A new Belgian covered bond legal framework provides investors with a range of protections, such as against market value, credit and liquidity risk, said Moody’s today (Monday), after the publication of royal decrees that finalise the country’s new law on Thursday.

The rating agency said that the publication of the royal decrees will allow Belgian credit institutions to issue covered bonds by the end of the year. The lead-up to this will involve a few more steps, however, according to market participants, such as applying for a licence from the National Bank of Belgium (NBB), which is also expected to come up with additional rules.

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Moody’s said that the covered bond legal framework in Belgium is credit positive, noting that it guarantees the legal integrity of the covered bond structure and lowers market risk by ensuring that bankruptcy of the issuer does not cause the covered bonds to become due and payable.

“Market-value risk is also lower under the framework because it restricts cover pools to high credit quality assets, which have less market risk than more volatile, lower quality or non-standard loans,” said the rating agency.

The framework is also credit positive in that it stipulates a 5% overcollateralisation minimum and minimum liquidity requirements that build up buffers capable of absorbing credit losses and liquidity shortfalls, noted Moody’s.

In addition, the framework improves reporting transparency, said the rating agency.

“The framework defines the reporting obligations of the issuer and of the cover pool monitor, thereby enhancing reporting quality and transparency for the benefit of investors,” it said. The cover pool monitor is an independent auditor recognized by NBB, noted Moody’s, and is responsible for reporting test breaches. The central bank can take remedial measures such as replacing the management of the cover pool if the NBB concludes that the breach seriously affects investors’ interests.