Canada Mortgage & Housing Corporation’s CEO has told a parliamentary committee that covered bond legislation will help lenders access new sources of funding and make the market more robust, although she gave little new colour as to CMHC’s role in administering programmes.

Speaking before the Banking, Trade and Commerce standing committee of the Senate last Thursday (17 May), CMHC president and chief executive officer Karen Kinsley said that the proposed framework would support financial stability. The bill, C-38, establishes CMHC as the administrator of covered bond programmes in Canada.

“This will include activities such as approving issuers, maintaining a registry of issuers, programmes, guarantors and other information,” said Kinsley, “and ensuring that issuers comply with disclosure and other requirements of the covered bonds programme.”

Kinsley referred Senator Wilfred Moore of the Liberals to the proposed bill when he asked what standards CMHC would use to gauge whether an issuer is eligible for covered bond issuance under the framework.

“The proposed legislation actually outlines some of the applicant criteria that will be expected for issuers under the programme,” said Kinsley. “It is found in clause 356 of the bill, which says that an application must contain a description of the loan, a description of the assets, information on credit worthiness and on the entity that will guarantee this issuance information – who will service these loans and who the backup services are.

“There is a fair amount of information prescribed in the bill as to what we would look at.”

She said that much of the detail regarding implementation of the new legislation was yet to be determined.

“Of course, we have a fair amount of work to do, assuming the legislation moves ahead, to identify what the terms and conditions and the detailed operating procedures will be,” she said.

Kinsley said that a policy goal of the government in introducing covered bond legislation is to increase the robustness of programmes by creating a legislative underpinning and greater certainty for investors.

“What is being proposed in the legislation today is that while the process and guarantees being offered and the covered bond programmes today will remain the same going forward, what the legislative framework does is allow for standardisation and certainty to investors looking to buy those bonds in terms of what happens, for instance, in the event of default or insolvency of one of those issuers,” she said.

“Today, investors have to look to the contractual arrangements within the covered bond programmes of the issuers themselves. In future, they will be able to look to the legislative framework and the provisions of that framework to get certainty on how their investment would be treated, for instance, in the event of insolvency.”

She noted that the legislation is not being introduced because there is anything wrong with existing programmes.

“Many investors around the world are even prohibited from investing in covered bonds unless there is that certainty of national legislation to protect their interests,” said Kinsley. “This is a question of enhancing an instrument that is out there through a legislative framework.”

CMHC expects all the large federally regulated institutions that have already issued covered bonds to participate under the new legislation, she said, noting that the bill also provides for provincially regulated credit unions to issue.

In response to a question from Senator Larry Smith of the Conservatives about how covered bonds will affect CMHC’s existing activities, Kinsley said that its covered bond role would effectively add a third pillar.

“Covered bonds are intended to be a new way of accessing funds for the mortgage market distinct from the programmes that are in place today,” she said. “The big distinction between these two programmes is in the case of Canada Mortgage Bonds and mortgage-backed guarantees the underlying loans, or mortgages, are all insured either by CMHC or a private insurer. The guarantees offered to investors that they will be paid back at the end of the day are guarantees offered through CMHC on behalf of the government.

“The distinction and why covered bonds are a new way of accessing funds is the proposed legislation prescribes two major differences: first, the underlying assets will not be insured; and second, the guarantees to the investor that they will be repaid are offered by the issuing entity backed by the underlying assets.”

Kinsley stressed the absence of government guarantees in covered bonds in response to a question from Liberal Senator Pierrette Ringuette.

“There will be more certainty around the framework, but to be clear, there is no guarantee that this bill is providing,” she said.