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Covered Bond Blog: DBS ask some questions

04 August 2015
Richard Kemmish

Congratulations to DBS of Singapore for having been granted the first ever covered bond label outside the European Economic Area. The granting of this label, and the decision last year to open up the label to non-EEA issuers does however re-open a fairly fundamental question; what is the label for?

One of the initial answers to that question was that it was just a convenient way to check whether any particular bond was a ‘real’ covered bond according to the EU legal definition. Which is why it was initially restricted to EEA issuers – a prerequisite for preferential treatment under the UCITS, Capital, Solvency and other Directives.

The ‘convenient database’ argument though was slightly undermined by both a lack of ambition – it could do so much more than that – and by its lack of completeness, with both Germans and Austrians being largely reluctant to sign up to it so far.

The next pragmatic answer to the question came with the national transparency templates, a standard form, comparable and easy to access collection of relevant pool data defined on national levels (which flaw is hopefully going to be addressed shortly with the Europe-wide standard data template). 

Again this seems as if it is a purely practical role for the label. But it wasn’t, by demonstrating that the covered bond industry was collectively improving transparency standards and was actually ahead of the game – in particular the requirements for pool transparency that were enshrined in the Capital directive – there was a strong argument that this forestalled the need for legislation. Possibly it even prevented the need for a covered bonds directive.

But if the initial decision to make it an EEA only label was based on an EU legal definition, does the reversal of that decision presage a new, global definition?

If the EU were to follow the ECBC and unilaterally drop the ‘EEA only’ rule that would be in line with the ostensible purpose of their rules – aligning the economics of owning the bond for an investor with its actual risk profile (of course it would go further for most investors due to the benefits of diversification). Call me an EU sceptic if you must but I suspect that this outcome is unlikely for obvious reasons (I only said the ‘ostensible’ purpose of the rules).

Two outcomes though seem more likely to me.
Mutual recognition of covered bond regimes is a long held dream of many in the covered bond market. The New York Fed accepting pfandbrief (only) as repo collateral is about as far as this dream has got so far. But it would surely be in the interests of the Singaporean regulator (to follow through with DBS) to, for example, allow EEA covered bonds as bank liquidity assets, which might allow the  EU to reciprocate for labelled Singaporean covered bonds? 

The second, better, potential outcome though is better acceptance of the concept of covered bonds globally. Next stop Basle. 

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