Rules for covered bond issuance recently proposed by the Monetary Authority of Singapore are a promising basis for establishing a covered bond market, but do not address liquidity gaps and public disclosure requirements and are silent on the appointment of an alternative manager, according to Fitch.

The rating agency’s comments today (Tuesday) come after an earlier reaction, in the middle of March, to the proposed rules in which Fitch said that it expects Singaporean banks to take an opportunistic approach to any covered bond issuance given a strong deposit base that limits wholesale funding needs.

The new report focusses on the details of the proposals set out in a consultation paper released by MAS on 9 March, with Helen Wong, director, structured finance, Fitch, noting that the proposals give no indication that specific legislation for covered bonds will be forthcoming.

“Fitch expects Singapore covered bonds will rely on current law and contractual arrangements, and assumes they will be guaranteed or issued by an asset-owning special-purpose vehicle, similar to those used in securitisation transactions,” she said. “Fitch’s experience in Singapore securitisation transactions leads it to expect that the legal regime for asset segregation will be strong and supportive.”

The rating agency said that the proposals are “an important first step” toward establishing a covered bond market, but are silent in several aspects, the clarification of which will add certainty for both issuers and investors.

Fitch said that the proposed rules do not address the following issues: mandatory liquidity protection for the covered bonds; public disclosure requirements of the cover pool and covered bonds; consequences of non-compliance with the MAS’s rules; or the appointment of an administrator after issuer default and the powers and duties of the administrator.

The rating agency noted that in the absence of covered bond laws in Singapore it expects Singaporean covered bonds to be issued pursuant to individual contractual arrangements and that Singaporean issuers will use prevailing current laws relating to SPVs. Fitch will carry out a specific review of the legal mechanism chosen by individual Singaporean issuers relating to the asset segregation of the cover pool, investigating how the covered bonds’ dual recourse against a financial institution and a cover pool is ensured in case an SPV is used as an issuer rather than as a guarantor of Singaporean covered bonds.

Mandatory liquidity provisions are not included in MAS’s proposed rules, added Fitch, with liquid assets such as cash, bank bills and certificates of deposit not specified as eligible assets in the cover pool.

“The rules also remain silent on the necessary measures to ensure continuation of payments to covered bondholders in the aftermath of an issuer default,” said the rating agency. “It does not address the appointment of an administrator, or its powers and duties in relation to meeting covered bond payments, such as sourcing payments from the cover assets or selling the cover assets.”

Fitch will, in the absence of regulatory guidance, review the measures at programme level that can protect covered bonds against an interruption of payments, such as pre-maturity tests or extendable maturities for the covered bonds, and the appointment of an administrator, its role in servicing and liquidating the cover assets to meet covered bond payments.

Another shortcoming in the consultation paper is that the reporting requirement proposed by MAS, according to Fitch, may be too infrequent to allow timely control and oversight of covered bonds issued in Singapore.

The proposed rules require an issuer to appoint an independent cover pool monitor to verify and report the compliance of covered bonds to the MAS annually, said the rating agency.

“In addition, the proposed rules do not address any public disclosure requirements,” it said. “Fitch believes the regulatory authority can play a role in promoting transparency for the covered bonds market.”

A minimum overcollateralisation of 3% is set out in MAS’s proposed rules, which Fitch said is a positive feature but below actual OC in most globally issued covered bonds.