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The European Covered Bond Council (ECBC) is supportive of the goal of improving the resilience, transparency and efficiency of the OTC derivatives market, and welcomes the effort of European regulators to take into account the specificities of covered bonds’ legal frameworks which would unfortunately make derivatives in the cover pool of a covered bond ineligible to be cleared through a Central Clearing Counterparty (CCP). In order to address this issue, Recital 122 states that ESMA should “take into account the specific nature of OTC derivatives which are concluded with covered bond issuers or with cover pools for covered bonds”. Therefore, the ECBC would like to draw attention to the specific use and format of hedging swaps that are currently used in covered bond cover pools.
The ECBC supports the inclusion of covered bonds within the list of assets accepted as collateral by a CCP. Covered bonds’ consistently strong performance and quality features have attracted the attention of regulators and market participants worldwide which has, in turn, led to an increasing recognition of the macro-prudential value of this asset class. The high liquidity of this asset class has already been acknowledged within the Recommendations of the Basel Committee (Basel III) and the CRD IV package proposed by the European Commission in July 2011 and currently under discussion at European level.
The ECBC believes that covered bonds should be included within the definition of highly liquid financial instruments with minimal market and credit risk, considering the excellent track record of this asset class. Covered bonds also comply with the criteria listed under item 135 of this Discussion Paper, except for point (vii) (debt instrument issued or guaranteed by a government, central bank or multilateral development bank).