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News on Covered Bonds: MAS proposes Covered Bonds Rules for Singapore


MAS proposes Covered Bonds Rules for Singapore


5th April, 2012: Following the league of USA, UK, Australia, Canada, New Zealand and others countries, Monetary Authority of Singapore recently came out with a “Consultation Paper on “Covered Bond Issuance by Banks Incorporated in Singapore” on 9th March 2012 (see the text of the consultation paper here) and is open for public comments till 10th April, 2012.

 Some of the key issues considered in the proposed rules are:

  • The aggregate value of assets in cover pools for all covered bonds issued by the bank, not to exceed 2% of the value of the total assets of the bank, at all times.

  • A loan to value limit of 80% is applicable to residential mortgage loans. Even if the LTV Limit exceeds 80%, the value of the loan for the purpose of determining the value of the loan as an asset to be part of the cover pool shall be reduced by the amount of the excess if the loan is to be included in the cover pool.

  • Covered Bonds shall not be issued through foreign incorporated entities.

  • Qualifying cover assets to include

o   Residential mortgage loans that are mortgage loans secured by residential property.

o   Derivatives held for the purpose of hedging risk arising from covered bonds issuance.

·         Minimum over collateralization to the extent of 3% of the cover pool

·         Appointment of a third party cover pool monitor

The rules pertain to providing protection to the investors in areas of quality covered areas, specifying minimum over-collateralization levels, a requirement for ongoing monitoring of risk but have not mentioned anything about legal protection to the bondholders in case of bankruptcy/ default of the issuer. The proposed Rules specifically rule out the segregation of the cover pool from the bankruptcy estate of the defaulting issuer and it states that it would depend on the existing legal regime. Unlike, similar Consultation document on Covered bonds, one such, issued by Reserve Bank of New Zealand, wherein the regulators propose “carve-out” of registered issues of covered bonds from specific parts of the statutory management and liquidation regimes which are in our view, would explicitly protect the covered bondholders rather having to rely or fall back on existing common laws.

[Reported by: Sikha Bansal; Abhijit Nagee]

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