An Australian covered bond bill introduced into parliament on Thursday includes substantial changes that make it less prescriptive than an exposure draft released in March, according to lawyers at Clayton Utz, who said that this could please potential issuers who had raised concerns during a consultation.

“Whereas the exposure draft adopted many of the features from European regulated covered bond regimes (ie. UCITS),” said the lawyers today (Monday), “the Bill has been significantly pared down resulting in a less prescriptive regime.”

They said that it will be interesting to see how investors and rating agencies might view the changes made by the Australian Treasury.

Among differences to the exposure draft cited by Clayton Utz are changes to the range of eligible assets. Whereas first mortgage loans with maximum initial loan to value ratios of 60% for residential mortgages and 80% for commercial mortgages would have been eligible under the exposure draft, the bill relaxes these to allow loans with higher LTVs as long as only up to 60% or 80%, respectively, of the value is assigned to the cover pool. Changes to substitute assets have also been made.

The Banking Amendment (Covered Bonds) Bill 2011 also removes a requirement of the exposure draft that assets of the special purpose vehicle in covered bond structures be distributed in a particular order of priority upon insolvency of the Australian ADI (Authorised Deposit-taking Institution), now leaving this to the relevant documentation.

The bill gives cover pool monitors a more limited role than in the exposure draft, according to Clayton Utz.

“In addition, the Bill permits the cover pool monitor role to be performed by registered auditors and has limited the role to providing biannual reports on the cover pool based on sampling,” said the lawyers. “This modified the position in the exposure draft which envisaged a far more proactive role for the cover pool monitor.

“However, the Bill retains APRA’s entitlement in the exposure draft to request pool reports, of an unspecified nature (presumably within APRA’s sole discretion), from the cover pool monitor. Regulations may also prescribe monitor functions from time to time.”

A new provision preventing APRA (Australian Prudential Regulation Authority) from directing the SPV as to its dealings with its assets and its repayments in respect of covered bonds (with one exception) has been added, said Clayton Utz, although an APRA power to stop top-ups of the cover pool in certain circumstances, which had raised concerns among some market participants, has been retained.