Loan-by-loan disclosure of cover pool assets, as required by the Bank of England, is “superfluous” and runs the risk of “contaminating” covered bonds’ reputation as a high quality product, said the Covered Bond Investor Council in a response to a review of the UK framework.

The level of transparency that investors in UK covered bonds should be provided with is the only point of contention raised in the CBIC’s submission, with the council saying that it is “generally positive” toward the changes proposed by the review.

HM Treasury

The consultation is being conducted by HM Treasury and the Financial Services Authority (FSA), and closed on 1 July.

The CBIC generally either expressed its agreement with the stances put forward by the review – for example answering affirmatively to the question “Do you agree that the list of assets eligible for inclusion in UK regulated covered bonds should not be expanded?” – or said that it does not have a view, for example in relation to the level at which a minimum overcollateralisation should be set.

But the council came out against the introduction of mandatory disclosure requirements in line with Bank of England requirements for Regulated Covered Bonds.

The council prefaced its rejection by highlighting the market’s shift to a “more hybrid credit universe with greater vitality and disparity among issuing bodies” and the need for greater transparency. However, the implementation of granular loan-by-loan requirements, as proposed by the review, “would contaminate the reputation of high quality the covered bonds product has in the market”, said the CBIC.

Asset backed securitisation (ABS) products and covered bonds need to be distinguished, it said, in particular with respect to the level of information required.

“Covered bond pools need to be monitored by investors but maybe not nearly as frequently as ABS pools as long as the pool is fairly elitist from its creation onwards and substitution mechanisms are in place,” said the council.

In addition, the CBIC suggested that loan level disclosure would undermine a necessary expansion of the UK covered bond market’s investor base.

“The high level granularity in the information requirements suggested by the review paper may mean that less sophisticated investors will not be in a position to analyse all this data,” it said. “The information needs to be easily accessible and timely for it to be of use to investors.”

The dynamic nature of cover pools makes regular loan-level disclosure superfluous, it added.

A covered bond banker said that it was unusual for investors to decline the provision of more data.

The publication of the CBIC’s response to the UK review comes as the council is itself preparing to publish a statement on feedback it has received in a consultation on transparency standards it has formulated (see separate story for more). The CBIC said in its submission to the UK review that its data list is intended to identify key information investors need to make well informed investment decisions.

The Covered Bond Report understands that the FSA has responded to the CBIC’s own consultation, noting that the UK authorities are pursuing loan-by-loan disclosure as part of their review of the country’s covered bond framework.

The CBIC response can be found here.