A Department of Finance spokesperson told The Covered Bond Report that the government expects Canadian banks not to issue covered bonds backed by CHMC insured collateral while a legislative framework is being finalised, with programme requirements expected to be ready by autumn.

The Canadian government in April released draft legislation to create a covered bond framework under which issuance backed by mortgages insured by Canada Mortgage & Housing Corporation will be prohibited. However, the bill does not explicitly state that such issuance cannot continue in the interim period until the legislation comes into effect, leading to uncertainty over the possibility of CMHC backed issuance, with opinions differing as to whether this would be permitted.

Minister of Finance Jim Flaherty

But comments from a Department of Finance spokesperson appear to rule out such issuance.

“Canada’s Jobs, Growth, and Long Term Prosperity Act of 2012 will create a legislative framework for covered bonds and prohibit the use of government backed insured mortgages as collateral for those bonds,” the spokesperson told The Covered Bond Report.

“Given the government’s clear intention to prohibit the use of insured collateral for covered bonds, it is our expectation that banks will refrain from issuing non-legislative covered bonds using insured collateral.”

However, the spokesperson said that work on the new framework is progressing.

“To ensure that the legislative model is available to issuers in a timely manner, the Canada Mortgage & Housing Corporation has begun drafting requirements to register a programme and will be consulting with issuers on these requirements,” he said. “It is expected that a complete set of requirements for legislative covered bond programmes will be ready in the fall.

“CMHC will provide ongoing updates on programme elements, as they are developed, to allow issuers to begin establishing new programmes (or modifying existing programmes) as quickly as possible.”

The spokesperson also made it clear that issuers will not be able to maintain covered bond programmes outside the legislative framework, as some market participants had said might be possible.

“Once the framework is fully in-force, any new covered bond issued by a federal financial institution will have to comply with the legislation and cannot have government backed insured mortgages in the cover pool,” he said.

However, suggestions that the grandfathering of existing issuance will be allowed appeared to be supported by the spokesperson’s response to a question as to whether or not this would occur.

“The proposed legislative framework for covered bonds does not impact bonds that have already been issued,” he said.