The ECBC is supportive of the European Commission adopting a combination of a principles-based directive and recommendations to encourage convergence between European covered bond markets, the industry body said today (Wednesday) in a draft response to a harmonisation consultation.

The European Covered Bond Council (ECBC) described the consultation as “one of the most important reflections on the covered bond asset class in decades”, and highlighted that it has collected feedback from over 750 market participants to inform its response, of some 56 pages, ahead of a 6 January deadline.

The consultation was launched on 30 September as part of the Commission’s Capital Markets Union (CMU) project. It set out three options for moving towards a more integrated European covered bond market: 1. Voluntary convergence of Member States’ covered bond laws in accordance with non-legislative coordination measures such as a Commission recommendation; 2. Direct harmonisation of national laws through EU law (Directive or Regulation) on covered bonds; 3. 29th regime as an alternative to existing national laws.

Welcoming the Commission’s “cautious approach” towards harmonisation, the ECBC said that among its members there is a preference for option 1, but added that they are also supportive of a combination of 1 and 2. The latter is more in line with what several market participants have said they believe the Commission to be leaning towards.

“A balance must be struck between maintaining national covered bond legislative frameworks and establishing a common European framework, by means of: (i) a recommendation to encourage Member States to increase convergence; and (ii) a high quality principle-based directive ensuring harmonisation of certain minimum standards,” said Luca Bertalot, EMF-ECBC secretary general (pictured).

The ECBC said that the introduction of legislative minimum standards would “better protect the covered bond market”.

It suggested a split between areas to be dealt with via a directive and via recommendations:

New secondary legislation in selected fields currently covered by UCITS 52(4) and Article 129 CRR – namely, public supervision, overcollateralisation, liquidity risk management, asset segregation and minimum transparency.

Voluntary convergence via EU non-legislative recommendations/best practice guidelines/market initiatives in other areas such as the cover pool administration post-issuer default, dual recourse, eligibility criteria, mixed cover pools, LTVs and valuations, stress testing, transparency (Covered Bond Label, Harmonised Transparency Template) and soft bullet/conditional pass-through structures.

The industry body added that its members are doubtful that the establishment of a 29th regime would be workable or beneficial, adding that any restriction of preferential regulatory treatment to instruments issued under a 29th regime would be a “major threat” to the market.

The ECBC also called for grandfathering in the event that changes to regulation under subsequent Commission harmonisation moves negatively affect outstanding covered bonds.