News on Covered Bonds: Covered Bonds-The Canadian Coverage

28th December, 2012:

Covered Bonds are seen as an effective alternative to securitisation and the world seems to be all promoting the instrument by making necessary regulatory amendments or devising new enactments[1].

Canada too is set to follow the trend globally. Canada Housing and Mortgage Corporation (CMHC), the country's national housing agency has announced the details of the legal framework for Canadian covered bonds[2].

The National Housing Act (the Act) in Canada is the legislation governing the construction of new houses, the repair and modernization of existing houses, and the improvement of housing and living conditions. As part of the 2012 Federal Budget[3], amendments were made to the National Housing Act charging CMHC with administering a legal framework for covered bonds. The provisions relevant to covered bonds are contained inPart I.1 Section 21.5-21.66 of the Act.

The important provisions are:

  • Eligible Issuer: A Federal Financial Institution
  • Eligible Assets:  Loans made on the security of residential property that is located in Canada and consists of not more than four residential units; or any prescribed assets.
  • Assets to be excluded: Certain loans cannot be held as covered bond collateral, e.g. a loan made on the security of residential property if the loan is insured by the CMHC.
  • Registry: CMHC is to establish and maintain a registry containing details of registered issuers, registered programs, other prescribed information
  • Regulations: The Ministry of Finance has been conferred power to make Regulations to carry out the provisions of the Part, including modifying the definition of covered bonds or covered bond collateral.

     CMHC feels that the framework will support financial stability by helping lenders diversify their sources of funding and attract more investors from off shore markets as well.

The issuers of covered bonds will have access to an alternative source of funding and will gain a broader investor base since some international investors are restricted from purchasing bonds issued under a non-legislative framework. For the investors, the benefits come in the form of high standards of disclosure in tune with international best practices; statutory protection, dual recourse to the issuer as well as the cover pool. The ultimate beneficiary will be the market.

CMHC has issued a Covered Bonds Guide for easy understanding of the framework.

The step by the Canadian Regulators comes as an incentive to boost the global covered bonds market, where financial regulators of some countries like Norway are seeing covered bonds as risk accelerators for banks[4].

[1] As for example, in India, recently a Working Group constituted by National Housing Bank, the apex housing agency, submitted its Report that suggests a unique structure for introducing covered bonds in India: the NHB-intermediated structure. The Working Group report can be viewed here

Vinod Kothari was a member of the Group, also see Covered Bonds with NHB intermediation coming, by Vinod Kothari.


[3] Chapter 3.2


Reported by: Sikha Bansal