The ECB will not accept contractual covered bonds as Eurosystem collateral from 1 January 2021, in the latest tightening of its position vis-à-vis the asset class, with market participants noting that Deutsche structured issuance will be excluded and citing international considerations.

The European Central Bank announced the move today (Monday) as part of a phasing-out of secured marketable assets other than asset-backed securities (ABS) and covered bonds that was initiated last year.

“In order to reduce the overall complexity of the Eurosystem’s collateral framework, the Eurosystem risk exposure and the operational burden on the eligibility assessment, non-legislative covered bonds (i.e. contractual covered bonds) should no longer be accepted as Eurosystem collateral,” the ECB said in one of the documents amending its framework.

“Therefore, the definitions and provisions relating to covered bonds in the Eurosystem collateral framework should be amended to restrict the type of eligible covered bonds to legislative covered bonds and multi cédulas.”

Market participants spoken to by The CBR said that, with banks in most jurisdictions nowadays issuing under legislative frameworks, the most notable issuance to be excluded will be Deutsche Bank’s structured conditional pass-through (CPT) covered bonds.

Legacy international covered bond issuance from Credit Suisse and UBS was also cited, although the Swiss banks no longer issue off the relevant programmes, with UBS having ceased covered bond issuance and Credit Suisse now issuing off a domestic Swiss programme.

Deutsche set up its structured CPT programme, which benefits from a guarantee from special purpose vehicle SCB Alpspitze UG, in 2016, initially for retained purposes, then issued a first benchmark in November 2019.

The exclusion will come into effect on 1 January 2021 and there while there is grandfathering of some other instruments in measures accompanying the covered bond changes, there will be no grandfathering for contractual covered bonds.

Contractual or structured covered bonds were included alongside non-jumbo covered bonds in category III of the relevant part of the ECB collateral framework, with jumbo covered bonds in category II after a Commerzbank SME-backed structured covered bond was promoted from category IV, which includes unsecured debt, in 2013.

An analyst noted that after being “rather generous” in that historic move, the ECB was now “going to the other end of the spectrum” in its treatment of contractual issuance.

However, a DCM banker noted that issuance such as Deutsche’s will continue to be viable, even if the ECB’s move will stymie bank treasury demand.

“There’s still a place for this product with fund managers,” he said.

He said the amendment to the collateral framework could be seen as a missed opportunity for the ECB to begin treating non-EEA, non-G10 covered bonds – such as Australian and Singaporean issuance – on a par with currently-eligible jurisdictions. He also queried the ongoing reliance on UCITS in the framework, given the arrival of the EU covered bond directive.

Prior to today’s move, Japanese contractual covered bonds from SMBC and shortly SMTB were considered potential candidates for ECB eligibility, but will now not be eligible unless they come under a regulatory or legislative framework, as has been mooted. Furthermore, under the amended collateral framework the ECB requires that the cover pools of non-EEA G10 legislative covered bonds not contain ABS and the structure used by Japanese issuers features RMBS.