HM Treasury on Thursday introduced two amendments to the UK Regulated Covered Bond regime to align it with the original policy intention and avoid potential “unintended consequences” arising from certain changes made last year as part of a review of the framework.

HM Treasury

There is one main amendment, with the other following as a result. According to an HM Treasury explanatory memorandum on the amendments – The Regulated Covered Bonds (Amendment) Regulations 2012 – the main change involves amending the regulations to modify the application of an overcollateralisation (OC) test so that it meets the original policy intention of changes proposed in 2011. These followed a review of the RCB framework, on which there was a comprehensive consultation, and amend the UK regulatory framework of 2008.

The latest amendment regulation was made last Wednesday (28 November), according to a government website, and laid before the UK parliament on Thursday. It comes into force on 1 January, at the same time as changes made following the 2011 review, which include the introduction of loan level data reporting and a minimum overcollateralisation level. (See here and here for previous coverage.)

Another change was to insert a definition of liquid assets that could be held in covered bond asset pools.

According to HM Treasury, the latest proposed amendment was prompted by a possibility that the combination of the OC requirement and the definition of liquid assets would have “unintended consequences for some issuers and increase the regulatory burden on them, which was not the intended purpose of the original review”.

This has become clear over time as issuers have adapted their systems to the new requirements, said HM Treasury.

As a result, the 2011 regulations are being amended so that, according to a separate explanatory note, “provision is made about the extent to which liquid assets may be taken into account in calculating the overcollateralisation requirement”.

The amendment specifies that:

• Liquid assets (cash and Government debt) are eligible for the purposes of the overcollateralisation test calculation for up to 8% of the value of the bonds outstanding with a maturity of one year or more; and
• Liquid assets are eligible for the purposes of the overcollateralisation test calculation for up to 100% of the value of bonds outstanding with a maturity of less than a year
• Government securities included in single asset class bonds as part of their asset class which also meet the definition of liquid assets shall not be treated as such for the overcollateralisation test calculation.

Consequential to this amendment, the 2011 regulations are also being changed to amend the deadline by which issuers have to notify the Financial Services Authority (FSA) of whether an existing regulated covered bond is a single asset class bond. This was an option introduced as a result of the 2011 review, which, for example, Royal Bank of Scotland has already availed itself of. On Monday it published a statement notifying the market that covered bonds issued off the RBS Programme are to be designated a single asset class regulated covered bonds.

A formal consultation on the latest amendments was not deemed necessary, said HM Treasury in its explanatory memorandum, because they ensure that changes made as a result of the 2011 review are correctly implemented. However, the government and FSA consulted issuers and investors on the changes through the FSA’s Covered Bond Forum, and also met with individual issuers to ensure that the amendments remove the unintended consequences of the 2011 Regulations.

The 2012 amending regulation can be found here: http://www.legislation.gov.uk/uksi/2012/2977/contents/made