UK Overseas Recognition Regime
The UK Government today published a response to the Policy Update 2025 setting out HM Treasury’s approach to replacing the existing equivalence regimes inherited from the EU and in the UK CRR with legislation which is tailored to the UK’s needs, and which fully reflects the government’s outcomes-focused approach to the unilateral regulatory recognition of overseas jurisdictions. These are called ‘Overseas Recognition Regimes’.
HM Treasury explained its intention to restate existing equivalence decisions made under the UK CRR equivalence regimes so that jurisdictions currently deemed equivalent are treated as designated under the Overseas Prudential Requirements Regime (OPRR) and generally to preserve the effects of the current decisions, except regarding exposures to exchanges.
HM Treasury has today published the draft regulations for the OPRR and is seeking industry views by 2 April 2026. These regulations are intended to legislate for the approach set out below. Responses can be sent by email to Prudential.Consultation@hmtreasury.gov.uk.
HM Treasury agrees that ensuring an appropriate prudential treatment of overseas covered bonds is important for the safety and soundness and growth and competitiveness of the UK financial services sector and the UK as a whole.
HM Treasury stated that it considers that the most timely, prudent and proportionate way to achieve these objectives in respect of the categorisation of covered bonds for liquidity purposes is to maintain the approach whereby firms are able to use certain non-UK covered bonds to meet their LCR requirements, within the criteria specified in PRA rules. The PRA statement on 15 July 2025, clarified that the PRA does not expect firms to alter their approach to the inclusion of non-UK covered bonds in Level 2A HQLA under the Liquidity Coverage Ratio (CRR) Part of the PRA Rulebook. That statement remains applicable. Since then, PRA has completed a review of the current liquidity treatment of non-UK covered bonds, and intends to consult on changes to PRA rules to confirm firms’ role in assessing the equivalence of non-UK covered bonds included in Level 2A HQLA.
HM Treasury and the PRA will work together to explore the most appropriate prudential treatment of overseas covered bonds for capital purposes. To facilitate options to address this, HM Treasury intends to introduce a power to designate jurisdictions through the OPRR for overseas covered bonds. This would allow HM Treasury, including through advice provided by the FCA and PRA, to consider whether the designation of a particular jurisdiction would advance HM Treasury’s policy objectives and introduce the most appropriate capital treatment for overseas covered bonds. The draft OPRR legislation, published today, will introduce this power in regulation 5..
GSE Reform Coming?
GSE Reform Coming?
The Wall Street Journal (6 Feb 2025) reported that the newly confirmed Secretary of HUD (Housing and Urban Development), Mr. Scott Turner, will be “quarterbacking” an effort to privatize Fannie Mae and Freddie Mac, working with the Treasury and Congress. The Journal said that “it remains to be seen how much of a priority privatization is for President Trump.” Skeptics warn of damage to the forward market for MBS that permits lenders to lock in mortgage rates for borrowers at the time of application for a loan.
If there is movement on the two GSEs, there is likely to be a wider discussion of housing finance, which opens the door for discussing covered bonds as an element of a stronger private market to support housing if the roles of Fannie Mae and Freddie Mac are reduced. As noted previously, SEC registered RMBS is also seen as an important contributor to a stronger private market for financing residential mortgage loans.
Resiliency of Canadian Covered Bonds
Resiliency of Canadian Covered Bonds
In the current world of sharply rising interest rates and a possible recession, questions have arisen about the resiliency of the cover pools for Canadian covered bonds. Additional focus is brought to this question by the declining housing values in Canada — Vancouver and Toronto in particular have seen reported 15 to 20 per cent declines in house prices from recent peaks.
Canadian covered bonds take their strength from several factors, not the least of which is the conservative nature of property investors in Canada, combined with fairly strict underwriting standards set by OSFI. This has resulted historically in a typical annual loss rate for residential mortgage pools for most banks in basis points in the single-digit or low double-digit range.
This low loss experience is supported by the full recourse nature of Canadian mortgage loans. A mortgagor under Canadian law is personally liable for full payment of the mortgage loan if the loan is foreclosed on and liquidated at a loss. Unlike the case in many U.S. States, a Canadian property owner cannot turn over the keys to house and walk away free of the debt.
Another protection for Canadian cover pools is the monthly Asset Coverage Test that each program must pass. If the value of eligible mortgage loans in the cover pool does not exceed the outstanding amount of covered bonds by the required overcollateralization amount, the test is failed. Defaulted mortgage loans are not included in test. If the test is failed, the issuing bank is required to transfer additional, non-defaulted eligible mortgage loans to the cover pool. Thus, the cover pool is constantly refreshed with performing mortgage loans protecting the value of collateral backing the covered bonds.
More protection is provided by the requirement that an eligible mortgage loan for Canadian cover pools must have a loan to value ratio not exceeding 80%, measured each month based on an index of current property values in the location of the property. If the loan to value ratio exceeds 80% at any time, only only the portion of the loan not exceeding 80% of the value of the property is included in the cover pool for the calculation. This means that the value of the cover pool is protected from declining property values.
Moreover, the typical average loan to value ratio of mortgage loans in cover pools for Canadian covered bonds is between 50% and 60%, which provides a substantial buffer before loan amounts are reduced in the cover pool because they fail the loan to value maximum for eligibility. Statistical information on cover pools is available in the monthly report provided to investors by each of the Canadian banks.
Lastly, in addition to strong cover pools, investors in Canadian covered bonds hold exposures to banks that operate in a conservative banking environment. Canadian banks came through the financial crisis of 2008 in excellent shape and continue to be highly regarded in international capital markets. Banking regulation in Canada contributes to the conservative environment with a with a regulatory approach that prioritizes stability. The recent tightening of mortgage loan underwriting evidences this caution.
This collection of protections is what supports the perception of quasi-sovereign risk for Canadian covered bonds.
Stellar Year for Canadian Covered Bonds
A Smashing Year for the Canadians
2022 was a remarkable year for Canadian covered bond issuers. The Canadians issued 68 series of covered bonds in 2022 for an equivalent total of C$100,515 million, more than doubling the 30 offerings of 2021. There were 58 offerings in 2020, but 25 of those were retained offerings for repo with the central bank, so don’t count as public offerings.
In 2021, the Canadians were 20 per cent of the global market in covered bond issuance. While the final numbers for 2022 are not yet available, with 68 offerings it is likely that the Canadian banks have not slipped from that position.
In 2022, the Canadians issued in six different currencies: USD, A$, C$, CHF, £, and €. Euro was the most popular currency, with 29 offerings for €32,368 million, followed by the USD with 14 offerings for $24,705 million. RBC was the most active issuer with 18 offerings, followed by BNS with 14 offerings.
Some of the motivation for issuance likely was replacing funding obtained at the beginning of the pandemic from the Canadian central bank in 2020, when about C$90,000 million of covered bonds was taken to the central bank by the Canadian banks. Most of those loans from the central bank were two-year loans.
The elevated Canadian covered bond issuance was also responsible in large part for the largest U.S. dollar covered bond issuance since 2012. With a total U.S. dollar covered bond issuance of $32,500 million in 20 offerings in 2022, the Canadian banks accounted for $24,705 million in 14 offerings, well above their typical 50% of the market.
In 2023, Canadian banks have 43 series of covered bonds maturing, 16 of which are in euros and 13 in Canadian dollars. Of the maturing Canadian dollar series, ten of the series, representing C$33,500 million, were retained covered bonds transferred by repo to the central bank. With so many series maturing next year, it likely that 2023 is going to be another very active year for Canadian banks in covered bonds.
1Q22 – A Blistering Pace in 1st Quarter
A Blistering Pace in 1Q22
It was a notable first quarter for Canadian covered bond issuers: 19 issuances across dollars, sterling and euros [see the table below]. All six of the major Canadian banks issued bonds. On a Canadian dollar equivalence basis, the banks issued C$38.7 billion. Continuing a trend set last year, the Canadians represented 20% of covered bond offerings for the quarter — punching well above their weight.
This activity is probably partly attributable to the heavy retained issuance by the banks at the start of the pandemic in March and April 2020, when nearly C$90 billion was taken to the central bank for funding. This was the inaugural covered bond repo program by the central bank. Issuance limits were temporarily increased at the time to support the central bank program and provide enhanced liquidity to the banks. Most of those covered bonds had two year maturities and are running off this year.
| Pricing | Issuer | Series | Cur. | (mm) | Coupon | Maturity | Tenor | Spread | Type |
|---|---|---|---|---|---|---|---|---|---|
| 2022-03-30 | National Bank of Canada | CBL18 | $ | 1250 | 2.900 | 2027-04-06 | 5yr | +65 | 144A |
| 2022-03-29 | Bank of Montreal | CBL28 | € | 1750 | 1.000 | 2027-04-05 | 5yr | +8 | Reg S |
| 2022-03-17 | Toronto-Dominion Bank | CBL34 | € | 2500 | 0.864 | 2027-03-24 | 5yr | +11 | Reg S |
| 2022-03-17 | Royal Bank of Canada | CB69 | € | 150 | 1.296 | 2037-03-24 | 15yr | +15 | Reg S |
| 2022-03-17 | Royal Bank of Canada | CB70 | $ | 1500 | 2.600 | 2027-03-24 | 5yr | +65 | 144A |
| 2022-03-15 | Royal Bank of Canada | CB68 | € | 2000 | 0.625 | 2026-03-25 | 4yr | +9 | Reg S |
| 2022-03-08 | Bank of Nova Scotia | CBL42 | € | 2000 | 0.450 | 2026-03-16 | 5yr | +10 | Reg S |
| 2022-03-03 | CIBC | CBL40 | $ | 100 | SOFR+45 | 2025-03-10 | 3yr | +45 | 144A |
| 2022-03-03 | CIBC | CBL39 | € | 2500 | 0.375 | 2026-03-10 | 4yr | +6 | Reg S |
| 2022-03-02 | Bank of Nova Scotia | CBL41 | $ | 2250 | 2.170 | 2027-03-09 | 5yr | +58 | 144A |
| 2022-03-02 | Bank of Montreal | CBL27 | £ | 600 | SONIA+40 | 2027-03-09 | 5yr | +40 | Reg S |
| 2022-02-02 | Bank of Nova Scotia | CBL36-2 | € | 100 | 0.623 | 2041-10-15 | 20yr | +16 | Reg S |
| 2022-02-01 | FCDQ | CBL14 | € | 750 | 0.250 | 2027-02-08 | 5yr | +5 | Reg S |
| 2022-01-20 | National Bank of Canada | CBL17 | € | 1000 | 0.125 | 2027-01-27 | 5yr | +5 | Reg S |
| 2022-01-19 | Bank of Montreal | CBL26 | € | 2750 | 0.125 | 2027-01-26 | 5yr | +6 | Reg S |
| 2022-01-18 | Royal Bank of Canada | CB67 | € | 2000 | 0.125 | 2027-01-25 | 5.25yr | +6 | Reg S |
| 2022-01-17 | Bank of Nova Scotia | CBL39 | £ | 1300 | SONIA+100 | 2026-01-26 | 4yr | +28 | Reg S |
| 2022-01-17 | Bank of Nova Scotia | CBL40 | € | 1250 | 0.375 | 2030-03-26 | 8yr | +10 | Reg S |
| 2022-01-11 | CIBC | CBL38 | $ | 2500 | 1.846 | 2027-01-19 | 5yr | +48 | 144A/Reg S |
Covered Bonds – Flight to Quality
Critical Liquidity Source in Times of Stress
In the past ten days, covered bonds have shown their value in a crisis for the Canadian banks. They have issued covered bonds in Europe at least seven times in that last ten days. When senior debt and ABS is difficult to bring to market, covered bonds have a ready investor base. Covered bonds represent a flight to quality when markets are difficult. The Canadians have been so successful that they have irritated European funding officials. See the story in Global Capital.
Canadian banks survived the last financial crisis in better condition than perhaps any other OECD banking system. And the Canadian banking system, although relatively small, remains one of the preeminent banking systems in the world. The six major Canadian banks dominate the banking market in Canada. They are quite conservative. They tend to follow each other and particularly the traditional leader, Royal Bank of Canada. Compared, for example to the banking system in the United States, the Canadian banks have had remarkably few crises. It is a close-knit community and a comfortably profitable business in Canada.
When the crisis created by the coronavirus COVID-19 began to envelope the Western world, the Canadian banks moved quickly to shore up their liquidity. An important tool for accomplishing this has been covered bonds. In uncertain times, investors tend to seek sovereign paper in a flight to quality. Covered bonds provide an attractive alternative to sovereign paper. Covered bonds have a similar risk profile to sovereign bonds but generally provide better yields.
Why did the banks choose Europe to issue their bonds? Because of favorable currency swap costs. And the market proved quite receptive. Even though there were at times two or three Canadian banks in the market at same time, they all managed to issue benchmark-size offerings at favorable rates. There was clearly an investor hunger for safe assets with a decent yield and the Canadians met that need quickly. They were in and out of the market before their European competitors had even contemplated challenging the market turmoil.
And although the Canadians deserve credit for moving quickly, the moral of the story is really the value of covered bonds in stressful times. As it did during the financial crisis, the covered bond market continues to be open and available to provide critical liquidity when other finding sources are spotty or not available at all. And just to note, this is a funding tool that U.S. banks do not have access to.
SEC Calls Reg AB II Meeting
The SEC announced today that it would hold a public meeting to consider amendments to Regulation AB on Wednesday, August 27:
SECURITIES AND EXCHANGE COMMISSION
Sunshine Act Meeting.
Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Pub. L. 94-409, that the Securities and Exchange Commission will hold an Open Meeting on Wednesday, August 27, 2014 at 10:00 a.m., in the Auditorium, Room L-002.
The subject matters of the Open Meeting will be:
- The Commission will consider whether to adopt rules revising the disclosure, reporting and offering process for asset-backed securities. The revisions would require asset-backed issuers to provide enhanced disclosures, including information for certain asset classes about each asset in the underlying pool in a standardized, tagged format, and revise the shelf offering process and eligibility criteria for asset-backed securities.
- The Commission will consider whether to adopt rule amendments and new rules to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act concerning nationally recognized statistical rating organizations, providers of third-party due diligence services for asset-backed securities, and issuers and underwriters of asset-backed securities under the Securities Exchange Act of 1934.
The duty officer has determined that no earlier notice was practicable.
At times, changes in Commission priorities require alterations in the scheduling of meeting items.
For further information and to ascertain what, if any, matters have been added, deleted, or postponed, please contact:
The Office of the Secretary at (202) 551-5400.
Kevin M. O’Neill
Deputy Secretary
Dated: August 22, 2014
Although the SEC’s proposal to amend Regulation AB (hence Reg AB II) is primarily concerned with asset-backed securities, the Commission’s action will be of interest to covered bonds issuers for two reasons:
-
- whether covered bonds will be defined as asset-backed securities and therefore expressly subject to Reg AB II;
- whether Reg AB II requirements will be extended to asset-backed securities sold under Rule 144A.
Covered bonds do not fall within the current definition of asset-backed security, as the SEC has recognized in several no-action letter issued to Canadian banks. Nevertheless, in those no-action letters, the SEC has required the banks to comply with specific provisions of current Regulation AB as a condition of registering covered bonds with the SEC. If those provisions are amended, the banks could be required to comply with the provisions as amended.
However, if covered bonds are defined as asset-backed securities under Reg AB II, there may be other provisions that they would be required to comply with, including possibly the proposed requirement to issue a preliminary prospectus at least five days prior to the sale of any security.
Until now, Regulation AB has applied only to asset-backed securities registered with the SEC, and 144A covered bonds have not been subject to the regulation. The extension of Reg AB II to asset-backed securities offered under Rule 144A would therefore affect Rule 144A covered bonds if covered bonds were defined to be asset-backed securities. The extension of Reg AB II to privately placed securities sold under Rule 144A would be a major departure from prior practice. If Reg AB II is not extended to 144A securities, covered bonds could still be offered in the United States under Rule 144A without complying with Reg AB II, even if covered bonds were defined as asset-backed securities under Reg AB II.
Accordingly, the outcome of the meeting on Wednesday will be of considerable interest to covered bond issuers who currently offer or plan to offer covered bonds in the United States.
PIMCO CB Fund
PIMCO starts managed covered bond ETF fund; see article in Covered Bond Report