The EC is seeking to appoint a contractor in January to undertake a six month study of three options outlined in its covered bond harmonisation consultation paper, with market participants saying the move is in line with growing expectations that the ultimate outcome will be a covered bond Directive.

A tender on behalf of the Directorate-General for Financial Stability, Financial Services and Capital Markets (DG FISMA) was announced today (Tuesday) for a study in relation to “Covered Bonds in the European Union: harmonisation of legal frameworks and market behaviour”.

The contract is to examine the extent to which differences in legal frameworks may have contributed to any market fragmentation during the financial crisis, to assess access to covered bond markets by different issuers and investors, and to weigh up the pros and cons of three options identified in the Commission’s consultation paper of 30 September:

Option 1: voluntary convergence of Member States’ covered bond laws in accordance with non-legislative coordination measures such as a Commission recommendation;

Option 2: direct harmonisation of national laws through EU law (Directive or Regulation) on covered bonds;

Option 3: 29th regime as an alternative to existing national laws.

According to the invitation to tender, the study should have regard to the Commission’s consultation paper and review all stakeholder feedback, with the European Banking Authority’s July 2014 best practice report also identified as an input.

The six month term of the contract means that the Commission should receive the final study around July 2016. The contract will be awarded in January, shortly after the scheduled end of the consultation period.

Market participants are increasingly expecting that the Commission will ultimately decide in favour of a Directive on covered bonds.

“Indeed we will end up in a Directive, which is not so bad at the end,” said one. “All the signs are going towards this direction.”

Bernd Volk, head of covered bond and agency research at Deutsche Bank, also said today that he expects a Directive, rather than a Regulation or recommendation.

“In our view, as the latter is basically nothing and the Regulation is probably impractical at this stage (due to the strong differences of the national covered bond laws), a EU covered bond Directive is the most likely outcome,” he said. “A EU Directive would probably give the EU sufficient legal backing to justify the preferential treatment of covered bonds in various regulations versus the Basel Committee.

“As a EU Directive is not direct national law in EU Member States (but needs to be transposed via national legislation), it will continue to allow national discretion. Therefore, a EU Directive would likely prevent to damage established and well-functioning but heterogeneous national covered bond frameworks.”