US Covered Bond Legislation Moving Forward

Jim Hamilton of Jim Hamilton’s World of Securities Regulation reports House Marks Up Bi-Partisan US Covered Bond Legislation:

The House Capital Markets Subcommittee marked up legislation creating a covered bond market for the US. This is bi-partisan legislation with a good chance of passing Congress this year. The U.S. Covered Bond Act of 2011 was introduced by Rep. Scott Garrett (R-NJ), Chairman of the Financial Services Subcommittee on Capital Markets and Rep. Carolyn Maloney (D-NY), Ranking Member of the Financial Services Subcommittee on Financial Institutions and Consumer Credit. H.R. 940 will help facilitate a robust covered bond market in the U.S. to add liquidity and certainty to the capital markets. The legislation was passed out of the subcommittee by voice vote and will now be considered by the full Financial Services Committee and is expected to garner wide bipartisan support.

According to recent testimony from the US Covered Bond Council, the public supervision of covered-bond programs by a federal regulator, whose mission is the protection of covered bondholders, is central to any legislative framework. In the European Union, this feature is enshrined in the Directive on Undertakings for Collective Investment in Transferable Securities (the UCITS Directive), compliance with which is what has given covered bonds their unique status in Europe, including privileged risk weighting under the Capital Requirements Directive and preferential treatment by the European Central Bank in Eurosystem credit operations. Issuances by regulated financial institutions is another fundamental element of covered bonds that is also recognized in the UCITS Directive. One other indispensable feature of covered bonds is a cover pool that contains performing assets and that is replenished and kept sufficient at all times to fully secure the claims of covered bondholders. This too receives specific mention in the UCITS Directive.

With covered-bond programs subject to rigorous public supervision, investors will be well protected. As a result, an expansion of existing securities-law exemptions may be appropriate.

I wrote a very brief primer on covered bonds a while ago. The proposed and defeated federal budget promised covered bond legislation, but so did the prior year’s: you can’t take these clowns too seriously.

2 Responses to “US Covered Bond Legislation Moving Forward”

  1. […] Bonds were last discussed in the post US Covered Bond Legislation Moving Forward. A previous article discussed the question of BAs or BDNs: What’s the […]

  2. […] Covered Bond legislation was last mentioned on PrefBlog when it passed the Capital Markets Subcommittee. Consultations in Canada are taking place behind closed doors, as is only right and […]

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