The Swedish Financial Supervisory Authority has proposed amendments to its covered bond rules and guidelines, in part to reflect changes made to the country’s legal framework since it came into effect, with the role of cover pool monitor, and supervision and valuation of collateral among aspects tackled.

The amended guidelines and associated information were published by the Swedish FSA (Finansinspektionen, FI) last Tuesday (3 July), with a consultation period open until 3 September. The new guidelines are scheduled to come into effect at the beginning of March 2013.

The information is only available in Swedish at the moment, with only the final regulations due to be translated, but The Covered Bond Report understands that the proposals are primarily intended to update the guidelines, which date back to 2004, in part given changes that have been made to the country’s covered bond legislation since it came into effect that year. Simplifying the language and reflecting changes to market environment and practice are also said to have provided an impetus to revisit the guidelines.

According to SEB analyst Charlotte Asgermyr, the most important changes concern the control and valuation of collateral, matching asset and liability requirements, and minimum rating requirements for derivative counterparties.

“Generally, we believe the new proposed guidelines would strengthen the Swedish framework,” she said. “This should, if anything, make Swedish covered bonds relatively more attractive compared to European peers, not least Swedish krone-denominated issues that currently trade comparatively cheap versus euro covered bonds both from Swedish issuers and European peers.”

She noted that the prevailing guidelines specify that house price declines should be monitored closely and property values updated in the event of a marked decline (-15%), and that the new guidelines are aimed at preventing excessive valuation of collateral.

“Price increases may also be reflected but such rules should be conservative,” she said. “Inter alia, the FSA declares it justified that market value of collateral for older mortgages should be allowed to be updated.”

According to Asgermyr, FI also considers it appropriate that market values be reassessed following a recovery after a larger price decline.

She said that FI proposes that issuers at least once a year perform a standardised sensitivity analysis of collateral market values based on minimum declines of 20% in residential and 30% in agricultural and commercial property prices. In addition, if the analysis implies that matching requirements are not fulfilled issuers should establish an action plan including steps to restore matching requirements, such as via buybacks of bonds or addition of eligible assets.

“To our knowledge, Sweden will be one of the first countries to implement stresses on collateral values,” said Asgermyr.

The proposals also include changes to net present value calculations of assets and liabilities, according to the analyst. Under the prevailing guidelines discount factors used in NPV calculations should be derived from the swap curve for each currency, she said, but FI is proposing “a more realistic valuation and an easier comparison between issuers”.

Assets and liabilities should be discounted using a bond curve or swap curve that incorporates all issuer specific risks, she said.

With respect to derivative counterparties changes being proposed by FI, according to Asgermyr, these include dropping minimum short term rating requirements (of at least P2, A2 or F2).

FI’s proposal with respect to derivative counterparty requirements, she said, “implies that current general guidelines regarding precautionary measures (such as demanding supplementary collateral or replacement of a counterparty) in the event of an issuer being downgraded below the minimum requirement are abandoned”.

“However, the FSA still regards as positive if issuers reach an agreement that specifies which steps should be taken should a derivative counterparty be downgraded below the minimum requirement.”