Amended Market Making Rules in Minimum Standards strengthen the Jumbo Pfandbrief

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1 Berlin, 29 August 2006 vdp press release No. 9 Amended Market Making Rules in Minimum Standards strengthen the Jumbo Pfandbrief The Pfandbrief issuers represented in the Association of German Pfandbrief Banks (Verband deutscher Pfandbriefbanken, vdp) and in the Association of German Public Sector Banks (Bundesverband Öffentlicher Banken Deutschlands, VÖB) and the Market Makers associated in the ACI have agreed on changes in the Minimum Standards for Jumbo Pfandbriefe (see attachment). The new rules were agreed upon with the prime objective to ensure Market Making in Jumbo Pfandbriefe will continue as long as possible in a crisis situation of the issuing entity. In the case that the Market Making cannot be continued, the new rules call for a rapid and co-ordinated communication vis-à-vis investors to warrant Market Making is resumed as quickly as possible. The changes to the Minimum Standards are meant to strengthen the trust investors put in the Jumbo Pfandbrief. Market Making plays a major part of the Jumbo Pfandbrief success story, as it ensures a highly liquid secondary market trading, thus making the Jumbo interesting for international, buy-and-sell investors. In the view of the issuing entities, the Market Making pledge in trades with other banks and investors remains a necessary core element of the Jumbo Pfandbrief concept, 11 years after its introduction. In October 2005, news of a possible closure of Allgemeine Hypothekenbank Rheinboden (AHBR) led to the discontinuation of Market Making in Jumbo Pfandbriefe of this bank. Communication with market participants was sparse and un-coordinated. This has led to investor confusion and in some cases discontent. In order to prevent similar cases from happening again, the revised Minimum Standards require Market Makers in the case of exceptional situations of a Pfandbrief issuer to immediately communicate the discontinuation of Market Making to the market. This is heeding the fact that it is unrealistic to call on Investment Banks to keep up Market Making in all situations. However, it remains the primary objective to keep up the Market Making of Jumbo Pfandbriefe even if the issuing entity should find itself in a state of crisis. With this in mind, a Market Maker and Issuer Committee (MIC) was founded. This committee, representing both sides, is set to meet regularly. In the case of an unfolding

2 crisis, the committee will discuss measures to prevent the discontinuation of Market Making or, should discontinuation prove inevitable, to aim for the resumption of Market Making as quickly as possible. It could, for example, opt for a temporary loosening of the Market Making rules. This flexible approach will be in the investor's interest, as temporary exceptions in a single case are most likely to prevent the total discontinuation of Market Making. To pay tribute to the outstanding standard of safety of the Pfandbrief, the amended Minimum Standards now recommend that all Investment Banks acting as Market Makers should have separate limits for Pfandbriefe of a particular issuer. It was the downsizing of the limits in AHBR investments that was quoted as a reason for discontinuing Market Making in Jumbos of this issuer by some Investment Banks last October. As it turned out, some of them did not have separate limits for Pfandbriefe. This does not consider the high credit quality of Pfandbriefe, which was impressively underlined in the course of the AHBR crisis by explicit acknowledgment of the high ratings of AHBR's Pfandbriefe. This new recommendation expresses the fact that from a credit quality point of view Pfandbriefe cannot be compared to unsecured issues. Separate limits are of great importance to Pfandbrief issuers. These changes are fundamental in reaffirming investors' trust in the high liquidity of Jumbo Pfandbriefe and fast, comprehensive communication even in the case that a Pfandbrief Issuer should find itself in a crisis again. The AHBR-crisis has shown that the Minimum Standards for Jumbo Pfandbriefe require a permanent review. The MIC will meet at least twice a year to discuss fundamental questions revolving around Market Making. One of the first results of past discussions is that an increase in the minimum number of Market Makers from three to five, the precise naming of the term "usual trading hours" as well as the clarification of the bid-ask spreads of Pfandbriefe with maturities of more than 20 years are now part of the Minimum Standard set of rules. Press Contacts: Dr. Helga Bender, vdp, Tel.: bender@pfandbrief.de Dr. Stephan Rabe, VÖB, Tel Stephan.Rabe@voeb.de Karl-Heinz Riehm, ACI, Tel karl-heinz.riehm@barcap.com

3 Attachment Minimum Standards for Jumbo Pfandbriefe (As at August 2006) 1. Minimum issue size The minimum issue size of a Jumbo Pfandbrief is EUR 1 billion. The volume of the initial issue must be at least EUR 750 million. The issuer is obligated to increase the outstanding total volume of the issue to at least EUR 1 billion within 180 calendar days after the initial offering. 2. Format Only Pfandbriefe of straight bond format (i.e. fixed coupon payable annually in arrears, bullet redemption) may be offered as Jumbo Pfandbriefe. 3. Stock market listing Jumbo Pfandbriefe must be listed on an organized market in a Member State of the European Union or in another Member State of the Treaty on the European Economic Area immediately after issue, although not later than 30 calendar days after the settlement date. 4. Market making Each Jumbo Pfandbrief must have at least five market makers who pledge to quote bid/ask (two-way) prices simultaneously for lots of up to EUR 15 million during usual trading hours (at least 9-17 hrs. CET). The function of market maker may also be performed by the issuing house itself. The market makers undertake to quote prices as long as there is sufficient outstanding volume to maintain a liquid market in the Jumbo Pfandbrief. The market makers undertake not to exceed the following spread between the bid and ask prices when quoting two-way prices: Residual life to maturity up to and including 4 years: 5 cents, over 4 up to and including 6 years: 6 cents, over 6 up to and including 8 years: 8 cents, over 8 up to and including 15 years: 10 cents, over 15 up to and including 20 years: 15 cents, over 20 years up to and including 25 years: 25 cents. The maximum bid/ask spread to be quoted is adjusted according to the residual life to maturity of an issue. In the exceptional event of market making being suspended in the situations outlined under Recommendation No. 2, this must be immediately communicated to the market by the market maker in an appropriate manner. 5. Add-ons In the event that a Jumbo Pfandbrief is tapped, the amount of the increase should not be less than EUR 125 million per add-on. In the case of taps and new issues, a maximum of 5 banking days should separate pricing date and settlement date. 6. Transfer and buyback A subsequent transfer to the name of an investor is inadmissible (restriction on transferability). It is admissible to buy back securities for redemption purposes or trustee administration if the outstanding volume of the issue is

4 not less than EUR 1 billion at any time. Furthermore, buy-backs are limited to half of the outstanding issue volume. The issuer must publicly announce any buyback, the planned volume thereof and the issue marked out for repurchase at least 3 banking days in advance, and make sure that thorough transparency in the market is assured. After a buyback transaction it is inadmissible to increase such an issue within one year. 7. Loss of status If one of the aforementioned provisions is not met, the issue will lose its Jumbo Pfandbrief status. Jumbo Pfandbriefe that were issued before April 28, 2004 and have a volume of less than EUR 1 billion retain the status of a Jumbo notwithstanding Number 1 if the other aforementioned provisions are met. Recommendations: 1. The market makers are to keep separate limits for the issuer's Pfandbriefe. 2. In the event of substantial rating changes or of a considerable deterioration of a Jumbo issuer's financial situation or of other circumstances that might jeopardize liquid trading of an issuer's Jumbo Pfandbriefe in a similar way, the Market Maker and Issuer Committee (MIC) consisting of representatives of market makers and issuers will immediately convene to discuss and, if applicable, recommend measures aimed at preventing the suspension of market making for the Jumbo Pfandbriefe of the issuer in question or at making the resumption of market making possible as soon as possible. The MIC will, with due consid-eration to the circumstances of the particular case, consider widening the bid/ask spread, lowering the single ticket sizes on which bid/ask prices are quoted or other measures that are appropriate and necessary in order for market making to be continued. Measures restricted in time should wherever possible be the subject of recommendations by the MIC.

5 3. Background information: Changes to the Minimum Standards for Jumbo Pfandbriefe in particular: Inclusion of a new rule on the discontinuation of Market Making: In the exceptional event of market making being suspended in the situations outlined under Recommendation No. 2, this must be immediately communicated to the market by the market maker in an appropriate manner. Inclusion of the following recommendations: The market makers are to keep separate limits for the issuer's Pfandbriefe. In the event of substantial rating changes or of a considerable deterioration of a Jumbo issuer's financial situation or of other circumstances that might jeopardize liquid trading of an issuer's Jumbo Pfandbriefe in a similar way, the Market Maker and Issuer Committee (MIC) consisting of representatives of market makers and issuers will immediately convene to discuss and, if applicable, recommend measures aimed at preventing the suspension of market making for the Jumbo Pfandbriefe of the issuer in question or at making the resumption of market making possible as soon as possible. The MIC will, with due consid-eration to the circumstances of the particular case, consider widening the bid/ask spread, lowering the single ticket sizes on which bid/ask prices are quoted or other measures that are appropriate and necessary in order for market making to be continued. Measures restricted in time should wherever possible be the subject of recommendations by the MIC. The minimum number of Market Makers is increased from three to five. The term "usual trading hours" is defined as "at least 9 17 hrs. CET". The bid/ask spread for maturities over 20 years up to and including 25 years is set at 25 Cents. There is no spread set for longer maturities. About the Jumbo Pfandbrief Market: The Jumbo Pfandbrief market is the market segment for highly liquid Pfandbriefe. Since its start in 1995 and thanks to continued improvements, the Jumbo Pfandbrief has grown to be one of the "Export hits" and figureheads of Germany as a financial center. The rules defining the Jumbo Pfandbrief are laid down in the Minimum Standards for Jumbo Pfandbriefe that were created in 1996 by the issuing entities and have now been modified for the second time. In the eleventh year of its existence, the Jumbo

6 Pfandbrief has an outstanding volume of Euro 360 billion, making up around 36 % of all Pfandbriefe outstanding. A C I, The Financial Markets Association, is a globally active association whose objective is to promote the professional interests of its members. Two of the main aims of this not-for-profit association are the promotion of education and professionalism in the financial markets. Membership is held on a personal basis and representation is irrespective of financial institutions. The ACI subcommittee on Market Making in Covered Bonds represents the banks participating in the Market Making almost in their entirety. The subcommittee deals with current questions and problems having to do with Market Making as well as the development of this market (i. e. e-trading, enhancing and safeguarding liquidity, etc.). Additionally, the subcommittee serves as point of contact for issuers and investors alike, thus contributing an important part to the furthering of the Jumbo Covered Bond Market. The Association of German Public Sector Banks (Bundesverband Öffentlicher Banken Deutschlands, VÖB) represents 62 member institutions including the Regional Banks (Landesbanken) as well as the development banks owned by the federal and state governments. With combined assets of Euro 1849 bn., the market share of VÖB member institutions is 27 % of the German banking market. VÖB-banks employ a total of staff. The member institutions of the Association of German Pfandbrief Banks (Verband deutscher Pfandbriefbanken, vdp) number among the most important providers of capital for the construction of residential and commercial properties as well as for the public sector and its institutions. It is the objective of the vdp to maintain the high quality of the Pfandbrief, and to consolidate and expand the international market leadership of this important German export through the continuous, ongoing development of the legal framework and of voluntary quality standards.