By Simon Miller

The Financial Services Authority (FSA) and the Treasury have published a joint review of the UK's covered bond regulation.

The review proposes a number of measures that aim to compete on a level playing field with those from other countries and increase the appeal of UK covered bonds to investors.

The review also provides an update on the UK's discussions internationally on policy including the key issue of the scope of proposed ‘bail-in’ powers, which would allow the authorities to impose losses on the creditors of a failing financial institution. The UK believes that in the exercise of any bail-in powers, secured creditors’ rights to collateral should not be over-ridden, and that the claims of covered bond holders in relation to the supporting asset pool should not be affected.

The review proposes the following changes:
o Introducing consistent standards of investor reporting: this will increase transparency for investors and highlight the quality of underlying assets, while the use of common standards will make it easier for investors to compare different programmes.
o Requiring issuers to maintain a fixed minimum level of overcollateralisation: a fixed floor will give clarity to investors and aid comparison between the UK’s regulated covered bond programmes and other regimes.
o Designating a regulated covered bond programme as backed by only a single asset type in the legislation: all UK issuers currently only use residential mortgages in their programmes, but the range of eligible assets in the regulations is much broader. This option will allow issuers who use only a single asset type to give greater clarity to their investors.
o Excluding securitisations as eligible assets for regulated covered bond asset pools: no issuers currently include securitisations as collateral in their regulated covered bond programmes. This proposal will emphasise the important distinctions between covered bonds and securitisations, and give greater clarity to investors.
o Creating a formal role of ‘asset pool monitor’ in the legislation: this codifies the existing UK practice of independent, external scrutiny of an issuer’s regulated covered bond programme and will provide added reassurance about the high standards of UK regulated covered bonds.
o Changes to regulatory reporting: updating and consolidating the regulatory reporting that the FSA requires when issuers apply to register with the FSA and on an ongoing basis. This information is used to assess issuers’ applications and as part of the regular stress-testing the FSA conducts on regulated covered bond programmes.

Responses to the HMT and FSA consultation paper must be received by Friday, 1 July 2011.

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