Canada’s federal budget yesterday (Thursday) failed to deliver covered bond legislation, but said that Canada Mortgage & Housing Corporation would have an “administrator” role in the country’s planned framework, even if no word on the expected prohibition of the use of CMHC-insured collateral in cover pools was given. Possible implications for institutions that are not federally regulated, such as Desjardins, were also seen.

CMHC headquarters, Ottawa

Although the budget said that “the government is moving forward with a legislative framework for covered bonds”, market participants had been expecting a bill to accompany the release of the budget, with the Canadian Department of Finance having been working on one since releasing a consultation paper last May.

“I’m a little disappointed,” said a representative of one Canadian covered bond issuer.

Instead, the document only hinted at what might be included in the legislation when it emerges.

“A legislative framework will support financial stability by helping lenders find new sources of funding and by making the market for Canadian covered bonds more robust,” said the budget. “CMHC will be the administrator of this covered bond programme, which will be available to federally and provincially regulated mortgage lenders in Canada.”

Market participants were unsure what exactly the government has in mind for CMHC with regards to covered bond issuance. However, those spoken to by The Covered Bond Report stressed that they do not understand the brief comments to imply that CMHC will have a regulatory role with respect to covered bonds, but will – in line with the budget’s language – have an administrative role, for example registering covered bond programmes. They also said that they understood “this covered bond programme” to mean the government’s initiative, rather than a specific issuance programme (for example, along the lines of CMHC’s own Canada Mortgage Bond programme).

A funding official at one Canadian bank said that he was somewhat surprised to read that CMHC would be given any oversight role, when the preamble to its covered bond involvement stressed the government’s plans for greater oversight of the crown corporation itself.

The budget also included a plan to make it clear in the Bank Act that “all banking activities throughout Canada be governed exclusively by the same high quality federal standards that have served Canadians so well, and to avoid the creation of local and potentially inconsistent rules that threaten the uniform application of the federal banking regulatory framework”.

This led a market participant to suggest that issuers that are not federally regulated could face the same legislation and rules for covered bond issuance as those that are. Moody’s, for example, has noted that the legislation proposed last May would not apply to Caisse Centrale Desjardins du Quebec. However, a banker suggested that Desjardins might anyway have sought to comply with legislation to win greater support for its issuance from investors.