Covered bonds of wind-down entities are no longer eligible for purchase under CBPP3 after the ECB this week amended its terms to exclude such issuers, as part of a wider move to remove their eligibility as counterparties and their bonds from the expanded APP.

Article updated to include DKD information.

In a decision adopted on Tuesday and effective today (Friday), the European Central Bank has amended Article 2 of Decision ECB/2014/40 to add the following as a condition of eligibility for purchase under the third covered bond purchase programme:

“The issuer of the covered bonds is not an entity, whether publicly or privately owned, that: (a) has as its main purpose the gradual divestment of its assets and the cessation of its business; or (b) is an asset management or divestment entity established to support financial sector restructuring and/or resolution, including asset management vehicles resulting from a resolution action in the form of the application of an asset separation tool pursuant to Article 26 of Regulation (EU) No 806/2014 of the European Parliament and of the Council or national legislation implementing Article 42 of Directive 2014/59/EU of the European Parliament and of the Council.”

Although entities likely to be affected have not typically issued new benchmarks since the start of CBPP3 in 2014, an exception is Dexia Kommunalbank Deutschland (DKD), which issued a Eu500m March 2022 deal in February 2015 and a Eu500m September 2021 in June 2016. Dexia said this afternoon that DKD is among Dexia group members that fall under the scope of the ECB move. At the time the two deals were issued, whether or not the Eurosystem participated under CBPP3 was not disclosed (to The CBR, at least).

Several other issuers meanwhile have covered bonds outstanding that would previously technically have been eligible for purchase under the ECB’s programme. Other issuers whose covered bonds could be excluded include names such as Depfa ACS Bank and KA Finanz.

An analyst suggested that the amendment would have little practical impact.

“None of those I can think of have issued lately, so there is not much material available to buy,” he said. “There might be something in the secondary market, but I would be sceptical that they had bought some previously.”

The amendments to CBPP3 come after the governing council of the ECB decided on 22 March to remove the eligibility of wind-down entities as Eurosystem monetary policy counterparties. It also announced it would exclude all securities issued or originated by such entities from any further purchases in any of the constituent parts of its expanded asset purchase programme, and it made further amendments to this end in parallel with this week’s covered bond move.

“The Governing Council also decided that a wind-down entity that was accepted as an eligible counterparty on 22 March 2017 would remain eligible until 31 December 2021, with the limitation that its access to Eurosystem credit operations would be capped at the average level of its recourse to Eurosystem credit operations during the 12-month period preceding 22 March 2017,” said the central bank.