The European Covered Bond Council needs to ensure that its efforts to introduce a covered bond label meet the expectations of central banks, regulators and investors, and is preparing a practical working proposal so that the labelling initiative can enter into an implementation phase, according to Antonio Torío, its chairman.

Speaking at an ECBC plenary in Barcelona last week, Torío said that the labelling initiative is a process that takes time and has necessitated “a lot of thinking to put together the pieces”.

However, work on the project has advanced to the point where key elements of the governance structure have been set out, for example that the label will be implemented on a founding principle of self-certification.

Antonio Torío speaking at the ECBC plenary, Barcelona

This means that issuers will submit applications and supporting information – such as that called for by a transparency element of the label – to a label office or secretariat, according to Torío. This is the body envisaged as managing the practical aspects of the labelling process, in which the ECBC steering committee and an advisory council will also be involved.

The advisory council will comprise market participants from outside the ECBC or from ECBC members that are not part of the steering committee, said Torío, and will be expected to help the steering committee direct the labelling process. The steering committee also envisages national regulators and the European Central Bank playing a role in the labelling process, according to Torío, by providing input and support.

The ECBC steering committee has also looked into legal structures and considers that an independent legal entity based in Belgian law is “probably the best way to manage the process”, said Torío.

Having agreed on these basic aspects of the governance structure, the steering committee and a labelling taskforce need to work on a practical working proposal to present at forthcoming meetings of the ECBC, said Torío.

The label will be based on a European Covered Bond Label Convention setting out a definition and requirements, according to Torío’s presentation. (The convention follows several elements of the Short-Term European Paper Market Convention initiative.)

Torío said that a covered bond definition is available, but that this is “pretty much wrapped around the UCITS directive” and needed to be taken further.

Last year the ECBC approved a set of standards as the basis of a European covered bond definition. Outlining five main objectives of a covered bond label, Torío said that transparency will be an “integral” part, but that as this means “different things for everybody” it is important to take a pragmatic approach. As a result, the label will incorporate a set of minimum standards that will need careful consideration because most transparency requirements sit at the local regulatory level, he said.

The transparency requirements would initially not be mandatory, said Torío, but will provide “a clear picture of what issuers are able to disclose about their portfolio on a very common basis”.

In addition, the label is intended to be practical and of use, he said.

“The efforts on behalf of issuers to adhere to the label need to be recognised by regulators and we hope that if we provide enough of a solid proposal that regulators will feel compelled to treat the asset class in an enhanced way,” said Torío.

Another objective is to “maintain and further develop the existing high standards of the asset class in a changing environment”, said Torío, noting that covered bonds had provided European issuers with market access because the asset class had been perceived as not being “quote unquote, tainted” by the inclusion of other assets and structures that make it more complex and possibly riskier.

Another aim of an industry label is to promote liquidity and strengthen the secondary market, he said, adding that one aspect of liquidity is covered bonds’ ability to receive privileged treatment on behalf of regulators and supervisors.