The European Parliament’s Committee on Economic & Monetary Affairs (ECON) yesterday (Monday) published a draft report on covered bonds that echoes many of the industry’s key positions regarding harmonisation. The ECBC has meanwhile released an HTT voluntary addendum.

The “own initiative” report, prepared by and at the instigation of ECON’s rapporteur, proposes a motion that is set be debated by the committee before being voted on by the summer, and which could then go to the Parliament plenary in the autumn. It would thus progress alongside any action the Commission decides to take – a decision that is expected as part of its mid-term Capital Markets Union (CMU) review around June. Parliament would be involved in negotiating any Directive.

The report, “Towards a pan-European covered bond framework”, is aligned with many of the recommendations made by the European Banking Authority (EBA) in a December report that will inform the European Commission’s decision on what, if any, action to take regarding covered bonds.

However, some market participants noted that the new report adopts a more cautious stance than EBA with regards to the degree of harmonisation and regulation. It warns of unintended negative consequences and “insists that European legislation be limited to a principles-based approach”.

“European legislation should cause no disruption for frameworks which are well embedded in national law and which have enabled covered bond markets to operate smoothly and successfully over decades,” said rapporteur Bernd Lucke, a German MEP.

He also highlighted the role covered bonds could play in supporting sectors such as SMEs, but at the same time called for SME loan-backed issuance to not carry the name covered bond but be designated European Secured Notes (ESNs) – a term originated by the European Covered Bond Council (ECBC).

Luca Bertalot, EMF-ECBC secretary general, told The CBR he welcomes the report.

“This document is an important recognition first of all of the principles-based approach, and also the value of the backbone proposed by the EBA, the three-step approach,” he said. “I think it is also important to notice that the rapporteur has very carefully tried to design a high quality product, so there is no intention of watering down.”

The report endorses the ECBC-led Covered Bond Label initiative and Harmonised Transparency Template (HTT).

“Where those initiatives exist, they should be encouraged and either replace public intervention or be the basis for optional or mandatory standards,” said Lucke.

The Covered Bond Label Foundation (CBLF) yesterday released a recently-flagged voluntary addendum to the HTT, named “option ECB-ECAI data”, which is aimed at aligning disclosure under the initiative with rating agency reporting requirements being introduced by the European Central Bank. Additional information on features such as asset distribution and swaps is covered.

“The addendum has been developed in coordination with issuers’ representatives and several rating agencies, with the latter being the prime users of the newly disclosed data,” said the CBLF. “The rating agencies and the Covered Bond Label have sought to cooperate in this exercise in order to minimise the additional reporting burden for issuers.”

S&P last week said it will accept the enhanced HTT and Label and representatives of Moody’s, Fitch and Scope also welcomed the moves.

“Fitch is supportive of efforts to improve transparency for covered bonds investors,” said Hélène Heberlein, managing director at Fitch. “As an industry standard, the HTT will contribute to an efficient process in meeting the minimum ECB disclosure requirements.”

Photo: Bernd Lucke; Source: European Parliament; Copyright: European Union