Covered Bonds

Covered bond traders are complacent, one investor told a panel at the European Covered Bond Council plenary on market dynamics. Despite market volatility, sovereign and senior traders had been able to continue to make markets but covered bond traders had shut up shop, he said.

The winners on this year's covered bond awards based on a poll of around 340 votes - of which about 25% were issuers and 50% were investors.

Australian politicians will start debating a covered bond law in the middle of next month, after the Treasury drafted legislation that would limit covered bonds to 8% of banks’ assets.

The panel on new covered bond markets at the Euromoney/ECBC Covered Bond Congress was punctuated by disagreement among some of the participants over how new legislation should define a covered bond.

In a panel on new markets at Wednesday’s European Covered Bond Council plenary session it was stated that much hyped US covered bond legislation might not materialise until 2014. But with the OCC and not FDIC likely to be the US covered bond regulator for big banks, a market size of up to $640bn is seen. The Canadian covered bond market is likely to lack homogeneity as non federally regulated borrowers are excluded from the law.

Santander UK’s Holmes 2011-3 RMBS picked up an impressive $2bn of demand for its ‘A2’ dollar tranche illustrating the depth of demand in dollars. Moreover, the new issue premium was negligible.

The privileged position of covered bonds in incoming regulation was a major topic at the Euromoney/ECBC Covered Bond Congress in Barcelona on Thursday. Regulators have tipped the balance too far in favour of covered bonds risking health of the bank funding market as a whole.

Crédit Mutuel-CIC Home Loan SFH kept the euro covered bond market alive on Tuesday with an increase of an outstanding 10 year trade. The €200m tap was the sum total of primary issuance this week, though Canadian Imperial Bank of Commerce proved the dollar segment’s resilience to market volatility by taking supply to $7bn within five trading days.

Covered bonds practitioners defended their product this week after JP Morgan chief executive Jamie Dimon criticised their privileged status in Basel III regulations.

Regulatory changes including labelling initiatives and the eligibility of the asset class to the capital requirement directive’s liquidity coverage ratio (LCR), were at the centre of debate at this week’s covered bond industry gathering in Barcelona.

The European Banking Authority is charged with defining liquid covered bonds for the Liquidity Coverage Ratio. Bonds that find a good bid might may not have much turnover and could therefore be excluded. Conversely, bonds which have a high turnover are more likely to be included but will be more volatile. This dynamic suggests the EBA cannot exclusively rely on data for decising what goes into the LCR and what doesn't. It will need to have a qualitative overlay.

Santander UK’s Holmes 2011-3 RMBS picked up $2bn of demand in the ‘A2’ dollar tranche, despite challenging conditions in wider markets continuing.