The ECB will from 2015 no longer accept as collateral for repo covered bonds backed by external ABS, and has added CRD-compliance to eligibility requirements for own-use covered bonds, it announced yesterday (Wednesday), with analysts seeing only a limited impact.

Covered bond analysts played down the rule changes, saying they will probably only have a limited impact on banks’ ability to use covered bonds as collateral.

“Most measures include a grace period or are designed to close some loopholes,” said Fritz Engelhard, German head of strategy at Barclays. “Overall, we believe the respective measures were taken prospectively to limit the ability of banks to arbitrage between covered bonds and ABS by setting up specifically structured covered bond programmes.

“It is interesting to see that these measures were taken shortly after the ECB published its third quarter collateral data, which showed another strong (Eu66bn) increase in the use of covered bonds within the ECB’s collateral framework.”

The measures also abolish certain rules that were introduced in the past to reflect the specifics of some covered bond frameworks in individual countries, added Engelhard.

The changes concerning use of covered bonds featuring RMBS in cover pools are also consistent with the ECB’s stance on securitisation, according to Florian Eichert, senior covered bond analyst at Credit Agricole.

“They have introduced additional line by line reporting requirements for RMBS tranches that are used as collateral,” he said. “At the same time they are getting tougher on covered bonds that have RMBS in their cover pools.”

The ECB has in the past also expressed critical opinions of covered bonds backed by collateral featuring intra-group securitisation. In August 2010, for example, it criticised the conditions of a proposed waiver in the Capital Requirements Directive allowing the senior tranches of self-originated residential and commercial mortgage backed securities to be used as collateral for covered bonds, although it has since appeared to relax its views on the use of intra-group securitisation. (See here for more.)

Under the amendments announced yesterday, already issued covered bonds with external RMBS as collateral will be grandfathered for a two year period from 3 January, and from 3 January 2015 will no longer be eligible as collateral for ECB funding.

This affects mainly French issuers, such as Compagnie de Financement Foncier (CFF) and CIF Euromortgage, according to analysts, with Eichert noting that Dexia Municipal Agency could potentially also be affected as Dexia Crediop and Dexia Sabadell public sector ABS would not count as intra-group securitisations if the issuers are sold.

“During the next two years, these banks will have to get rid of the external RMBS tranches they still have in their pools,” he said. “Internal RMBS as are used by CIF but also Axa are still okay for now in the eyes of the ECB.”

Engelhard at Barclays noted that French issuers are phasing out use of external ABS in any case.

“Overall we think that this measure might not have a material impact,” said Engelhard, “but is rather a provision for limiting arbitrage between ABS and covered bonds in the future and for creating some consistency with ABS-eligible rules, where ABS of ABS is also excluded.”

The ECB also tightened its collateral eligibility rules for covered bonds by announcing that it will only accept own covered bonds as collateral for repo if they are CRD-compliant or offer “comparable protection” in addition to complying with Ucits, the latter having already been a requirement.

Engelhard said that this rule simplifies language and essentially restricts the exception to French home-loan backed covered bonds (obligations de financement de l’habitat, OHs), suggesting that the ECB might consider removing this exception once EU lawmakers have implemented CRD IV, as this will include OHs.

Bernd Volk, head of covered bond research at Deutsche Bank, however, said that OHs could be affected by the new rules as they are backed by high shares of guaranteed home loans (instead of mortgage loans) that are CRD-compliant only up to 15% of the cover pool.

“It remains to be seen if the ECB plays hard ball and argues that French OH does not offer ‘comparable protection’,” he said. “In our view, this seems very unlikely. Probably, this will be decided by Banque de France, in which case the decision would be obvious.

“Overall, while the change is likely to have only minor consequences,” he added, “the ECB (as future bank supervisor) could take a lead in transparency and provide more clarity when announcing such changes.”

Eichert said that the new close-link rule limits bank’s creativity in setting up dedicated covered bond programmes that are structured only for retention purposes.

The ECB also announced that it is phasing out acceptance as repo collateral unrated Ucits-compliant covered bonds issued before 1 January 2008.

Barclays’ Engelhard said the change mainly just closes a loophole, but provides some insight into the ECB’s thinking about the value of covered bond ratings, coming against a backdrop of a “substantial” recent issuance of unrated retained covered bonds, mostly Italian.

“We believe the measure highlights that the ECB sees some benefit in having a covered bond rating available,” he said, “and thus also creates incentives for these issuers to get their covered bonds rated, although generally authorities aim to lower the reliance on ratings.”