CIBC tapped a sterling covered bond for £200m today (Monday), after UK authorities’ proposals to introduce an Overseas Prudential Requirements Regime boosted confidence with a move that market participants said should in the longer term provide a constructive basis for equivalence.

No non-UK benchmark covered bonds had been issued in the sterling market since the Prudential Regulation Authority (PRA) on 8 April made a surprise announcement that such securities would be excluded from banks’ LCRs, even though the process to do so was paused on 17 April in the face of a backlash against the move and the way it was handled.

The initiative was deemed particularly problematic given how it could also affect EU treatment of UK covered bonds, which is currently being considered by European authorities.

In coordinated announcements on Tuesday, the PRA and HM Treasury (HMT), as part of a broader policy update, unveiled a new plan to consult on and potentially introduce “an Overseas Prudential Requirements Regime (OPRR) that could be used to designate overseas jurisdictions in relation to the prudential treatment of UK firms’ exposure to non-UK covered bonds”, according to the PRA’s statement.

HMT will meanwhile ensure that any designation does not create cliff edges in treatment for overseas covered bonds issued prior to the legislation.

The news was greeted positively by market participants.

“We welcome the certainty this brings,” Ian Stewart, executive director, UK Regulated Covered Bond Council, told The CBR, “and the opportunity to participate in the consultation.”

And today Canadian Imperial Bank of Commerce (CIBC) tapped a £800m October 2029 floating rate covered bond for £200m (C$368m, €231m).

Wojtek Niebrzydowski, vice president, corporate treasury, CIBC, said the issuer had been considering such a tap for over a month and had considered it feasible ahead of last week’s UK announcement, but had been focused on other trades, including a US dollar AT1 and Australian dollar covered bond.

However, with these out the way, and renewed impetus behind the sterling market in the wake of the regulatory news, the issuer refocused on the sterling tap. According to Niebrzydowski, the tap was exclusively placed with UK investors, a combination of bank treasuries and real money accounts.

Bankers anticipate new benchmark issuance picking up later in August.

“We’ve had some conversations with investors, asking if they are cool to buy now, and there’s been a really positive reaction, because they feel like they’ve been given a lot of comfort,” said a DCM banker. “There are still some investors who will need to have internal discussions before they begin buying again, but we’ve already seen the secondary market pick up a bit, with the non-UK stuff trading.

“So it seems like we’re back to where we were in March, with the upside of an there being an equivalence regime that would improve the capital treatment at some point in the future.”

While non-UK covered bonds will now continue to be treated as Level 2A-eligible, market participants raised the possibility of their joining UK covered bonds in Level 1.

The timing of any such move is unclear, but should be soon enough that five and even three year paper issued now could benefit, particularly as plans are firmed up.

“There has been a widespread view that the EU will do its equivalence thing and then other countries could use that as a model for what they might do in their own jurisdiction,” said a banker. “But the EU could take four years or so, while there’s a chance the UK could get all this in place first – they mention 2027 as when Basel 3.1 is coming into play.”

HMT’s statement notes that, in parallel with the liquidity requirement developments, it is working on updating the capital framework for UK financial institutions, where non-UK covered bonds similarly face risk weight issues.