The new Covered Bonds Directive

The European Commission and Parliament have recently agreed on harmonizing the covered bonds legal framework. Some highlights should be mentioned:

  1. The new Directive provides guidance on the use of extendable maturity structures and the related requirements. The recognition of these structures shall be voluntarily made by each Member State. The Directive requires that the extension is for a pre-determined period of time – and not ‘at the discretion of the issuer’ – and that the extension is specified in the covered bonds documentation.
  2. To ensure investors’ protection, the Directive sets out coverage and liquidity requirements.
  3.  Joint funding and intragroup pooled covered bonds structures.

Joint funding allows the pooling of cover assets by several credit institutions.

Under the intragroup pooled covered bonds structure, there will be an issuer of the “internal covered bonds”, that belongs to a group, and an issuer of an external covered bond. The internally issued covered bonds will be used as cover assets for the external issue of covered bonds.

The Romanian covered bonds legislation has the advantage that it was set up while discussions were already initiated at EU level for a new harmonized framework.

Various key areas for convergence identified in the Directive are reflected by the current Romanian law. Just to name a few:

  1. the dual recourse mechanism, as well as the bankruptcy remoteness of the covered bonds.
  2. the segregation of the cover assets, which is achieved by registrations made in the Internal Cover Pool Register.
  3. ongoing covered bond monitoring, by an independent cover pool monitor or the special cover pool administrator; and also
  4. minimum requirements set for quarterly investor reporting.

The Covered Bonds Directive is expected to be published soon. Thereafter, each Member State will need to reflect the new Directive into its legal framework.