumes (worldwide) Source: European Covered Bond Council 4

9 June 2016 | Frankfurt Covered bond markets (outstanding volumes) COVERED BONDS OUTSTA NDING 2014 in EUR million Public Sector Mortgage Ships Others Mixed A ssets TOTA L Germany 206,535 189,936 4,811 1,006 - 402,288 Denmark - 369,978 5,013 - - 374,991 France 67,696 188,925 - - 68,896 325,517 Spain 25,495 282,568 - - - 308,063 Sweden - 209,842 - - - 209,842 United Kingdom 6,152 130,797 - - - 136,949 Italy 8,700 122,464 - - - 131,164 Norway 1,820 102,704 - - - 104,524 Switzerland - 100,436 - - - 100,436 Canada - 64,836 - - - 64,836 A ustralia - 61,326 - - - 61,326 The Netherlands - 58,850 - - - 58,850 A ustria 19,279 22,450 - - - 41,729 Ireland 20,258 18,473 - - - 38,731 Portugal 400 33,711 - - - 34,111 Finland - 32,031 - - - 32,031 Luxembourg 16,002 - - - - 16,002 Greece - 14,546 - - - 14,546 Belgium 1,750 10,575 - - - 12,325 Czech Republic - 11,106 - - - 11,106 New Zealand - 9,464 - - - 9,464 United States - 4,000 - - - 4,000 Slovak Republic - 3,939 - - - 3,939 Hungary - 3,272 - - - 3,272 South Korea - 1,349 - - - 1,349 Cyprus - 1,000 - - - 1,000 Poland 82 882 - - - 964 Iceland - 927 - - - 927 Panama - 247 - - - 247 Latvia - - - - - - Total 374,169 2,050,633 9,824 1,006 68,896 2,504,527 Source: European Covered Bond Council 5

9 June 2016 | Frankfurt Covered bond markets (issuance volumes) COVERED BONDS ISSUA NCE 2014 in EUR million Public Sector Mortgage Ships Others Mixed A ssets TOTA L Denmark - 154,310 399 - - 154,709 Sweden - 48,424 - - - 48,424 Germany 15,334 29,145 920 500 - 45,899 Italy 1,000 39,475 - - - 40,475 France 5,318 14,483 - - 6,149 25,950 Spain 1,853 23,038 - - - 24,891 Canada - 19,275 - - - 19,275 Switzerland - 19,193 - - - 19,193 Norway 664 14,474 - - - 15,138 A ustralia - 12,716 - - - 12,716 United Kingdom - 12,529 - - - 12,529 A ustria 5,146 7,111 - - - 12,257 Finland - 6,469 - - - 6,469 Belgium 1,750 2,387 - - - 4,137 The Netherlands - 3,910 - - - 3,910 Portugal - 3,825 - - - 3,825 Ireland - 2,535 - - - 2,535 Czech Republic - 2,188 - - - 2,188 Greece - 750 - - - 750 New Zealand - 750 - - - 750 Slovak Republic - 654 - - - 654 Luxembourg 398 - - - - 398 Poland - 269 - - - 269 Iceland - 91 - - - 91 Hungary - 91 - - - 91 Cyprus - - - - - - Latvia - - - - - - Panama - - - - - - South Korea - - - - - - United States - - - - - - Total 31,463 418,094 1,319 500 6,149 457,524 Source: European Covered Bond Council 6

9 June 2016 | Frankfurt Key elements of regulatory treatment of covered bonds • Covered bonds are benefitting from favourable regulatory environment: – At national level: several countries have set in place (or updated) ad-hoc covered bond legislations which “waive” the general applicable insolvency law and provide for a specific regime “setting in stone” the preferential claim of covered bond holders over the asset contained in the cover pool. – At European level: • Bank Recovery and Resolution Directive (BRRD): exempts covered bonds from bail-in, • Capital Requirement Regulation (CRD IV / CRR): covered bonds are (i) categorised as High Quality Liquid Asset for the purposes of the Liquidity Coverage Ratio or LCR (certain types of covered bonds receive same treatment as sovereign which goes beyond the Recommendations of the Basel Committee) (ii) assigned low risk weights to covered bonds • Solvency II: grants low spread risk factors to covered bonds • EMIR (exemption for clearing obligation and bilateral collateral posting) and MiFID II (pre-trade SSTI) • Favourable haircuts for ECB repo operations

9 June 2016 | Frankfurt Regulatory concepts of liquidity and transparency Concepts of liquidity and transparency are serving different purposes under “securities market regulation” (e.g. MiFID II) or “banking regulation” (e.g. CRD IV) and, thus, are interpreted differently depending on the context: • Liquidity: – CRD IV: whether an instrument in a portfolio can be sold during financial turmoil. Definition of liquidity under Article 509(4) of the CRR focusses rather on the credit quality of the instrument and includes criteria such as “proven record of price stability” whereas… – MiFID II it is about the trading frequency and (daily) volume traded (Article 2(1)(17) of MiFIR) in order to be suitable for the transparency regime • Transparency: • CRD IV package, and especially when it comes to covered bonds or securitisation, transparency refers to the information available on the cover assets and the intrinsic credit quality of the product whereas… • MiFID II transparency refers to pre- and post-trade transparency (publication of prices before the transaction and details of the transaction afterward). 8

9 June 2016 | Frankfurt MiFID II / MiFIR – Transaction reporting & transparency • Transaction reporting : MiFID II / MiFIR extends the scope of the transaction reporting obligation and enhances the scope of the reports: – From “admitted to trading on a regulated market”, to all financial instruments “admitted to trading or traded on a trading venue” (i.e. include bonds traded only on MTF or OTF). As a consequence, if a bond is traded on at least a TV in the EU (either a RM, an MTF or an OTF), all transactions (including OTC transactions) have to be reported. – New information specification to be included in transaction reports (+ ESMA Guidelines) • Transparency: The existing pre- and post-trade transparency regime which applies under MIFID I only to shares admitted to trading on a regulated market is extended to all type of financial instruments and asset classes (i.e. including covered bonds and SFP): – Pre-trade transparency (Article 8, MiFIR): current bid and offer prices and depth of trading interests at those prices. Information to be available to the public on a continuous basis during normal trading hours. Calibration depending on the trading system or protocol. – Post-trade transparency (Article 10, MiFIR): Shall make public, in real time (i.e. within 15 during the first three years and 5 minutes thereafter), price, volume and time of the transactions executed. • MiFID II / MiFIR provides here the general applicable framework and ESMA has delivered in September 2015 to the EC a package of RTS and ITS (ESMA/2015/1464) specifying further the applicable requirements 9

9 June 2016 | Frankfurt MiFID II / MiFIR – Pre-trade transparency for bonds and derivatives 10

9 June 2016 | Frankfurt MiFID II / MiFIR – Post-trade transparency for bonds and derivatives 11

9 June 2016 | Frankfurt MiFID II / MiFIR – Amendments to draft RTS 2 proposed by the Commission • EC said in April it wanted to introduce 2 changes to the RTS 2 on non-equity transparency : – Definition of what constitutes a liquid market for bonds – in particular the liquidity criterion ‘average daily number of trades ’; – The trade percentile for determining the pre-trade size specific to the instruments (SSTI) for certain non-equity classes • ESMA issued an opinion (2 May 2016), supporting the idea of a phased-in implementation of the new transparency regime but recommending an automatic phase-in. • Main amendments to be introduced: – Increased ‘average daily number of trades’ in the definition of liquid bonds (from 2, as initially proposed by ESMA, to 15 trades per day); – Increased issuance thresholds to be used to determine whether newly issued corporate bonds and covered bonds have a liquid market (from EUR 500 million to EUR 1 billion); Reduced thresholds to determine the applicable pre-trade SSTI (reduced to the 30 st percentile) and introduction of – threshold floors for bonds; – Annual report to be published by ESMA to assess the impact of those metrics on bond market liquidity and on the activity of liquidity providers. 12