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News on Covered Bonds: New Zealand and South Korea puts up Covered Bond legislation


New Zealand and South Korea puts up Covered Bond legislation


27th July, 2012: More and more countries outside Europe are vying to have a dedicated legal framework for covered bond issuances. It seems the world is all game for covered bonds legislation and intermittently we hear non-European nations putting up covered bond laws in place specifically post the sub-prime crisis. The recent proposal of Singapore - Consultation Paper on Covered Bond Issuance by Banks in Singapore for issue of covered bond is an example.

This time it is New Zealand and South Korea. New Zealand had regulatory guidelines on covered bonds already. The Reserve Bank of New Zealand ("RBNZ") took a step ahead and released a draft of the new legislative framework to govern covered bonds with the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill ("the Bill"). Whereas for South Korea, the draft legislation is all set to release by the end of July, 2012.

Covered Bonds Legislation In New Zealand - Currently covered bond issuances in New Zealand are solely governed by contract and banks in New Zealand have been issuing Covered Bonds under contractual agreement for the past 2 years. A designated legislative framework would improve the nation's access to the Covered Bonds market and would also help bag positive credit rating which in turn would lower the cost of issuance for the banks. Legislation would also facilitate investor confidence in these instruments through greater certainty and would contribute to financial system stability.

The Bill amends the Reserve Bank of New Zealand Act, 1989 with a view to provide legal framework to the covered bonds issuances by banks in New Zealand; it also makes provisions for the framework to be extended to other entities, such as non-bank deposit takers in future.

The Bill aims at providing legal certainty as to the treatment of cover pool assets and specifically requires that the cover pool assets are beneficially owned by an Special Purpose Vehicle ("SPV"), which is a separate legal entity so that the assets of the cover pool be segregated from the assets of the issuer by way of true sale of those assets to the SPV. This would mean that the SPVs cannot be included in the statutory management of the bank as an associated person and hence ensure that cover pool assets will not be available to meet the claims of creditors other than covered bond-holders, should the issuing bank become insolvent.

Key aspects and requirements placed in the Bill:

  • Mandatory registration of the covered bond programme prior to issuance after ensuring that the covered bonds issues comply with the registration requirements on a continuous basis to ensure  transparency and offer greater clarity for investors and depositors;

  • To ensure that the covered bond programme specifies a test(s) to determine whether the value of the cover pool assets is at least equal to the principal amount outstanding on the covered bonds

  • Appoint an asset pool monitor who is independent of the issuer to verify the accuracy of the test as stated above and also to verify the register of assets.

  • covered bond programmes are to be registered subject to class designation based on the assets in the relevant cover pool.  

The Bill has been referred to the Finance and Expenditure Committee for consideration and is expected to come into effect sometime in November 2012.  Once enacted, the legislation will facilitate New Zealand registered banks to have access to the covered bond market as a source of long-term relatively stable finance and would also probe investor confidence and greater transparency.

The Reserve Bank of New Zealand has produced a regulatory impact statement in relation to this Bill. A copy of that regulatory impact statement, dated 28 March 2012, can be found at -

Following the league, the South Korean Financial Services Commission ("FSC") also has plans to release the draft covered bond legislation by July end pending final submission to the Parliament in November 2012. Thus the local Korean covered bonds issuance under the designated legislative framework is likely before the end of this year. This signifies that the covered bond market is all set for a boom with a number of countries making simultaneous issuances under the legislative framework. The discussion revolving covered bonds legislation in Korea has much deeper roots than Singapore and there have also been previous covered bond issuances in the Korean market. The FSC and Financial Supervisory Service ("FSS") published guidelines governing covered bond issuance in June 2011 as part of comprehensive measures to address the level of household debt. Korean Banks will be keen to issue covered bonds once the legislation is passed.

For more news on Covered Bonds see our Covered Bonds News page here.

[Reported by Abhijit Nagee]

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