At an ECBC plenary on Wednesday DG FISMA’s Didier Millerot offered encouragement that several areas of industry concern around Commission proposals are being addressed, regarding the use of derivatives, liquidity requirements, third country equivalence, and the time for transposition.

Speaking on a panel discussing the proposed covered bond directive and regulation, Millerot, head of unit, banks and financial conglomerates, DG FISMA, tackled various aspects of the package – in this article we address those on which he offered more clarity or encouragement; we will address discussions of the more contentious or challenging issues – such as Article 6, ESNs and CPTs – early next week.

Many market participants have raised concerns about Articles 11 and 15 of the draft directive, arguing that the amount of derivatives in the cover pool should not – as is proposed – be limited, that the Credit Quality Step criteria for counterparties are too restrictive, and that – contrary to the current text – derivatives be included in asset coverage calculations.

Millerot acknowledged that the issue of derivatives is very important for some member states, and that the Council had been working on the issue. He said no solution has yet been fully decided, but that “we are going towards, let’s say, relaxation” of the criteria – including the rating requirements for derivative counterparties – to accommodate some member states’ concerns.

The potential need for issuers to double-up on liquidity buffers – to meet both proposed 180 day cover pool liquidity requirements and also satisfy LCR requirements for the same assets – has been an area of concern within the industry, and Millerot said that the Council is exploring how to best frame a solution to this issue.

He said that the “neatest solution” would probably be to address this by introducing changes to the LCR text to make sure that additional liquidity is not required on top of that needed under the covered bond directive, but noted that this could not be not be done until the directive is finalised and also that occasions to change LCRs are infrequent. He said that as a temporary solution until the LCR is amended member states could, for example, be given something like a right to exempt issuers from the first 30 days of the directive’s specific liquidity requirements.

The industry has called for an acceleration of equivalence measures for third countries versus what the Commission has proposed, with the draft directive envisaging an assessment as to whether an equivalence regime is necessary or appropriate, and then, if so, a legislative proposal being submitted within three years of adoption of the directive.

Millerot said the Commission had envisaged reviewing how the market is developing after the directive is adopted, but that it does not have “strong feelings” on the matter, and that some member states have called for a more ambitious timetable.

He also agreed with the wish that the directive be taken up as a global blueprint for covered bonds, something advocated by Christophe Kimmerle, policy advisor, Economic & Monetary Affairs, European Parliament, who has been involved in ECON’s work on covered bonds. Kimmerle highlighted that the Parliament’s report has called for a speedier process regarding equivalence.

Millerot said member states have asked for more time to transpose the final directive into national law than the 12 months that has been proposed, and that two years is now envisaged.

Photo: Christophe Kimmerle, left, Didier Millerot, second left; Source: EMF-ECBC