A Covered Bond Investor Council transparency template is nearing completion and the investor group’s vice chairman told the ICMA CBIC & The Covered Bond Report conference last Thursday that it could serve as a model for national templates under the ECBC’s labelling initiative if that is to be taken seriously.

Andreas Denger, vice chairman of the ICMA Covered Bond Investor Council and senior portfolio manager at MEAG, noted that the covered bond market is becoming increasingly complex and diverse and that transparency is needed to help investors carry out their analysis, in particular of cover pools and issuers, be they investors who are new to covered bonds and/or traditional or other accounts who need adequate data to carry out a deep analysis.

The ICMA CBIC has been conducting a second round of consultation with its membership and respondents to an initial consultation, which ended in April 2011, and at the conference Denger invited further comments on the transparency template, but told market participants to “hurry up a little bit” as the consultation concludes at the end of May.

The investor group believes that transparency standards should be set by investors, and that they must be able to identify possible risk in cover pools and on an issuer’s balance sheet. In this vein, the CBIC has come up with a list of seven transparency criteria, a “7 C List”.

Information should be, in the CBIC’s own words:

• Comparable: The data is reported according to a standardised template
• Comprehensive: The template aims to provide European comparability and not only national
• Continued: The data must be reported and updated on a regular basis
• Coordinated: The template is the result of compromise between investor needs, discussions with issuers representatives to ensure the data is easily available
• Circumstantial: The template recognises differences between jurisdictions and holds a key concept list for each jurisdiction to explain their own specificities
• Conceptional: Investors are able to understand and readily use the reported data presented on a stratified basis
• Cost-free/easily available: Free data access via a dedicated platform (links to data)

Setting out the structure and content of the CBIC transparency template, Denger said that not many changes were made following the consultation, and that this was a positive aspect, but that certain amendments were made, such as adding data fields to capture the percentage of assets an issuer has pledged to central banks and whether or not there is “a legal possibility to redeem the covered bond before its legal and final maturity” – a question that Denger said often arises when it comes to soft bullets.

The template, released yesterday (Monday) can be found by clicking here.

As previously communicated by the investor group, Denger said that its transparency template does not seek to duplicate the work carried out by credit analysts or rating agencies, that it should not require issuers to set up cost intensive new systems for reporting data, and that blanks are acceptable.

“It’s absolutely fine with us,” he said. “It’s a template to be used by all issuers in various countries. If you cannot or do not want to fill in every field just leave blanks.

“Feel free to explain why you leave it free and then we as an investor know why you are not reporting it. It is not by definition a negative think, there’s no scoring.”

He said the CBIC appreciated that “there are limits to transparency” but felt a “good compromise” had been reached.

The CBIC’s work could also help inform national associations’ efforts to develop and/or update national transparency templates, also in the context of the European Covered Bond Council’s label initiative, according to Denger.

“National templates with the ECBC label, I think there is a connection,” he said. “Therefore I think it is important to not go for an easy solution within the national template.”

National associations should take national transparency templates seriously, he suggested, as the market perception of the ECBC label will also, at least in a second or third step, depend on the quality of data disclosure.

The possible alignment of the CBIC and ECBC initiatives was later welcomed as a long term aim by Michel Stubbe, head of the financial operations service division at the European Central Bank but speaking in a personal capacity, during a panel discussion on the investor group’s transparency standards.

He spoke of a “roadmap” that should include increasing convergence and standardisation of national templates, and said that alignment of the CBIC and ECBC initiatives would be a “sensible” aim, although national templates are unavoidable at this stage.

The former represents “one of the answers to the consequences of the crisis” in that it addresses the regaining of investors’ confidence and is also useful for the ECB as a collateral-taker, he said.

Tofte Nielsen, Stubbe, Tolckmitt, Sjølie, Bertalot (left to right)

The CBIC initiative was welcomed by other panellists, with Jens Tolckmitt, chief executive of the Association of German Pfandbrief Banks (vdp), and Stein Sjølie, senior advisor, Finance Norway (FNO), outlining how it relates to transparency work within their respective jurisdictions, and Luca Bertalot, head of the ECBC, explaining how the investor initiative is helping inform national efforts in the context of the transparency element of the ECBC label convention.

The aim is to have national templates ready as soon as possible, said Bertalot, and for these to be operative in the fourth quarter. There are limits to standardisation, he suggested, given that covered bonds, despite being a simple product, are rooted in countries’ mortgage and legal systems and cultures, with the ECBC’s transparency efforts aimed at providing a platform for national templates to raise such specificities.

But market participants’ focus on improving transparency could be somewhat akin to tilting at windmills, according to a conference delegate, who said that a “gratuitous standardisation of things that mean different things in different countries” could potentially lead to a false sense of security, and that many covered bond downgrades, for example, are not driven by deterioration of cover pool assets but by senior unsecured or sovereign cuts.

Claus Tofte Nielsen, head of position management allocation strategies, Norges Bank Investment Management, and chairman of the CBIC, said that the CBIC had clearly decided against pushing for a European standard in favour of allowing explanation of definitions and concepts at a national level, with standardisation something to be pursued after getting “facts on the table”.

Others noted the benefits of grassroots transparency initiatives as opposed to transparency standards imposed from above by a “Big Brother”, with the vdp’s Tolckmitt noting the important contribution transparency can make toward making investors and therefore issuers less dependent on rating agencies. This was a goal that informed the vdp’s Pfandbrief transparency efforts, going back to 2004, and one that has largely been achieved, he said.

FNO’s Sjølie said that the CBIC’s bottom-up approach to its transparency push was part of the initiative’s success, and in relation to rating actions questioned as “puzzling” a tradition of granting rating agencies discretionary information.

“Transparency is about everyone having access to information,” he said.

And the ECB’s Stubbe also warned of the dangers of a lack of information, saying that it is the absence thereof that gives a false sense of security, with improved availability of information supporting due diligence and a better assessment of risk to provide a more genuine sense of security.