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New jurisdictions help old in battle for Basel support

The globalisation of covered bonds offers a strategic opportunity for the industry to push for better treatment at the Basel level, according to delegates at the latest ECBC plenary, and the alignment or even harmonisation of frameworks could offer a further advantage in such lobbying.

At the European Covered Bond Council (ECBC) plenary, held in Oslo on 6 April, the global spread of the covered bond product and brand featured heavily – notably on a panel featuring members of the industry body’s global issues working group but also as a thread that ran through the day’s discussions.

This comes as new or potential covered bond markets spring up around the world, some cementing their place in the covered bond universe with successful first benchmarks, as in Poland, some on the cusp of long-awaited inaugural issuance, as in Brazil, and some taking tentative steps towards establishing issuance-worthy frameworks, as in Croatia.

Singapore, which has offered benchmark issuance across three currencies and from three issuers since DBS inaugurated the market in July 2015, was cited by delegates as an example to follow.

Colin Chen, managing director and head of structured debt solutions at Singapore’s DBS Bank and chairman of the ECBC’s global issues working group, moderated the global panel and spoke of opportunities for the global expansion of covered bonds.

“There are new jurisdictions that have started conversations with us about how they can start covered bonds, or asking ‘what are covered bonds?’” he said. “We have recently conducted conversations in the Middle East, in India, in Thailand and in Malaysia.”

He added that there is also interest in the covered bond product from potential issuers in China.

Chen described the global issues working group as a “bridge” between traditional markets, new markets and global markets, and highlighted the importance of regulatory developments and alignment of the definitions and principles of covered bonds globally, especially to the newer additions to the covered bond family.

“A lot of this work is done and anchored by understanding the regulatory changes, and it doesn’t help for us, at least in the developing markets, that these regulations continue to evolve, and we play catch-up,” he said. “But catch up we will, at some point.”

Such markets, on the periphery in terms of the covered bond’s history and traditional northern European heartland, are now central to the thinking of many legislators and market participants.

When offering hints of the European Commission’s deliberations on whether and how to harmonise covered bonds, Didier Millerot, head of unit, banks and conglomerates, DG FISMA, said one of the key considerations would be whether a recognised EU covered bond label – based on a robust regulatory framework – would help EU member states establish new covered bond markets and make the product more attractive to “third country” investors.

Delegates acknowledged that the spread of covered bonds to new jurisdictions, in the EU and further afield, offers opportunities not just for investors and prospective issuers, but also for names already established in the market.

“On the subject of the opportunities – even though the backbone of investors for German Pfandbriefe, and probably for all covered bonds, is in Germany, many German issuers are still traveling the world to find new investors,” said Sascha Kullig, head of capital markets at the Association of German Pfandbrief Banks (vdp).

“We think that if a country has introduced a covered bond framework, investors might be willing to look first of all at their domestic covered bonds, but secondly to look at other traditional kinds of covered bonds. So one opportunity would be to find new investors.”

This process is already underway, as demonstrated by a recent dual-tranche, US$500m three year and Eu500m five year covered bond for Singapore’s United Overseas Bank (UOB). That deal on 22 February was the first ever benchmark dual-tranche covered bond issue in euros and dollars.

“We don’t only have an internationalisation of issuance, we also have an internationalisation of investors,” said Fritz Luithlen, head of covered bonds at DZ Bank – one of lead managers of UOB’s trade. “We saw in this euro and US dollar dual tranche that we had a large, even unexpectedly large, overlap of investors committing funds to both currencies.”

The next big opportunity presented by the covered bond’s global expansion, said Kullig, is to further improve covered bonds’ treatment at the Basel level.

“For many years, the covered bond has been regarded as a strange European animal in Basel,” he said. “If we succeed in spreading the covered bond system around the world, we can achieve a much better treatment on the Basel level.

“But for that, we have to come up with an idea of what covered bonds should look like, and what the essential features should be. This is the task of the global issues working group.”

Luca Bertalot, secretary general of the EMF-ECBC, said that in the context of the current Basel Committee debates, “the globalisation of the covered bond product is of clear strategic interest for the ECBC”.

“Over recent years,” he told The CBR, “our establishment of the ECBC global issues working group as an international think-tank for the industry has primarily been targeted at providing the market with a global qualitative benchmark for legislators, issuers and investors, and with a view to ensuring an effective and harmonised implementation of similar regulatory treatments around the globe – especially in terms of privileged treatment in prudential regulation, repo operations, insolvency regulation, etc.

“Long term, this will increase investors’ appetite and reduce market fragmentation, which risks the watering down of the covered bond brand. As such, we welcome the evident and growing appetite of global issuers to join both the ECBC and the Covered Bond Label initiative, which is now recognised as the qualitative standard for the global covered bond community.”

Should a recognised, commonly accepted idea of the covered bond be defined by an EU framework, in the form of a Directive, this would help the industry and its representatives in the ECBC earn greater recognition at Basel, some delegates said, while stressing the need for any harmonisation effort to account for national specificities.

DZ’s Luithlen warned that the push for better treatment at the Basel level could be complicated by US policy, however.

“In general, we want to have a level playing field for European issuers alongside non-EEA, global markets,” he said. “At the moment, the whole Basel process is at a halt, because one of the chairs is empty – the US chair.

“Already we know there is a potential division between the European camp and the US camp when it comes to the capital treatment of mortgages on balance sheets. The US administration doesn’t seem to have an opinion yet, and personally, given ‘America first’, I am not too confident that we will be able to create that level playing field.”

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