The advent of onerous Reg AB II reporting requirements in November could spell the end for SEC-registered US dollar covered bond issuance, with other Canadians possibly following the example of Bank of Montreal, which withdrew the registration of its programme in December.

Royal Bank of Canada launched the first fully SEC-registered covered bond in September 2012, a $2.5bn (Eu2.18bn, C$3.21bn) five year issue. Fellow Canadians Bank of Nova Scotia (BNS) and Bank of Montreal (BMO) followed suit, although while BNS issued an SEC-registered covered bond as recently as 19 April – a $2.5bn five year – BMO has not issued under the format, not having visited US dollars since January 2012.

The SEC-registered format allows issuers to sell covered bonds to investors who are not able to participate in the 144A format that is more commonly used by foreign issuers selling bonds into the US, thereby also holding out the possibility of tighter pricing. Balanced against this is the cost and administration involved, although for financial institutions already active in the US the extra requirements may be lower.

When applying for SEC registration the Canadian issuers said that they would comply with certain disclosure requirements under Regulation AB – a Securities & Exchange Commission (SEC) rule governing the offering process, disclosures and reporting for asset-backed securities – even if covered bonds, not being ABS, are not generally covered by the regulation.

However, in September 2014 the Securities & Exchange Commission adopted significant revisions to the rule, dubbed Reg AB II. These are said to have had a wide range of unintended consequences for foreign issuers, and in relation to the reporting agreed by the Canadians require disclosure of 270 data fields for each residential mortgage loan backing securities.

“This is causing Canadian issuers to re-evaluate the likelihood of issuing SEC-registered covered bonds,” said Jerry Marlatt, senior of counsel at Morrison & Foerster. “The impact of the rule is very significant, and it is significant both in terms of legal complexity and from the point of view of expense.”

According to Marlatt, the framing of the regulation in relation to US specificities makes it difficult for foreign institutions to deal with, while the disclosure is defined in US-centric terms and also includes fields that are not collected by banks such as the Canadians and which would require systems modifications.

RBC in an SEC filing in June 2015 flagged the potential impact of such loan-level disclosures being required from 23 November 2016.

“The Issuer and Guarantor LP are assessing the impact of these amendments on the offerings of covered bonds under this prospectus,” it said. “No assurance can be given that covered bonds will be offered under this prospectus after November 23, 2016.”

RBC nevertheless noted how such information could be disclosed if it continued to sell SEC-registered covered bonds after the requirements kick in.

Bank of Montreal meanwhile in December requested the withdrawal of its registration.

Neither BNS nor RBC responded to requests for comment on their latest plans for their programmes in relation to SEC registration.

However, some market participants are pessimistic about the outlook for SEC-registered issuance.

“Given the current state and structure of the US covered bond market,” said one, “having SEC registration does not give an issuer any perceptible pricing benefit versus non SEC-registered formats, such as Rule 144A. As a result, this does not support the incremental resources required to maintain SEC-registered format versus non SEC-registered format.”

Marlatt said that although the SEC may move to try to lessen the wider impact of Reg AB II on foreign issuance – which has all but died out – a positive solution is hard to foresee.

SEC registration relates to the status of bonds when issued, so, were the registrations of the Canadian issuers withdrawn, that would not directly affect holders of outstanding covered bonds.

“However,” added Marlatt, “they may be a little affected by liquidity, in the sense that the market for SEC-registered covered bonds won’t be nearly as big and it won’t be nearly as optimistic, if you will.”