CBPP3 began today (Monday) with Eurosystem central banks buying a variety of covered bonds in the secondary market as certain details of the operation of the ECB’s programme were still being cleared up. However, the primary market remained quiet with little activity anticipated.

The start of the third covered bond purchase programme (CBPP3) came as expected this morning after the European Central Bank had on Friday published a legal act covering the programme that was effective on the following day, and in line with the ECB’s initial statement that the programme would begin in the second half of October.

A Bloomberg report of purchases of short-dated French covered bonds being bought under the programme quickly surfaced and the ECB confirmed that buying has begun.

Bankers variously said that that alongside French covered bonds, Belgian, German, Portuguese and Spanish issues have also been bought under CBPP3 in the secondary market.

“They’ve sorted themselves out now and we saw them sending enquiries on various jurisdictions,” said one covered bond banker. “So far it has just been small turnover in the single-digit millions.

“The whole market is well bid now.”

Ahead of CBPP3’s start, market participants were questioning how aggressive the ECB would be in its buying and the banker said that in this respect the programme had begun modestly.

“The turnover we saw was on the offer levels that we have had on the screens for quite some while,” he said. “There has been maybe only 1bp in tightening.

“I think there will be a gradual tightening over time, although it remains to be seen if they kick start things in the coming days,” he added. “For sure no-one wants to be short.”

Another banker said that, after weeks of guessing what the ECB might or might not do, it was good to see the programme in operation – although this raised further questions.”

“Since the report they have started came out, everyone is asking, why?” he said. “Why short-dated? Why French, core paper? Maybe it was the only point where they could get bonds in size.”

An update to the ECB website to provide space for CBPP3 data to be included alongside information on CBPP1 and CBPP2 had led some market participants (The CBR included) to assume that the ECB would provide data on its purchases in the same manner as on the previous programmes.

However, an ECB spokesperson said that it will be providing data on a weekly basis, in line with a wider change to the way it disclose information on portfolios of securities held for monetary policy purposes. It will on Monday, at 1530 CET, update the amount purchased and settled up to the Friday before on this webpage:

http://www.ecb.europa.eu/mopo/implement/omo/html/index.en.html

This could make it more challenging to estimate what new issues the Eurosystem has bought for CBPP3 given that under CBPP1 and CBPP2 market participants could watch out for large increases in amounts purchased on the days that coincided with the reporting of purchases that settled on their payment dates.

The ECB spokesperson said that a decision has not yet been taken on whether monthly reports will be published. Under CBPP1 and CBPP2 these offered a breakdown of purchases into primary and secondary market activity.

The legal text that formalised the modalities of CBPP3, which was released on Friday, also contained small changes to the press release and technical annex that had previously been relied upon for information on CBPP3, and some market participants have interpreted one change as meaning that covered bonds (with the exception of multi-cédulas, which were explicitly included in CBPP3) no longer have to be CRR-compliant.

Jan King, senior covered bond analyst at RBS, for example, highlighted that a reference to “lit. (b)” of Guideline ECB/2011/14 Section 6.2.3.2 paragraph 5 has been dropped from a criterion, meaning that the scope of eligible covered bonds expands from CRR-compliant issuance to covered bonds with “comparable specific legal safeguards”, which are included in point “c” of the paragraph.

This would align CBPP3 more closely with the ECB’s previous purchase programme policy, where covered bonds with similar safeguards to UCITS covered bonds were allowed. According to King, this would let in aircraft Pfandbriefe from Germany, Luxembourg lettres de gage, and SME-backed obbligazioni bancarie collateralizzate from Italy if they are issued.

“Nevertheless, a reference to specific legal safeguards remains,” he added. “Thus, covered bonds issued outside a specific legal framework would still be out of the scope (except for multis).”

The CBR asked the ECB to clarify this, and received the following response:

“The scope of eligible covered bonds did not change and is still limited to CRR compliant covered bonds and multi-cédulas. However, now the legal act on CBPP3 is aligned with the wording of the General Documentation.”

However, a senior industry source said that in spite of this the interpretation of the citeria whereby eligibility has been expanded outside CRR-compliance is correct.

A first test of the ECB’s appetite in the primary market is yet to be scheduled, with no public mandates for Eurozone new issues having been announced yet. However, some syndicate officials said that they expect one such issue could emerge this week.

The only mandated euro benchmark in the public pipeline is for Coventry Building Society, via Danske, HSBC, Natixis and UniCredit. It finishes a roadshow tomorrow and a syndicate official suggested its deal could emerge on Wednesday, ahead of AQR results being released over the weekend.

He said that covered bond had held up well amid the volatility of last week and there was no reason a covered bond from a core issuer with nothing to fear from AQR could not come to market.

Another market participant noted that last week’s volatility had shown the value of CBPP3, which could cushion the impact on the covered bond market, but other bankers remained sceptical about the point of CBPP3.

Sweden was identified by some syndicate bankers as a potential source of supply, with Swedbank kicking off the third quarter results season tomorrow (Tuesday), followed by Handelsbanken and Nordea on Wednesday, and SEB on Thursday. However, one said that local market and dollar levels are more attractive than euros given the basis swap.

DNB announces results on Thursday but issued a Eu1.25bn five year deal only last month, on 29 September.