The Monetary Authority of Singapore (MAS) published a notice on the issuance of covered bonds on Tuesday, putting in place a long-awaited framework for Singapore banks that doubles a previous cap on issuance relative to an issuer’s assets.

The notice comes following a consultation launched back in March 2012 and after a MAS official told The Covered Bond Report in mid-December that it was finalising the covered bond notice. MAS also on Tuesday published its response to feedback received during the consultation.

Monetary Authority of Singapore building (left)

An analyst described the new framework as “regulation light” – with Singapore covered bonds in his view likely to be enhanced by contractual features – and MAS noted in its response to feedback that a few respondents had suggested that there be dedicated legislation to facilitate covered bond issuance and provide greater legal certainty to investors.

“As the covered bond market in Singapore has not yet developed, the need for dedicated legislation will be assessed as the market takes shape,” it responded. “We would highlight that requirements set out in a Notice to Banks issued under the Banking Act are mandatory.”

The MAS notice sets a 4% limit on the value of assets in the cover pool relative to a bank’s total assets. This is double a previous 2% limit, which was lower than in any other jurisdiction and which MAS noted was seen by some respondents to its consultation as conservative.

“They noted that covered bond investors preferred large transactions that were benchmark in size and widely placed,” it said. “This would help ensure liquidity in the product and a bigger pool of potential buyers should the investors wish to sell.

“Investors also preferred issuers that were likely to access the market on a regular basis and were committed to using covered bonds as a funding tool.”

MAS therefore increased the limit to 4%.

“We note that an encumbrance limit of 2% may not provide a sufficiently large demand and liquidity pool for the use of covered bonds as an additional source of funding for banks,” it said.

According to MAS, some respondents to its consultation sought clarification as to the structure of programmes that it will permit, and MAS said that banks will be allowed the flexibility to adopt the structure that best suits their needs. Its notice refers to cover pool assets being held by either the issuer or an SPV, and also appears to envisage issuance by either entity.

MAS also noted that banks must also obtain a legal opinion to confirm that cover pool assets “are beyond its and its creditors’ reach, even in an insolvency situation”.

The only eligible collateral type is residential mortgages, although these are not restricted to Singapore mortgages. Where they are outside Singapore, legal advice must be sought to confirm that the laws of the foreign jurisdiction do not adversely affect the rights of covered bondholders.

Respondents to MAS’s consultation also requested the inclusion of commercial mortgages, public sector debt, and shipping and aircraft loans, but MAS said in its response that covered bonds remain a nascent product in Singapore and that globally residential mortgages remain the predominant asset type. It nevertheless said that it will review the inclusion of other asset types at a later stage.

There is an 80% limit on loan-to-value ratios for the mortgages, based on current market valuations. The notice requires issuers to value residential properties on an annual basis or more often, and more frequently “where the property market is subject to significant changes in conditions”.

Issuers must ensure that the value of the cover pool is at least 103% of the face value of outstanding covered bonds. A register of cover pool assets must be maintained.

Cash, including foreign currencies, Singapore Government Securities and MAS bills can comprise up to 15% of the cover pool. Derivatives held for the purpose of hedging risks arising from the issuance of covered bonds are also allowed in the cover pool.

Many of the above requirements must be performed by a cover pool monitor, which must be an external third party that is a qualified auditor. MAS also said in its response to feedback that a bank is expected to appoint an administrator to protect covered bondholders’ interests in the event of an issuer’s insolvency, although The CBR was unable to establish where this requirement is laid out in the notice.

Prospective issuers have to give MAS one month’s notice before issuing covered bonds along with relevant information and documentation, and then three days’ notice before any individual covered bond issue, including the size, maturity and terms of issuance as well as the amount of collateral and a memorandum of compliance.

Issuers are exempted from having to comply with Notice 628, which governs securitisation, with respect to their covered bond issuance.

MAS said that it will be following Basel Committee on Banking Supervision Liquidity Coverage Ratio rules and hence covered bonds will be eligible as Level 2 assets. It said it will review the eligibility of covered bonds for its Standing Facility “in line with the depth and liquidity of the covered bond market in Singapore”.

The MAS notice can be found here and the response to feedback here.