The European Parliament’s ECON committee voted through its final report on the EU covered bond package yesterday (Tuesday), with critical industry concerns alleviated by compromises. The Council is now finalising its position ahead of the Trilogue process, where key issues remain to be concluded.

The industry had been concerned that earlier iterations of the report and proposed amendments could hit national markets and structures such as extendible maturity covered bonds, and the committee’s final vote on the report was delayed from 5 November. The difficulties in finding compromise positions in the run-up to yesterday’s vote had led some market participants to fear that the window of opportunity to finalise the overall package next year could be missed.

However, following negotiations concluding only a couple of hours before the vote, the compromise Directive text was approved with a two-thirds majority, and the Regulation text by 45 in favour and five against.

“The fact that we were able to set consistent and clear criteria for covered bonds is a great success,” said Rapporteur Bernd Lucke of the European Conservatives & Reformists (ECR) (pictured).

Among potentially damaging proposals that were removed from the final version was a call for extendible maturity covered bonds to face higher risk weights, which had been supported by Lucke. Instead, there is now a transitory provision in the Directive text calling for the Commission to prepare within two years a report on such structures and the potential risks to investors, with input from the European Banking Authority and European Central Bank, together with a proposal if appropriate.

The CBR understands that as a quid pro quo for including this as a transitory provision – meaning it is legally binding – rather than as a mere recital, Lucke and others accepted a similar transitory provision whereby the Commission will prepare a report and possible proposal within two years on European Secured Notes (ESNs). Some industry members as well as MEPs had pushed for a legally binding call for action on ESNs, with shadow ECON members only supporting the inclusion of the extendible maturity provision if the ESN provision were also included.

The final text also broadens the eligibility criteria for derivatives counterparties to make allowances for credit quality step (CQS) 3, rather than just 1 and 2, as discussed by the Commission, and stricter criteria supported by Lucke. This change – which should support markets such as Italy and was pushed by the Progressive Alliance of Socialists & Democrats (S&D) – is understood to have been the final compromise to have been arrived at yesterday, after having won the support of the European People’s Party (EPP).

Other proposals that could have undermined joint funding in Denmark, for example, have been spiked, while the text improves the Commission version in areas such as liquidity buffers, where double-counting for LCRs could now be avoided.

Changes were also made to key issues Articles 6 and 10, dealing with asset eligibility and homogeneity, respectively, although clarity on the final outcome in respect of these areas will have to await the forthcoming Trilogue. The Council yesterday approved its version of the Regulation text, and is understood to be now finalising work on the Directive, with a view to completing it by next week.

“The industry had several concerns round the ECON text and there were very intense negotiations to avoid major gaps with the Council version and disruptions to well-functioning markets,” Luca Bertalot, EMF-ECBC secretary general, told The CBR. “These concerns have now been mitigated and we are glad to now be moving on with the process, with a good chance of meeting the deadline for having final approval before the last plenary meeting of Parliament in Strasbourg in mid-April.”