Erhvervs-, Vækst- og Eksportudvalget 2015-16
ERU Alm.del Bilag 119
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ANNEX – DANISH RESPONSE TO THE CONSULTATION
Part II – Exploring the case for a more integrated framework
1. Legal framework and integration
1.1.
Would a more integrated "EU covered bond framework" based on
sound principles and best market practices be able to deliver the
benefits suggested in section 2 of Part II? Are there any ad-
vantages or disadvantages to this initiative other than those de-
scribed in section 2 of Part II?
A more integrated "EU covered bond framework” is likely to deliver
some of the benefits suggested in section 2 of Part II as long as it builds
on the experiences of well-functioning national systems, such as the Dan-
ish mortgage credit system, and is not achieved at their expense.
The Danish government believes that a directive leaving room for the
national systems is the best way to achieve the benefits suggested.
This being said, section 2 of Part II on benefits and challenges of an inte-
grated framework does not seem to recognize the challenges that exist as
regards adjacent legislation. Covered bonds legislation is in many ways
dependent on other parts of national legislation, including but not limited
to insolvency regulation, enforceability of mortgages, rules governing the
cadastral register and land registration. The adjacent legislation is of very
significant importance in securing well-functioning national covered
bonds systems. A process towards a more integrated EU covered bond
framework would have to recognize this and further analysis on the mat-
ter should be made before deciding on the level of harmonisation of the
specific covered bonds framework.
Summing up, the Danish government supports a covered bond framework
in the form of a directive as long as it is possible to maintain core ele-
ments of the Danish mortgage credit system. We, however, find it im-
portant that analysis on the adjacent legislation is made before deciding
on which elements should be part of a future directive on covered bonds
and witch parts should only be made subject to recommendations and soft
law. This being said, for a sufficiently effective framework to be made it
would be necessary that harmonisation through a directive would cover
the major parts of the covered bonds regulation.
1.2.
In your view, are market-led initiatives such as the "Covered
Bond Label" sufficient to better integrate covered bond markets?
Should they be complemented with legislative measures at Union
or Member State level?
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In our view, market-led initiatives lack the protection which follows from
supervision of a regulatory framework. The prudential element entailed in
supervision secures the appropriate common standard for covered bonds.
Market-led initiatives should, therefore, as a minimum be complemented
with recommendations in the relevant area to ensure a common ground
for best practices in the Member states. As already mentioned, however,
the Danish government finds that a directive setting the minimum stand-
ards could better ensure the integration of the covered bonds market.
1.3.
Should the Commission pursue a policy of further le-
gal/regulatory convergence in relation to covered bonds as a
means to enhance standards and promote market integration? If
so, which of the options suggested in section 3 of part II should
the Commission follow to that end and why?
Covered bonds play an important role to the Danish economy just as other
national covered bonds systems do in other economies. Any further har-
monisation of covered bonds legislation will, therefore, have to respect
well-functioning national systems.
From a Danish perspective, we find that a directive setting the minimum
standards would be the best way to ensure the integration of the covered
bonds market.
A directive would, however, have to respect core elements of the Danish
covered bonds system thereby enabling our system to continue in the fu-
ture without material changes.
First of all, it is vital for the Danish government that the specialised mort-
gage credit institutions can maintain the business model funding loans
solely through the issuance of bonds and not e.g. through deposits.
Secondly, together with the specialised banking model, at least these fol-
lowing core features of the Danish model should be kept: Match funding
with a close match between a loan and the bonds funding the loan, the
balancing principle limiting the liquidity- and market risks, the capital
centre structure with separate capital requirements to each centre and to
the mortgage credit institution in general but without requirements speci-
fying that each capital centre should be a separate legal entity and special-
ised insolvency regulation.
To the extent that these and other core features of the mortgage credit
system in Denmark can be maintained the Danish government would be
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supportive of further regulatory convergence in relation to covered bonds
in the form of a directive leaving room for national flexibility.
1.4.
Specifically, if the Commission were to issue a recommendation
to Member States as suggested in section 3 of Part II would you
consider that sufficient or should it be complemented by other
measures (both legislative and non-legislative)? (see question 8
below)
Further harmonisation based on recommendations can to some extent
promote market integration as it may be expected that the recommenda-
tions will set the market standard.
To achieve integration of the different national covered bonds regimes
while not changing the basic elements of well-functioning national sys-
tems, however, the Danish Government believes that a directive would be
the best solution.
We find that a directive can best ensure the characteristics of well-
functioning national regimes while providing the sought after clarity on
the treatment of covered bonds. As mentioned in the consultation paper a
directive would make a flexible approach possible. In our view, this is the
best way forward.
The Danish Government does not support a regulation, which would be
directly applicable in national law. We find that a regulation would not
leave a sufficient degree of flexibility for national rules which take into
account the characteristics of the national covered bond systems.
Regarding the proposed 29
th
Regime, a regime providing a fully integrat-
ed system for issuers without the need for amendments to existing nation-
al covered bonds legislation might at first glance seem appealing. Howev-
er, if the consultation does result in a general wish for a more integrated
covered bonds framework the Danish government finds it more appropri-
ate to create such a framework through either recommendations or legis-
lation.
In our view, recommendations and legislation can ensure that the sought
after integration is properly ensured whereas a voluntary system runs the
risk of not enough issuers choosing to issue under the regime. In this case,
a 29
th
Regime will be insufficient as it will not ensure the needed integra-
tion. As pointed out in the consultation paper, even if a sufficient amount
of issuers make use of the system over time the 29
th
Regime will create
increased fragmentation in the short run before sufficient issuance volume
is reached.
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1.5.
On the suggested list of high level elements for an EU covered
bond framework:
a) is the list sufficiently comprehensive or should it include any other
items?
In our view, the list seems sufficiently comprehensive for further work on
a legislative framework. As already mentioned, this further work should
preferably be in the form of a directive.
This being said, it is important for all of the high level elements listed that
further analysis be made. This analysis should focus on which of the ele-
ments could be harmonised fully and in detail and which of the elements
should be subject to high level principles. Such an approach will leave a
sufficient degree of flexibility for national rules which are accustomed to
the characteristics of the national covered bond systems.
To find that right balance between harmonisation through a directive and
high level principles through recommendations is especially relevant due
to the differences that exist between universal banks and specialised
mortgage credit institutions. An EU covered bond framework should take
into account that the different structures of a universal bank and a special-
ised mortgage credit institutions demand for the rules for e.g. coverage
requirement and overcollateralization to be implemented with due regard
to the different business models.
b) should the Commission seek to develop all the elements or a sub-
set of them?
In our view, it is useful to concentrate on all elements specifically related
to covered bonds. This being said, however, we find that other issues of a
more general importance could be handled elsewhere.
Besides this, we find that many of the elements in the directive establish-
ing a framework for the recovery and resolution of credit institutions
(BRRD) have a connection to the work that is currently on-going on in
the field of covered bonds. This is the case e.g. in the making of the re-
covery and resolution plans.
c) if only a subset, should the Commission give priority to the target
areas identified by the EBA Report: (i) special public supervision
of cover pools and issuers; (ii) characteristics of the cover pool;
and (iii) transparency?
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We find that it is useful to focus on all elements specifically related to
covered bonds. If focus is only on a subset, however, we find that the
characteristics of the cover pool are a central element of the regulation of
covered bonds and that this specific subject should receive special atten-
tion.
1.6 What are your views on the merits described under section 3 of Part
II of using different legal instruments to develop an EU covered bond
framework? In particular, would it be desirable to harmonise through
a directive some of the legal features of covered bonds and require-
ments applicable to them under Member States' laws? If it were pro-
posed, how could a 29th Regime on covered bonds be designed to
provide an attractive alternative to existing national laws?
In our view, using different legal instruments to develop the EU covered
bonds framework run the risk of being fragmented and unnecessarily
complex.
As described above, we find that targeted harmonisation through a di-
rective – possibly in combination with recommendations in the areas
where the need for regard to specialised national rules is necessary – has
the advantage of ensuring a more integrated covered bonds framework
while leaving room for well-functioning national systems.
As for the 29
th
Regime, as pointed to above, the Danish government is
inclined to believe that a voluntary system will not ensure the integration
in regard to covered bonds that is sought.
1.7 How should an EU covered bond framework deal with legacy trans-
actions?
The Danish government agrees that careful consideration should be given
to grandfathering or transitional provisions, thereby ensuring the interest
of the existing investors and the financial stability in the Member States.
1.8 Would you view a combination of recommendations to Member
States (Option 1) and targeted harmonisation of certain minimum
standards (Option 2) as desirable and sufficiently flexible? If so, what
should be the subject of each option?
In our view, a combination of recommendations and targeted harmonisa-
tion through a directive could be a good solution to ensure a common
ground for the future covered bond framework while leaving room for
national interpretations. For a sufficiently effective framework to be
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made, however, it would be necessary that harmonisation through a di-
rective would cover the major parts of the covered bonds regulation.
The recommendations would be useful regarding the parts of the covered
bonds legislation where the adjacent legislation in the national regimes
makes harmonisation more challenging and extensive and where recom-
mendations on best practice would provide the necessary flexibility.
Part III – Elements for an integrated covered bond framework
1. Covered bond definition
What are your views on the proposals set out in section 1 of Part III for a
"new legal definition" of covered bonds to replace Article 52(4) of the
UCITS Directive?
The Danish government believes that having a new legal definition of
covered bonds could be a useful element in ensuring the “covered bonds
brand” while at the same time ensuring the role of covered bonds as e.g.
instruments to place funds or handling liquidity risks.
We support a definition of covered bonds which sets out common stand-
ards where only covered bonds meeting the requirements could make use
of the term covered bonds.
When deciding on the specific elements of this covered bonds definition,
Denmark is in favour of a two tier definition. In this way, we support a
covered bonds definition including a broad basic definition of covered
bonds plus an additional set of criteria giving the latter some more prefer-
ential treatment than covered bonds which only comply with the broad
definition. Such a two tier definition is already the case today with a
broad basic definition of covered bonds as set out in article 52 (4) of the
UCITS Directive plus an additional set of criteria as set out in article 129
of the CRR giving the latter some more preferential treatment than only-
UCITS-compliant covered bonds.
The LTV limit requirement in CRR (not present in UCITS) means that
specialised institutions are required to fund additional cover assets (typi-
cally government bonds or other non-mortgage CRR eligible assets) when
property prices are decreasing to the extent that the LTV-limits are ex-
ceeded. In certain very stressed scenarios - although such a situation has
never materialized in Denmark - it may turn impossible for the Danish
mortgage credit institutions to continue to fund additional cover assets
and it is in this situation imperative that the issued covered bonds remain
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UCITS-compliant as well as the institutions can continue to fund the real
economy with only-UCITS-compliant covered bonds.
For Denmark, keeping a two tier definition is therefore very important.
2. Covered bonds issuers and system of public supervision
2.1.
Issuer models and licence requirement. Roles of SPVs
2.1.1. Should the current licensing system be simplified to require a
"one-off" authorisation only for all covered bond issuers based on
common high level standards? What specific prudential require-
ments (that is, in addition to those in CRR and CRD) could be ap-
plied as a condition for granting a covered bond issuer license?
A “one-off” authorisation based on common high level standards could
simplify the covered bonds programmes. A “one-off” authorisation is the
current practice in Denmark and in several other countries.
Where universal banks or specialised mortgage credit institutions meet
the requirements of CRR and CRD, especially with regard to the rules
relevant for issuing covered bonds, further requirements in regard to the
issuance of covered bonds do not seem necessary. We find that CRR and
CRD form a detailed and high standard for credit institutions thereby con-
stituting the necessary basis for issuing covered bonds. Following this, we
do not find further requirements necessary.
2.1.2. If the covered bond issuer is subject to a one-off covered bond-
specific licence, what would be the additional benefits of requiring
that each covered bond programme be subject to prior authorisa-
tion as well? Alternatively, would pre or post notification to the
competent authority of the programme and of each issue within or
amendment to the programme suffice? How should "covered bond
programme" be defined for these purposes?
If a covered bond issuer has been granted the authorisation to issue cov-
ered bonds in general, requiring that each covered bond programme be
subject to prior authorisation as well would make it more complex and
expensive for the issuer without adding much security to the system. Fol-
lowing this, we find that demands for notifications or renewing or exten-
sion of the authorisation in case of major changes to the covered bonds
programme would suffice.
In case there is only a “one off authorisation” the definition of a covered
bond programme would in practice be the whole credit institution.
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Following this, in our view the covered bond programme in a system with
a one-off authorisation should be defined as the issuer’s business model
and organisation relating to covered bonds issuance at the time of authori-
sation to issue covered bonds.
2.1.3. Should the Framework explicitly allow the use of SPVs to ring-
fence cover pools of assets backing issues of covered bonds? What
specific requirements should apply to these SPVs?
As a starting point, the Danish government would not be in favour of
ring-fencing cover pools through SPV-structures where the SPV does not
hold a credit institution license securing at least normal supervisory in-
volvement and requirements to capital, management, governance, etc.
The use of SPVs should therefore only be allowed within a future Euro-
pean covered bond framework
if
a level of security and overall regulation
directly comparable to the situation with the cover pool on the balance
sheet of a credit institution-issuer can be achieved.
The Danish government believes that a basic requirement should be that
covered bonds shall be issued by credit institutions and that the assets
should be ring-fenced in structures meeting the same requirements. This
ensures that rules on capital, management, governance, supervision etc.
apply and will be part of the basis for the issuance of covered bonds.
In light of the above, it is the opinion of the Danish government that a
specialised mortgage banking structure like the Danish one is an appro-
priate solution to the issues related to covered bonds issuance. Danish
mortgage banks are credit institutions and thus have to fulfil all require-
ments for credit institutions. In addition, they are restricted further by
special national legislation which e.g. prohibits taking deposits thereby
effectively eliminating the question of asset encumbrance. In addition, the
special legislation on balance principle, valuation etc. requires additional
supervisory control resulting in a comprehensive supervisory effort to-
wards these specialised institutions.
In a way, one could say that these specialised banks are SPVs being
owned by or otherwise related to universal banks. This is the case since
they are confined to a very restricted business related to issuing covered
bonds as funding for lending against mortgages. However, importantly,
they are credit institutions regulated by all rules pertaining to credit insti-
tutions in addition to further special national rules and under strict super-
vision of the Danish FSA.
2.1.4. Regarding the use of pooled covered bonds structures and SPVs:
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a) would it be desirable for an EU covered Bond Framework to
allow the use of these structures and why? What legal struc-
tures are used in your jurisdiction to pool assets from different
lenders or issuers?
Joint funding arrangements are allowed according to Danish legislation
(based on CRR article 496). The issuer needs a specific authorisation
from the Danish FSA for each joint funding arrangement.
In the case of joint funding arrangements for non-group related compa-
nies it is a requirement that the loans and the mortgages are transferred to
the issuing credit institution. In the case of joint funding arrangements in
intra-group cases the issuing credit institution will need a security from
the funded credit institution, giving the issuing credit institution direct
access to the cover pool (complying with CRR article 129) of the funded
credit institution
(i
.e. covered bonds backed by other covered bonds
)
.
Thus, the situation is directly comparable to a situation where there is no
joint funding.
Such arrangements should be possible also in a future integrated EU
framework. Following this, it is therefore important that these structures
can continue even if article 496 in CRR is removed. In this context it
should be mentioned that it is essential for us that the derogation in article
496 in CRR is not removed before a new legal basis is in place ensuring
the existing intra-group structures may continue without interruption.
b) which approach would be the most suitable for pooling assets
across borders?
When pooling assets across borders a uniform level of security should
apply. The pooling of assets should be ring-fenced in structures meeting
the same requirements as is the case for credit institutions. This ensures
that rules on capital, management, governance, supervision etc. apply and
will be part of the basis for the pooling of assets across borders as well as
nationally.
c) where the issuer of pooled covered bonds is an SPV, should
this issuer be regulated as a credit institution or as some other
form of legal entity?
See the answer to question 2.1.3.
2.2 On-going supervision and cover pool monitoring (pre-insolvency)
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2.2.1
In your view, would it be desirable for an EU covered bond
Framework to set common duties and powers on competent au-
thorities for the supervision of covered bond programmes and is-
suers? What specific duties and powers should be included in the
Framework and/or EBA or ESMA Guidelines?
In our view, the supervision of credit institutions more generally should
be dealt with in the regulation covering all credit institutions. Following
this, the Danish government finds that the duties and powers on compe-
tent authorities should as the main rule not be part of the covered bonds
framework.
This being said, in case there is specific supervision of covered bonds not
relevant for other credit institutions this could be dealt with in the Euro-
pean framework for covered bonds, this could e.g. be in the case of valua-
tion of cover assets.
2.2.2
What are your views on the proposals set out in subsection 2.2 of
Part III on the appointment of and legal regime for cover pool
monitors?
The Danish government sees no need for a requirement for independent
third party cover pool monitors. On the contrary, we find that the role of
the cover pool monitors described in the consultation could be carried out
by the competent authorities as is the case in Denmark today.
In our view, the Danish regulation of segregation of assets in cover pools
can be controlled effectively by the competent authority. See answer to
question 3.2.2.
2.3 Covered bonds and the SSM
2.3.1
Should the ECB have specific supervisory powers, and if so which
ones, in relation to covered bond issuance of credit institutions
falling within the scope of the SSM?
Today, for Member States participating in the Banking Union the supervi-
sion of covered bond issuance of credit institutions is a national responsi-
bility. Whether the ECB should have specific supervisory powers in this
area depends on the character of the future covered bonds framework in
EU. Following this, we find that there is a need to explore this issue fur-
ther before considering whether there is a need to change the rules.
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3.
Dual recourse principle
3.1. Do you agree with the proposed formulation for "dual recourse"?
The EBA report states that best practice on dual recourse is in accordance
with article 52 (4) in the UCITS Directive. The proposed formulation for
the dual recourse principle in the consultation document grants the bond-
holders a direct claim against the cover pool on an
absolute priority basis
upon default of the issuer and a full recourse claim against the issuer’s
estate which ranks
pari passu
with the claim of the issuer’s unsecured
creditors.
In the Danish mortgage credit model dual recourse grants the bondholders
a direct claim against the cover pool on an absolute priority basis upon
default of the issuer, and also a direct claim against the issuer’s estate if
the assets in the cover pool are insufficient to secure payment to the
bondholders in full. Following this, the current Danish formulation of the
dual recourse principle is different from the formulation proposed by the
Commission as the bondholders have an absolute priority in both the cov-
er pool and against the issuer’s estate.
The Danish government can support the dual recourse principle as pro-
posed by the Commission as long as it is only a minimum standard there-
by ensuring that Denmark can maintain the existing version of the princi-
ple. Following this, the Danish government can support the proposal if
our system entailing absolute priority in both the cover pool and against
the issuer’s estate can be maintained.
The Danish government acknowledges the need for addressing the con-
cerns regarding asset encumbrance in universal banks issuing covered
bonds. Asset encumbrance in universal banks can be a concern as encum-
bered assets become unavailable to support the resolution of credit institu-
tions in accordance with BRRD, which may increase credit losses for
unsecured creditors. However, in specialised mortgage credit institutions
there are no depositors and, following this, creditors are only bondholders
or junior creditors. Therefore, rules giving the bond investors a direct
claim in the cover pool and in the credit institutions estate will not have
the same consequences for the unsecured creditors as in a universal bank.
A future framework should not prevent a dual recourse giving the bond-
holders a direct claim against the cover pool as well as a direct claim
against the issuer’s estate. There is no need for prudential concerns relat-
ed to asset encumbrance for specialised mortgage institutions since these
institutions are not allowed to take deposits. Given the different situations
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for universal banks we do, however, understand why a different solution
may be needed as the general rule.
3.2. Segregation of cover assets
3.2.1. Are there any advantages to using an SPV as an additional segre-
gation mechanism at issuance? Are cover assets typically trans-
ferred to the SPV at issuance via legal or equitable assignment?
Please see the answer to 2.1.3
3.2.2. In your jurisdiction, what legal and practical steps are required in
order to segregate effectively the cover assets from the issuer's in-
solvent estate or in resolution? Would it be necessary to serve a
notification to each borrower of the issuer? Until notification is
served, what is the legal status of any proceeds of the cover assets
which may be paid directly into the insolvent estate or to the issu-
er in resolution?
In Denmark, the legal and practical steps to segregate assets are the same
in the case of a going concern as in case of insolvency or resolution.
For universal banks issuing covered bonds, the Financial Business Act
states that universal banks, which have been granted a licence to issue
covered bonds directly, shall establish and maintain a group of assets,
which shall be held separate from the other assets of the bank, and that the
universal bank shall keep registers of the assets. Supplementary collateral
shall be registered separately and individualised as well. The supervisory
authority shall verify the existence of the assets.
Specialised mortgage credit institutions have similar rules. The mortgage
credit institution can grant mortgage credit loans and issue covered bonds
in series, called capital centres, each having an individual serial reserve
fund (which is separate capital related to the series). The funds of the se-
rial reserve fund shall remain separate from the other funds of the mort-
gage credit institution. An executive order defines detailed rules for the
series.
The registers and the capital centres are upheld in case of insolvency or
resolution. A trustee is appointed by The District Court (the department
handling bankruptcy cases) immediately and at the same time the bank-
ruptcy court decides to initiate either bankruptcy proceedings or restruc-
turing proceedings, and the trustee will control the upholding of the regis-
ters and the capital centres. There is therefore no need for further steps in
order to segregate the cover assets.
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The initiation of the insolvency or resolution proceedings is announced
publicly. The trustee is obliged to inform the creditors individually on an
ongoing basis.
In relation to the last question on the legal status, proceeds of the cover
assets will remain in the estate and, if related to a register or a capital cen-
tre, will be kept in the register or a capital centre.
3.3. Administration of the cover pool post insolvency/resolution of the
issuer
3.3.1. Legal form and supervision of the cover pool
3.3.1.1. Should the cover pool be incorporated as a regulated entity? In
that case, what type?
In our view, there is no need for incorporating the cover pool as a regulat-
ed entity. We find that such a requirement would entail considerable costs
as the cover pools should in this case e.g. meet all capital requirements
(including all buffer requirements), all liquidity requirements, establish a
board etc. We do not find that the benefits entailed in such a requirement
are high enough to compensate for these significantly added costs.
We acknowledge that it is mandatory to secure the cover pool in insol-
vency/resolution, but we find that this can be handled by upholding the
same procedures securing the cover pool in case of a going concern as in
the case of insolvency/resolution.
In Denmark, the balance sheets of Danish mortgage credit institutions are
structured with a number of separate and ring-fenced cover pools out of
which covered bonds are issued. Most Danish mortgage institutions have
several cover pools on their balance sheets. A requirement of 8 % RWA
must be complied with by the mortgage institutions as a whole, but also
by the individual cover pool.
3.3.1.2. Who should be the supervisory authority for these purposes, the
competent authority or the resolution authority?
The competent authority should be the supervisory authority in insolven-
cy/resolution in cooperation with the appointed trustee.
When handling issues relating to resolution according to the BRRD, the
resolution authority should be the relevant authority.
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3.3.2. Special administration of the cover pool
3.3.2.1. What are your views on the proposals set out in subsection 3.3 of
Part III on the appointment and legal regime for a cover pool spe-
cial administrator?
The Danish government can support the content of the proposals on the
appointment and legal regime for a cover pool special administrator. In
Denmark such a cover pool special administrator would be the appointed
trustee.
However, if made part of an integrated covered bonds framework it is
vital that the wording leaves room for national insolvency rules. E.g. the
notion that the special administrator would be “an officer of the court”
can intervene with the set-up of the national courts, where a trustee in
Danish legislation is a lawyer and not an officer of the court. We, howev-
er, find that a broader demand for the administrators to be “only those that
may act as insolvency practitioners in each Member State would be eligi-
ble to be appointed” would set a sufficiently high standard without the
need for harmonisation of the national insolvency rules. We therefore
support the latter.
3.3.2.2. Should the special administrator be obliged to report regularly to
the relevant supervisory authority? Should the content and regula-
tory of such reporting be the same as for the issuer?
The special administrator should be obliged to report regularly to the rel-
evant supervisory authority and in the Danish perspective to the creditors
as well. This reporting is to ensure that the competent authority is able to
follow the proceedings and ensure the financial regulation is respected.
The content of the reporting to the competent authority should be the
same as for the issuer in a going concern, however without reporting
strictly linked to a going concern, e.g. issuing of new loans or bonds.
Furthermore, we find that the reporting provided to the creditors should
be sufficient for the creditors and especially the bondholders to safeguard
their interests. This means that the level of details should make the credi-
tors feel ensured that the trustee is exercising the principal duty of the
trustee to preserve and maximise the net value of the estate for the benefit
of the creditors while minimising the ongoing liabilities and costs associ-
ated with its administration.
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3.3.3.
Ranking of cover pool liabilities
3.3.3.1. Do you agree with the suggested ranking for cover pool liabili-
ties? Is the wording proposed in subsection 3.3 of Part III suffi-
cient to define clearly the claims that may arise, avoid confusion
between claims and prevent claims in an unreasonable amount
from arising?
The suggested ranking for cover pool liabilities can be supported by the
Danish government. This is the same ranking as in Denmark.
In an integrated framework it is important that the rules on ranking of
claims in national insolvency rules are respected. The rules on ranking
that are suggested in subsection 3.3 of part III seem to leave room for
deciding to have one or more of the claims not being ranked pari passu
with the bond holders. As the possibility of absolute priority to expenses
incurred by the special administrator or the liquidator is also kept, the
necessary room for incorporating national insolvency rules seems to be
secured. This is important for the Danish government.
The wording proposed in subsection 3.3 of Part III defines the claims
clearly. We can therefore support the wording proposed.
3.3.3.2. Is it possible to define hedging activity better and, if so, how?
It could be considered to specify the description of hedging instruments to
include instruments covering risks between assets and corresponding cov-
ered bonds issued. Furthermore, it could be considered specifying that the
derivatives should not be terminated upon issuer insolvency. The EBA
covered bonds report defines this latter element as best practice regarding
the use of derivatives.
3.4. Interaction between cover pool and issuer in insolven-
cy/resolution
3.4.1. Are current provisions in EU law sufficient to deliver effective
protection for bondholders in a resolution scenario involving cov-
ered bonds? In particular, is it sufficiently clear:
a)
how the cover pool would be segregated under each possible reso-
lution or recovery scenario of the issuer?
b)
how the full recourse against the issuer would take effect if the
issuer is in resolution and is not placed subsequently into liquida-
tion?
c)
what procedural steps should be followed in resolution and by
whom in order to make effective the dual recourse mechanism?
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At this point of time, it is difficult to give a general answer to these ques-
tions.
3.4.2. Should the Framework provide for a cut-off mechanism as sug-
gested in subsection 3.4 of Part III? In particular, should such a
cut-off mechanism:
a)
preclude the closure of insolvency or resolution before possible
residual claims from the covered bondholders against the issuer
or the insolvent estate have been identified and quantified?
b)
set out clear and objective requirements on the valuation of the
cover pool and the timing for such valuation?
c)
extinguish the residual claim on the estate or the successor credit
institutions after sufficient assets have been segregated for the
benefit of covered bondholders at the outset of the resolution or
insolvency proceedings?
d)
give specific powers and duties to the resolution authority and, if
so, what should those consist in?
In Denmark, specialised insolvency rules enable a non-forced winding
down of the mortgage credit institution ultimately up to the residual term
of the outstanding covered bonds. The Danish government wishes to keep
this possibility for a non-forced winding down of the mortgage credit in-
stitution. Therefore, we do not support harmonized EU-rules requiring a
cut-off mechanism.
We can, however, accept that a possibility for a cut-off mechanism is in-
cluded in the framework as long as we can still keep our non-forced and
gradual winding down of the mortgage credit institution.
This being said, the use of a cut-off mechanism should at all times respect
the principle of dual recourse as carried out in each Member State. It is
moreover essential that the use of a cut-off mechanism does not interfere
with the principle of no creditor worse off as this is a fundamental princi-
ple in the BRRD.
4. The cover pool
4.1. Eligible assets: qualifying criteria and requirements
4.1.1
Residential and commercial loans
4.1.1.1 Do you agree with the proposed definitions for "residential" and
commercial loans" as cover assets? Should certain riskier resi-
dential or commercial loans (i.e. buy-to-let mortgages; second
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home loans; loans to real estate developers; etc.) be excluded
from the cover pool or permitted subject to stricter criteria?
Regarding the first question, the Danish government agrees with the defi-
nitions. We do, however, not see any need to require a first rank as long
as the loan stays within the LTV-limit. This view is elaborated under
point 4.1.1.2.
Regarding the question of excluding certain riskier loans from the cover
pool, the Danish government is open to discussing a more differentiated
LTV approach towards the different real estate segments. This being said,
we do not support excluding loans from the cover pool. Unlike universal
banks, specialised institutions cannot move loans with exceeding LTV-
limits or non-performing loans from the cover pool – either in whole or in
part. Instead Danish specialized institutions need to add additional cover
assets / liquidity in the cover pool
Following the above, excluding loans from the cover pool is simply not
possible in specialised mortgage credit institution using a match funding
principle. An exclusion from the cover pool would require the use of oth-
er loan funding instruments, which are not present in non-deposit taking
Danish specialised mortgage credit institutions.
4.1.1.2 In relation to mortgage loans:
a)
what are your views on the proposed requirements on "perfection
of security" and "first ranking mortgage"? Is registration of the
security a requirement for perfection in your jurisdiction?
In regards to the latter question; yes. Registration of the security is needed
to secure the claim against new subsequent mortgages.
As long as the mortgage stays within the LTV limit there should be no
requirement for first ranks since loan amounts within the LTV limit can
be regarded as secure lending.
Furthermore, a requirement for first rank could hamper competition in the
market because it would exclude the possibility of additional loans by
other credit institutions. This would be the case as the credit institution
having provided the first loan would have the first rank thereby making it
impossible for the next credit institution to provide a loan with first rank.
b)
is the enforceability of mortgages in the different Member States
equivalent or should there be additional requirements to ensure
their equivalence?
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The Danish government is not in possession of knowledge of the situation
in the different Member States.
c)
are minimum standards for mortgage rights in third countries
necessary?
Equivalent standards should apply for mortgages in third countries. This
is important for ensuring equal competition as well as ensuring covered
bonds of a sufficiently high standard.
4.1.1.3 In relation to LTVs:
a)
what are your views on the proposals set out in subsection 4.1 of
Part III on minimum LTVs?
The Danish government is in favour of a regulation setting stricter LTV
limits for certain commercial property segments than for residential prop-
erty. Following this, we support that the LTV limits are 80 and 60 per
cent for residential and commercial property, respectively, as is the case
today.
b)
in the case of insured properties, should higher LTV limits be al-
lowed if the insurance cover meets certain requirements and, if so,
what should such requirements be? In what other cases should
higher LTV limits be allowed? Could loan-to-income requirements
be used to replace or complement LTV limits?
The Danish government finds it natural with a requirement, as is the case
today, of a sufficient insurance coverage. This is necessary to ensure the
mortgage. This should, however, not imply higher LTV limits as the fo-
cus would then be removed from the property towards an exposure on an
insurance company. We find that LTV limits should be inflexible in the
sense that they should always be observed.
In our view, LTI requirements should never replace LTV limits since this
would also remove focus from the property. Furthermore, a meaningful
measure would have to include the full financial picture of the borrower
including wealth. Following this logic, we find that LTI requirements
should not be regulated in a covered bond framework.
c)
should there be an additional average LTV eligibility limit at port-
folio level?
Is is unclear to us how such a requirement should be specified. Our posi-
tion on this issue depends on the exact calibration. We are, however, not
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convinced on the added value of an additional average LTV eligibility
limit at portfolio level.
d)
with the advent of a Binding Technical Standard defining Mort-
gage Lending Value, is it appropriate to apply this for eligibility
in all cover pools across the Union as a prudent measurement?
The Danish government is in favour of market value.
e)
should LTV limits be used to determine: eligibility (loan in/out) of
loans at inception? Eligibility (loan in/out) of loans on an ongoing
basis? Should they instead be used to simply determine contribu-
tion to coverage? A combination of the above?
LTV-limits should be used to determine eligibility of loans at inception.
Certain national systems like the Danish specialist banking principle do
not make it possible to take the loans in and out of the cover pool depend-
ing on actual LTV. This is due to the loan and the corresponding covered
bonds being inextricably tied together.
In case of LTV breaches of a loan, additional security in the form of sup-
plementary collateral should be supplied. This requirement could be
based on the underlying risk, i.e. taking account of different loan loss sce-
narios. However, for specialised mortgage credit institutions loans cannot
be taken out of the cover pool due to the match funding principle. Fur-
thermore, an exclusion from the cover pool would require the use of other
loan funding instruments, which are not present in non-deposit taking
Danish specialised mortgage credit institutions.
4.1.1.4 In relation to the valuation of cover assets:
a)
how frequently should the value be updated and in which way (re-
valuation, update of the initial valuation, and in which way)?
The Danish government is satisfied with the existing set-up concerning
frequency and possibility for revaluation based on statistic methods. Fol-
lowing this, we can support that commercial property should be revaluat-
ed every year and that residential property should be revalued every third
year. We see no need for revaluing all properties every year. In our view
yearly revaluation of both commercial and residential property would be
very burdensome.
b)
what criteria should be applied to (i) the valuer and (ii) the valua-
tion process to ensure that they meet the transparency and inde-
pendence principles set out in the first and second subparagraphs
of Article 229(1) CRR?
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The Danish government is in favour of a general requirement for a skilled
and experienced valuer independent of the credit granting process. This
implies that the valuer can be an employee of the mortgage credit institu-
tion, which is the common situation in Denmark. The Danish FSA super-
vises the work of these valuers on an on-going basis.
4.1.1.5 Should the Framework adopt the definition of "non-performing
exposures" as set out in the EBA's draft Implementing Technical
Standards on Supervisory Reporting on Forbearance and Non-
performing Exposures?
The Danish government is flexible on the matter but notes that we do not
support excluding non-performing loans from the cover pool if measures
to secure sufficient asset cover (i.e. supplementary collateral matching the
specific write-downs on the cover assets) are applied.
In the Danish mortgage credit model it is not possible to take out non-
performing loans of the cover pool. This being said, the value of the loan
shall of course be adjusted accordingly and eventually additional security
in the form of supplementary collateral will have to be supplied to the
cover pool to account for the loan impairment charges.
4.1.1.6 In light of the EBA's prudential concerns in relation to the use of
RMBSs and/or CMBSs in cover pools, should the Framework ex-
clude these assets completely from qualifying as cover assets (in-
cluding, for these purposes, as substitution assets) or should they
be allowed only subject to strict criteria and within the 10% limit
currently permitted under Article 129 of the CRR? What is the
added value and practical uses of RMBS/CMBS as collateral in
your jurisdiction/issuer?
The Danish government sees no need for inclusion of such asset types in
the cover pool.
In Denmark, out of these instruments only joint funding instruments are
allowed. This is the case when one mortgage bank in a group issues all
the covered bonds for all mortgage banks in the group secured by a spe-
cially formed mortgage deed giving the issuing mortgage bank access to
the mortgages in the funded mortgage bank
(i
.e. covered bonds backed by
other covered bonds
)
. This results in a situation completely comparable to
one where all the loans would originally all be funded in the issuing
mortgage bank.
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4.1.2
Public sector loans
4.1.2.1 What are your views on the proposals for public sector loans as
cover assets set out in subsection 4.1 of Part III?
The Danish government is comfortable with the existing possibility ac-
cording to Article 129 to include public sector loans in the cover pool.
The Danish government is however also open for adjustments on this is-
sue.
4.1.2.2 What eligibility requirements in terms of validity and enforceabil-
ity should apply to the guarantee granted by the relevant public
sector entity?
The Danish government finds that the guarantee should ideally be in the
form of surety from a public sector entity backed by tax imposition. We
find this necessary in order to make it a very secure eligible asset.
4.1.3
Other asset class: Aircraft, ship and SME loans
4.1.3.1 Should the Framework exclude aircraft, ship and SME loans from
cover pools or should they be allowed only subject to strict crite-
ria and limits? If so, what criteria and limits should be applied?
The Danish government is comfortable with the existing possibility of
allowing ship mortgages within a lending limit of 60 percent of the ship
value. However, mortgages in real estate should not be mixed with mort-
gages in e.g. ships since these asset classes are too different in kind.
4.1.3.2 In relation to SME loans, is it possible to identify a category of
"prime" SME loans as a potential eligible asset class for cover
pools?
The Danish government prefers to restrict the potential asset classes to
what is the case today. We, therefore, do not support identifying a catego-
ry of SME loans which can be an eligible asset class for cover pools.
4.1.4
Mixed pools and limits on exposures
4.1.4.1 Do you agree that mixed-asset cover pools should be allowed?
The Danish government agrees that mixed-assets cover pools should be
allowed in the sense that e.g. mortgages on residential property can be
mixed with mortgages on other types of properties. This can mitigate
concentration risks.
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4.1.4.2 What are your views on the proposed limits on specific assets and
concentration of exposures? Should any other limits or require-
ments apply?
In general, the Danish government finds that additional analysis is needed
in this area.
4.2
4.2.1
Coverage requirement and overcollateralisation
Coverage requirement
4.2.1.1 Which option should be preferred for the Framework to formulate
the coverage requirement and why?
a) a general requirement along the lines of Article 52(4) of the
UCITS Directive, amended to include the wording suggested
by the EBA;
b) a nominal coverage;
c) a net-present value coverage;
d) a net-present value coverage under stress; or
e) any other or a combination of the some or all of the above.
The Danish government is in favour of a market value principle. The
market value of the issued covered bonds should (apart from OC) be cov-
ered by assets of a similar market value.
4.2.1.2 If the coverage requirement were formulated as net-present value
coverage under stress, should the stress tests be specified in any
form in the Framework or ESMA/EBA regulatory guidelines? If
so, what specific stress tests should be required and why?
4.2.1.3 Should derivatives entered into in relation to the cover pool be
taken into account for the purpose of determining the coverage
requirement? If so, what valuation metric should be used for these
purposes?
Derivatives entered into for hedging purposes should be an integral part
of the cover pool and valued at market value. In this way they would
serve their hedging purpose at all times.
4.2.1.4 What exposures to credit institutions within the pool should be
taken into account to determine the coverage requirement and
why?
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Exposures towards credit institutions in the form of guarantees, provi-
sional investments made with revenue from issued covered bonds or in
the form of exposures from derivatives for hedging purposes – both with-
in the 15 pct. limitation on such exposures – should be taken into account
in the determination of the coverage requirement.
4.2.2
Overcollateralisation
4.2.2.1 Should a quantitative mandatory minimum OC level be set in the
Framework? If so, what should that level be and should it be the
same for all types of covered bonds?
In general, the Danish government finds that such requirements should be
risk based. That is, the capital requirements based on risk weighted expo-
sures in the cover pool would be appropriate and consistent with the regu-
lation in general.
In Denmark there is a requirement of 8 % RWA for each cover pool in
specialised mortgage institutions. This requirement can be seen as an OC
requirement.
In case a mandatory minimum OC requirement should be set at EU level,
it needs to be carefully considered how to define this requirement and
how large it should be.
If an OC requirement is set the framework should furthermore state the
method for calculating OC, e.g. is it a NPV calculation on future margins
or is it a nominal requirement.
4.2.2.2 If a mandatory minimum OC level were set in the Framework,
should there be exceptions to the requirement? (for example
where the issuer applies a precise "match funding model" or
where certain targeted liquidity and market risk mitigation
measures are used – see subsection 4.3 of Part III)
The Danish government believes that further analysis is needed in this
area.
4.2.2.3 Should the Framework set a maximum level of permitted OC? If
so, when and at what level?
For specialised banks that are not allowed to take deposits a maximum
level does not seem relevant since for practical purposes there are no oth-
er creditors than the covered bond investors and junior creditors. Asset
encumbrance is, therefore, not a practical issue here.
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4.2.2.4 Should the Framework provide for the treatment of voluntary OC
in the event of insolvency/resolution of the issuer?
The Danish government believes that a covered bonds framework should
be specific on the status of voluntary OC in the event of insolven-
cy/resolution of the issuer. Furthermore, it should be possible to grant the
voluntary OC an absolute priority upon default of the issuer.
This being said, one should be careful in defining voluntary OC as this
can be many different things. Is voluntary OC for an example the OC
described in a prospect? Or the OC required in relation to agreements
with rating agencies, etc.
4.3
4.3.1
Market and liquidity risks
In your view, are OC levels adequate to mitigate market and li-
quidity risks in the absence of targeted measures such as those de-
scribed in subsection 4.3 of Part III?
No. The Danish government believes that it is necessary to supplement an
OC requirement with risk profile limitations measured on differences be-
tween future payments on the issued covered bonds and the future pay-
ments on mortgages and derivatives for hedging purposes in areas like
interest rate risk, FX risks and options risks.
In the Danish specialised banking model, the balancing principle effec-
tively limits both liquidity and market risk, leaving room mainly for credit
risks within the strict LTVs.
In general, two types of “funding models” exist in the Danish mortgage
credit system. One possibility is to finance the mortgage loans with cov-
ered bonds with the same maturity as the loans – i.e. 30 year mortgage
loans are financed with covered bonds with a 30 year maturity. Another
possibility is to finance the loans with covered bonds with a maturity
which is shorter than the maturity of the loans. Following this, 30 year
mortgage loans are financed with covered bonds with a maturity of e.g. 1,
3 or 5 years. In this case, the mortgage loans are refinanced continually
(every 1, 3 or 5
th
year).
In April 2014 a new law was implemented in Denmark regulating the
refinancing risk inherent in the refinancing of a large amount of the mort-
gage loans. The law implies that if the refinancing of a loan fails, the ex-
isting bonds will be extended by 12 months at a time ultimately through-
out the lifetime of the underlying loans. Following this, refinancing of
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mortgage loans is always possible and the refinancing risk is moved from
the mortgage credit institutions to the investors.
Besides this law, the Danish FSA has set up a so-called supervisory dia-
mond for mortgage credit institutions. The supervisory diamond sets a
number of benchmarks to indicate activities which initially should be re-
garded as having a higher risk profile. For mortgage credit institutions the
benchmarks include i.e. an indicator regarding the proportion of loans
with frequent refinancing, borrower’s interest-rate risk and large expo-
sures.
4.3.2
Should the Framework lay down specific requirements on the use
of derivatives as suggested in subsection 4,3 of Part III? How
should "eligible counterparties" be defined for the purposes of en-
tering into permitted derivatives?
The Danish government believes that the use of derivatives should be
confined to hedging purposes. Eligibility of derivatives counterparties
could be based on ratings.
4.3.3
What are your views on the potential provisions on the manage-
ment of cashflow mismatches suggested in subsection 4.3 of Part
III? In particular:
a) for issuers, do cashflow mismatches between cover assets and
covered bonds arise in your jurisdiction and/or transactions,
and, if so, in which way? Are you able to describe a scenario
for the timely repayment of the covered bonds? Do you plan
for contingencies? Are such scenarios and contingencies dis-
closed to investors?
b) for investors, do you understand how such cashflow mis-
matches would be dealt with in practice? Would it be benefi-
cial from your perspective to get systematic information about
cashflow mismatches and how these would be managed?
On the EBA's liquidity buffer recommendation:
a) should covered bond issuers hold a "liquidity buffer" to miti-
gate liquidity risk in the cover pool and, if so, in what circum-
stances?
4.3.4
It is the opinion of the Danish government that the possibility of liquidity
risks in a covered bond arrangement should be limited to an insignificant
level. This can be obtained in several ways e.g. through OC requirement
or specific liquidity requirements or combinations hereof.
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In Denmark, the balancing principle effectively limits both liquidity and
market risk, leaving room mainly for credit risks within the strict LTVs.
Furthermore, as already mentioned, in April 2014 a new law was imple-
mented in Denmark regulating the refinancing risk inherent in the refi-
nancing of a large amount of the mortgage loans. The law implies that if
the refinancing of a loan fails, the existing bonds will be extended by 12
months at a time ultimately throughout the lifetime of the underlying
loans. Following this, refinancing of mortgage loans is always possible
and the refinancing risk is moved from the mortgage credit institutions to
the investors.
Besides this, the Danish FSA has introduced a supervisory diamond for
mortgage-credit institutions, cf. above.
b) should the buffer be calibrated to cover the cumulative net
out-flows of the covered bond programme over a certain time
frame? What length of time should be used as a time frame for
calibration purposes?
Please see answer to a). Mitigation of liquidity risks can be achieved in
several ways.
c) what eligibility criteria should liquid/substitution assets meet
to qualify for the purposes of this buffer?
In the light of the purpose of such a buffer a requirement for secure and
liquid securities like covered bonds, claims on central governments or
central banks could be a possibility.
5
5.1
Transparency requirements
What are your views on the current disclosure requirements set out
in Article 129 (7) of the CRR? If more detailed requirements were
preferred, do you agree that issuers should disclose data on the
credit, market and liquidity risk characteristics to a more granular
level? If so, what data and to what level of granularity?
The Danish government agrees with the importance of disclosure to the
market on specifics of the assets in the cover pool. In this connection the
disclosure provisions in paragraph 7 of Article 129 are a good starting
point. Nevertheless, improvement in the direction of a more granular level
could be sought like e.g. according to the European Covered Bond Coun-
cil project on a cross-border harmonized template.
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5.2
Should issuers disclose information on the counterparties involved
in a covered bond programme and, if so, what type of information?
The Danish government believes in transparency as an important precon-
dition for an efficient market. Disclosure of information on counterparties
involved in a covered programme could be beneficial. We have at present
no specific indications on what kind of information is sought by investors
in this field.
5.3
How frequently should covered bond issuers be required to make
disclosures to investors?
The Danish government has no firm view on the matter but believes as a
matter of principle that if investors express reasonable disclosure re-
quirements these requirements should be complied with.
As stated in the answer to question 5.1 the existing templates prepared by
the industry could be a good starting point for the mapping of what kind
of information investors seek. However, it is also important to stress that
in a new regulatory set-up system should be flexible in light of the fact
that investors over time must be expected to demand new types of infor-
mation. The current set up with Article 129(7) and a harmonized template
could therefore be a way forward.
When deciding on requirements for disclosure to investors related to cov-
ered bonds the general information requirements related to the securities
market should furthermore be taken into account.
5.4
What are your views on the existing and prospective investor report-
ing templates prepared by industry bodies and referred to in section
5 of Part III? Would these templates:
a) be granular enough to enable investors to carry out a comprehen-
sive risk analysis as recommended by the EBA? And
b)
be sufficient without further legislative backing to deliver en-
hanced and consistent disclosure in European covered bond mar-
kets?
As pointed out under question 5.3 the existing set up could be sufficient
but before making any conclusions the industry should be consulted.
5.5
Should detailed disclosure requirements apply to all European cov-
ered bonds or only to those that would fall within the scope of the
Prospectus regime?
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Covered bonds receiving the same treatment should ideally be subject to
the same requirements including disclosure requirements. Prospectus reg-
ulation should apply in addition to this.
5.6
Should the same level of disclosure standards apply pre- and post-
insolvency/resolution of the issuer (except for those reporting items
referring to the issuer itself)?
At this stage the Danish government sees no reason to distinguish be-
tween the need for disclosure standards applying pre- and post-
insolvency/resolution. The disclosure obligation towards investors could
therefore be the same in both cases.
5.7
In relation to covered bonds issued in third countries, what mini-
mum level of disclosure should apply for European credit institutions
investing in those instruments to benefit from preferential risk
weights?
The Danish government believes that justification of preferential risk
weights should in all cases be based on the same level of disclosure.