The European Commission is making permanent a waiver that can be used to allow certain own-issued MBS and equivalents to comprise more than 10% of cover pools – but the move is understood to be to the sole benefit of Nykredit and subject to review upon the arrival of an EU covered bond framework.

Under the Capital Requirements Regulation (CRR), the use of qualifying senior tranches of mortgage-backed securities (MBS) in cover pools is generally restricted to 10% of outstanding covered bonds. However, in the past some issuers – notably CIF Euromortgage – started to use RMBS structures to transfer assets from group members to the central issuer, and a temporary waiver was introduced enabling supervisors to allow this (dubbed the “MBS waiver”).

After previously being extended – despite earlier negative comments from the European Central Bank and European Banking Authority – the waiver was due to expire at the end of this year unless prolonged by the Commission. In line with this, France updated its legislation to provide alternative means for issuers to transfer assets and bring an end to the use of French RMBS, and Axa and CIF Euromortgage modified their programmes accordingly.

But the European Commission on 11 August adopted a Delegated Regulation that would make the waiver “permanent”, citing its application to pooled covered bond structures, specifically that of Nykredit in Denmark. The Danish group has since 2006 – as approved by the Danish FSA (Finanstilsynet) – used a covered bond structure to transfer assets from one of its two mortgage credit institutions – Totalkredit – to its other – Nykredit Realkredit – with the latter used for market covered bond funding.

“The way we link those two mortgage banks together – the cover pools – and hence make sure we have this joint funding model where we only need to issue out of covered bonds out of one legal entity, is technically this MBS waiver,” Morten Bækmand Nielsen, head of investor relations at Nykredit, told The CBR. “The key difference between the other banks that have used it and us, is that we don’t technically have an MBS in our cover pool, but a covered bond that we effectively issue another covered bond on top of – which is the crucial difference also for the European Commission and the EBA.”

The Commission said that although there has been general support among Member States for allowing the waiver to expire with respect to MBS (which it noted are only permitted under the frameworks of France, Ireland, Italy and Luxembourg), there was support for extending it in relation to pooled covered bond structures as used by Nykredit.

The EBA previously recommended such a move, with the addition of a relevant clause carving out these covered bond structures to CRR Article 129, but the Commission said that due to time constraints the most sensible option is simply to remove the end-date of the waiver – but otherwise retain current language, such as “senior units issued by French Fonds Communs de Créances (FCCs) or by securitisation entities which are equivalent to FCCs” – thereby making it permanent.

However, market participants close to discussions around the waiver said that they expect it to ultimately be superseded by considerations in the anticipated EU covered bond Directive that would finally restrict the use of MBS in line with regulators’ wishes, as referred to in the latest Commission document: “Article 496(1) of Regulation (EU) No 575/2013 should therefore be amended to repeal the date mentioned in that provision, with the understanding however that the possibility for competent authorities to grant a waiver may have to be reassessed in the context of a future covered bonds framework.”

Commerzbank analysts described the solution as “an act of goodwill towards Denmark, in order not to undermine the business models of local issuers unduly”.

Nielsen at Nykredit said the move rather fits with the Commission’s overriding objective of not disrupting well-functioning business models.

The Delegated Regulation will be applicable from year-end unless objected to by the Council of the EU or the European Parliament.