Regulatory changes proposed for Swedish covered bonds
The Swedish Financial Supervisory Authority (Finansinspektionen) has proposed changes to guidelines on covered bonds, and has set 3 September as a deadline for consultation responses.
The new guidelines are intended to come into effect by 1 March 2013, and follow previous changes to covered bond legislation.
Swedish bank SEB said in a note on the changes that the most important changes concern:
– Control and valuation of collateral
– Matching requirements: Discount curve to be used in NPV calculations of assets and liabilities
– Minimum rating requirements for derivative counterparties.
“Generally, we believe the new proposed guidelines would strengthen the Swedish framework,” SEB said.
“This should, if anything, make Swedish covered bonds relatively more attractive compared to European peers, not least SEK-denominated issues that currently trade comparatively cheap versus EUR CBs both from Swedish issuers and European peers.”
“As a result, we would consider SEK-denominated 2017 covered bonds such as Stadshypotek 6% Jun 2017 (C1579), SEB 3% 2017 (SEB570), Swedbank Mortgage 3.75% Dec 2017 (Sp186) as attractive buying candidates vs. EUR peers not least given the superior liquidity of the SEK compared to the European covered bond market.”
The new guidelines would require closer control over the valuation of collateral, in mind of volatility in property prices. According to SEB’s understanding of the proposals then “price increases should only be reflected if there are strong reasons to do so. A general price index increase is not deemed a sufficient reason. Every decision to reflect a price rise should be carefully documented. If higher house prices are taken into account, downward movements should also be reflected.”
Furthermore, the proposals, if accepted, would require an annual sensitivity analysis of collateral market values, in respect of minimum price declines of 20% for residential property, or 30% for agricultural and commercial property.
Providers of covered bonds also need to put in place action plans for dealing with such levels of price declines, such as buy backs.
On the guidelines on matching requirements, SEB said that the Authority was proposing easier comparison between issuers, but that this would require a different use of curves to illustrate risk and reward.
“Assets and liabilities should be discounted using a bond curve or swap curve that incorporates all issuer specific risks.”
Finally, on the issue of derivatives counterparties, the proposals would do away with a short term rating requirement – currently a minimum of P2/A3 (Moody’s), A2/A- (S&P0 or F2/A- (Fitch) – in favour of a long term rating of at least A3 (Moody’s), A- (S&P) or A- (Fitch). Additionally, should the counterparty rating fall below the minimum requirement, then the covered bond issuer must immediately inform the Authority.
“No new contracts may be established with the counterparty without the consent of the [Authority] A report on outstanding contracts with the counterparty and a plan concerning how the issuer intends to satisfy the requirement must be produced within 30 calendar days,” SEB said.
Further information on the new guidelines is available on the Financial Supervisory Authority’s website: http://www.fi.se/Regler/FIs-forfattningar/Forslag-nya-FFFS/Listan/Forslag-till-nya-regler-om-sakerstallda-obligationer/