Canada Mortgage & Housing Corp yesterday (Monday) unveiled detailed requirements for the legislative covered bond framework being introduced in Canada that include enhanced disclosure and structural features, and which will allow banks to work towards registering programmes.

CMHC headquarters, Ottawa

Announcing the news, Jim Flaherty, Canada’s minister of finance, said that with the release of the framework CMHC is now in a position to begin accepting applications.

“This framework will support financial stability by helping lenders find new sources of funding and by making the market for covered bonds more robust,” he said. “This will help reinforce the stability of Canada’s financial system, benefitting Canadian families.”

CMHC will administer the new regime and act as registrar. It was charged with fleshing out the country’s framework after amendments were made to the National Housing Act under this year’s federal budget.

“The new framework establishes a high standard of disclosure for covered bonds for lending institutions across the country” said Karen Kinsley, CMHC president and CEO. “The framework strikes a balance between issuer and investor needs and takes into account evolving international best practices.”

CMHC said that it consulted with a wide variety of stakeholders and industry participants while developing the framework and Terry Campbell, president of the Canadian Bankers Association, welcomed the announcement.

“We are pleased that the government created legislation for a covered bond framework in Canada and for the opportunity to provide our input as the CMHC developed that framework,” he said. “A robust market for Canadian covered bonds is important to enable the Canadian financial sector to have access to global sources of financing and compete with other financial institutions in these markets.”

CMHC highlighted how having a legislative framework should open up the Canadian market to more investors than were able to invest in previous, contractual-based covered bonds.

The most important aspect of the new regime is that issuance backed by CMHC-guaranteed mortgages will be prohibited. That had already been announced, but CMHC’s framework appears to confirm that existing programmes will benefit from some form of grandfathering in the way that it makes reference to how issuers will deal separately with new registered covered bonds and “historical bonds”.

Among the details announced by CMHC yesterday – in the form of a “guide” – was that covered bond programmes will have uninsured one to four unit residential mortgage loans as their primary collateral.

A funding official at a Canadian bank cited additional disclosure as being among the most significant requirements announced by CMHC, as well as an 80% LTV limit comparable with European covered bonds.

He also highlighted a requirement that issuers index housing values, which he said Canadian issuers have not previously done. He noted that this would affect asset coverage test calculations, and was therefore a notable enhancement.

“At the core of the framework is the existing structure – which is quite uniform across Canadian issuers – and the guide builds on it from there,” he said. “There are some structural improvements that they want to see and some new tests. Programme documents will have to be changed to further improve programmes in light of their requirements.

“It’s not just papering over what we are doing,” he added. “They are serious efforts to try to improve the product and it will take us some work to get ready for it.”

The relevant CMHC documents can be found here.