Standard & Poor’s has dubbed the approaches to covered bond frameworks in New Zealand, Singapore and South Korea “legislative light”, noting that – with the exception of Australia –specific legislation is not yet in place in such Asia-Pacific jurisdictions.

In a report published yesterday (Thursday), S&P commented on the emergence of covered bond issuance in the Asia-Pacific.

“Regional markets seek to take advantage of favourable investor sentiment toward this asset class and issuers seek to diversify bank funding and keep up with their counterparts’ product offerings,” said the rating agency.

Monetary Authority of Singapore building (left)

S&P said that although many stakeholders see legislation as key to unlocking investor confidence in new covered bond markets – and in Australia a change in existing legislation prohibiting their issuance was necessary – covered bonds have been launched in jurisdictions without legislation where issuance is not prohibited.

“So far, Asia-Pacific jurisdictions are taking a ‘legislative light’ approach to covered bond regimes,” said the rating agency, “generally benefiting from existing legal frameworks that support structured finance transactions.

“New Zealand has proposed legislation,” it added, “Singapore has proposed rules and Korea has established guidelines.”

Issuance in New Zealand without legislation began in 2010 and S&P said that given the existence of structured covered bonds, the country’s legislative proposal – released by the Reserve Bank of New Zealand in December – is focused on putting beyond doubt the segregation of covered pool assets and the treatment of those asset in the event of an issuer insolvency, with key elements – such as eligible assets – being left in the hands of stakeholders for now.

“New Zealand appears to have considered existing legislative frameworks,” said the rating agency, “using those in the UK, Australia, and Canada as examples, but has taken an even lighter approach than those jurisdictions.

S&P said that New Zealand’s approach contrasted with that of Singapore, where rules proposed by the Monetary Authority of Singapore on 9 March are light on asset segregation, but provide some comfort in relation to asset quality, minimum overcollateralisation, and the qualifications for asset monitors.

“As it stands now, Singapore’s proposed position would appear to be that parties may rely on existing law and contractual arrangements commonly utilised in structured finance transactions,” it added.

S&P noted that while countries such as the UK and New Zealand had launched their markets on the basis of structured covered bonds, they “eventually succumbed to stakeholder pressure to initiate legislative frameworks”.

The rating agency said that Korea and Japan – which have yet to put forward formal legislative proposals – could take a different approach “given their traditional affinity with legislative jurisdictions such as Germany and France”, which S&P said have more comprehensive covered bond legislation.

“While investors would welcome the harmonisation of legislative frameworks, S&P believes each Asia-Pacific jurisdiction is likely to develop its covered bond regime within the context of existing legal systems, albeit with reference to existing covered bond frameworks,” said the rating agency.

It published the report, “S&P comments on emerging frameworks for covered bonds in Asia-Pacific”, in parallel with its assumptions for classifying Australian covered bonds (see article here).