The European Covered Bond Council wrote to European issuers today (Monday) to invite them to sign up to its labelling initiative, offering early bird discounts of up to 50% on fees in a bid to raise seed funding and achieve a critical mass to help win around regulators.

According to the letter and related documents, issuers signing up before 30 September will be able to cover joining, annual and issuance fees for Eu7,000 rather than costs of up to Eu14,000 were they to join later and issue Eu5bn or more in 2013.

The Eu7,000 includes a joining fee that will be Eu3,000 for what the ECBC calls “early joiners” rather than a standard Eu5,000 that will apply to later joiners. All issuers will have to pay a Eu4,000 annual fee, but a Eu1 fee per Eu1m of issuance up to a cap of Eu5,000 per year will be waived for 2013 for early joiners. Issuers will have outstanding issuance “labelled” upon payment of the joining fee, but the label will be withdrawn should they not pay an annual fee.

“The label will provide immediate visibility to the issuer and its cover pool(s), as all labelled Covered Bonds will be flagged on the Label website,” wrote Paul O’Connor, chairman of the ECBC, and Annik Lambert, secretary general of the European Mortgage Federation (the ECBC’s parent), in the letter to issuers.

“This Initiative requires start-up funding to cover legal, IT and other less significant costs,” it added. “We ask for your support for the Label Initiative and invite you to register your commitment by completing the attached response form.”

Luca Bertalot, ECBC head

Luca Bertalot, head of the ECBC, told The Covered Bond Report that the “consensus-based” initiative is offering is offering incentives for early joiners in order to reach a “robust” initial critical mass and to avoid any wait and see behaviour.

“With a solid critical mass joining the Label Initiative, the Covered Bond community will have the opportunity to send a strong message in the current regulatory debate to both regulators and market participants, setting a clear perimeter and highlighting the three core pillars of this asset class: quality, transparency and liquidity,” he said.

The ECBC said it is on target to have the operational aspects of the label ready by September to be able to run a pilot phase in the fourth quarter of this year, ahead of full launch at the beginning of 2013. It is now planning on visiting issuers around Europe to help win them around to the initiative.

A group of investment banks is also supporting take-up of the label by offering to deduct the initial costs of joining the label from the fees on the first benchmark from each issuer.

“This shows that the investment banks involved have faith in the labelling initiative,” said Richard Kemmish, head of covered bond origination at Credit Suisse, one of those who suggested lead managers offer the incentive.

In its letter, which is being sent to all European Economic Area issuers, the ECBC said that the labelling initiative was launched at the behest of investors and regulators at a time when the regulatory preferential treatment of covered bonds is being determined in a complex decision-making process involving several national and European authorities.

“The ECBC experience in lobbying for the better treatment of covered bonds is that an agreed definition of the core characteristics of covered bonds is a powerful tool in providing guidance to EU lawmakers,” it reads. “We believe that the ECBC Label Initiative is the best starting point to obtain the maximum recognition and highest prioritization for the covered bond asset class in the European regulation-making process.”

The ECBC cited positive comments from Francesco Papadia, director general of market operations at the European Central Bank, at the ECBC’s March plenary meeting, where he reiterated the central bank’s support for the project and emphasised the timeliness of its aims.

“He also said that the ECB would carefully observe the impact of the Label on the risk profile of covered bonds,” said the ECBC. “The lower the risk of the asset class, the less stringent the risk mitigation measures applied (for example, repo haircuts).”

The ECBC’s Bertalot said that the label should help the asset class’s liquidity and could thereby help in the industry’s bid for preferential treatment for covered bonds in liquidity buffers under CRD IV when the European Banking Authority comes up with eligibility criteria.

“Why should this produce liquidity?” said Bertalot. “Because, first of all, the Label and its transparency component will make traditional investors even more comfortable with this asset class, as well as attract new investors into the covered bond market. As soon as these two components are achieved, and a critical mass of issuers has joined the Label, I’m strongly convinced that this Initiative will be considered positively for better treatment of covered bonds in the repo facility of the ECB.

“These three elements together should improve liquidity, and even more so if we succeed in getting the preferential LCR treatment. If you put all these together, it is the key to having a long term improvement in liquidity.”