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Transparency has to be a good thing, right?

15 December 2014
Richard Kemmish

Several months ago ICMA asked me to write a report on pool transparency in covered bonds. One of the things that I noticed was how much investors wanted disclosure on those details of covered bond programmes that can’t really be called pool data (so covered in the national transparency templates) and aren’t really legal details (so, covered in the ECBC’s comparative framework database).

I called them static programme data and came up with a fairly long list of details like rating triggers for swap providers, eligibility of RMBS for the cover pool and over-collateralisation levels.
So I was very pleased to hear that the covered bond label is about to add a field for issuers to disclose their over-collateralisation levels. Well, quite pleased, obviously there are a few practical and interpretational problems for investors to overcome.

I’ve made the point many times before about the incomparability of cover pool data produced on a different basis. If this new label field is to be a meaningful piece of credit information it will have to as a minimum disclose the valuation methodology used, whether properties are indexed, whether the calculation is on a nominal or PV basis and whether it takes into account overcollateralization which is ineligible for statutory tests but is included in the cover pool and accessible to investors.

But is this field intended to be a piece of credit information at all? Or is it simply about conforming to the new Liquidity Cover Ratio rules? As a reminder depending on which category your bonds are aiming for one of the eligibility criteria is a minimum over-collateralisation level. The fact that the rules state a bare figure without taking into account all of my minimum disclosure points above makes me wonder if this particular criterion was properly thought through.
But there is of course on much more important piece of information, the basis for the over-collateralisation. Is it

..the actual over-collateralisation in the pool today? So, more or less useless information if things turn bad.

..the minimum over-collateralisation required currently by the competent regulator? What is the risk that this number will be reduced if it’s a choice between that and letting an issuer fail because they’ve run out of assets? How is this influenced by the fact that the regulator deciding it is also sometimes the lender of last resort, therefore long those assets in repo with the issuer?

..the legal minimum overcollateralization. Therefore woefully inadequate in almost every case. amount specified in a covenant, or a trust deed? The former being far more useful than the latter from an enforceability perspective.

..the current result of an asset cover test in the bond covenants that references the rating agency models?

For me only the last of these is truly dependable.

Will the new column in the label website include this level of detail? Please.

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