The new covered bond framework is part of the Commission's Capital Market Union (CMU) and aims to expand the banks’ and mortgage banks’ ability to provide cheap and stable financing for homeowners and businesses in the EU.
In Denmark, the rules thus include the access of banks and mortgage banks to issue “Særligt Dækkede Obligationer”/”Særligt Dækkede Realkredit Obligationer” (SDO/SDRO) and “Realkredit Obligationer” (RO), and the access of Danmarks Skibskredit to issue “Skibskredit Obligationer” (SO) and “Særligt Dækkede Obligationer” (SDO). The European regulatory framework provides the opportunity to maintain the basic structure of the Danish mortgage credit model and with the continued possibility of issuing both SDO/SDRO and RO.
Content of the new rules
The Directive is a principle based framework which must be implemented in Danish legislation. It is the assessment that the provisions of the directive are to a large extent already reflected in existing Danish legislation.
The Directive specifies core elements of SDO/SDRO, RO and SO, which in the future also will fall under the European common name "European Covered Bond". This definition will form the future basis for the regulation of covered bonds in other EU regulation.
The directive defines the types of assets that can be used as collateral for SDO/SDRO, RO and SO and the basic structural principles. It includes, among other things, that investors in case of insolvency have a priority claim on the cover assets and a claim on the issuer ("dual resource"). Other elements include: the use of derivatives, maturity extension of covered bonds, coverage requirements, liquidity buffer, joint funding, transparency requirements and special public supervision of covered bond issuers.
Furthermore, SDO/SDRO that meet the existing rules in the European Capital Requirement Regulation (CRR) and a number of stricter requirements – including a minimum requirement of overcollateral - can continue to achieve a lower risk weight, and thus a lower capital requirement compared to other bonds.
Time schedule for implementation/entry into force
The time schedule for implementation/entry into force of the new rules are:
- In July 2019, the European Parliament gives its final formal approval of the regulation. This happens after the final text of the compromise has been translated into all languages of the European Union.
- The Covered Bbonds Directive and the changes in CRR mentioned above concerning covered bonds are expected to be published in the Official Journal in September/October 2019.
- The Directive must be implemented in national legislation no later than 18 months after the publication in the Official Journal. It is expected to be no later than spring 2021.
- Entry into force no later than 12 months after the implementation deadline of 18 months. It is expected to be no later than spring 2022.
The Directive provides for grandfathering of SDO/SDRO, RO and SO issued before the new set of rules come into force/take effect. This means, that SDO/SDRO, RO and SO issued before the entry into force of the new framework continue to qualify as covered bonds. Only SDO/SDRO, RO and SO issued after the new rules have entered into force, which must meet the requirements of the new framework.
However, it is possible for continued issuance (tap issuance) of SDO/SDRO, RO and SO for a few years without fulfilling the new rule. This requires the opening of the ISIN is before the entry into force of the new set of rules and the fulfillment of specific requirements.