The Swedish government is proposing to introduce a 2% minimum overcollateralisation requirement in legislation so the country’s covered bonds will meet the criteria necessary for exemption from central clearing obligations for OTC derivatives under the European Market Infrastructure Regulation (EMIR).

Under EMIR, covered bonds are exempt from central clearing requirements as long as they meet criteria laid down by the European Securities & Markets Authority (ESMA). These include a requirement for a “legal” collateralisation level of 102%, and changes to frameworks in countries, such as Sweden, where this is not already included in legislation had been anticipated.

The Association of Swedish Covered Bond Issuers (ASCB) said that the change to legislation will enable Swedish issuers to fulfil the OC requirement, but it is not expected to entail any increase in costs for them since they already have a significant level of OC far above what the amendment will require.

“This is a positive step for the Swedish covered bond issuers who can continue to use derivatives for hedging purposes as before,” said Martin Rydin, chairman of the ASCB.

According to Jonny Sylvén, senior advisor at the ASCB, the proposal is now being consulted upon and will then be put to parliament, with the government planning to have it effective on 1 May 2016, well ahead of when clearing obligations are expected to come into force.