CENTRAL BANK OF CYPRUS

Transcription

1 CENTRAL BANK OF CYPRUS DIRECTIVE TO BANKS, COVERED BOND MONITORS AND COVERED BOND BUSINESS ADMINISTRATORS ΟΝ THE ISSUE OF COVERED BONDS BY APPROVED INSTITUTIONS AND THE CONDUCT OF COVERED BOND BUSINESS BY INSTITUTIONS WITH COVERED BOND OBLIGATIONS N.B. This translation of the Directive is unofficial. It has been prepared by the Central Bank of Cyprus for information purposes. The Central Bank of Cyprus shall not be responsible for its content. The official text is in the Greek language. JANUARY 2011

2 DIRECTIVE ON THE ISSUE OF COVERED BONDS TABLE OF CONTENTS PART I PRELIMINARY 1 Short title and scope of application. 2 Purpose of the Directive. 3 Interpretation. PART II REGISTRATION OF APPROVED INSTITUTIONS 4 Register of approved institutions. 5 Application for registration as an approved institution. 6 Application fee for the registration in the register of approved institutions. PART III ISSUANCE OF COVERED BONDS 7 Maintenance of covered bonds register. 8 Submission of application for registration in the covered bonds register. 9 Application fee for the registration in the covered bonds register. 10 Annual supervision fee. 11 Limits as to the charge of assets in favour of cover pool creditors. PART IV COVERED BONDS BUSINESS 12 General criteria, terms and conditions in relation to the cover pool. 13 Criteria, terms and conditions in relation to residential or commercial loans. 14 Criteria, terms and conditions in relation to public claims. 15 Criteria, terms and conditions in relation to maritime loans. 16 Definition of complementary assets. 17 Complementary assets of covered bonds collateralised by public claims. 18 Complementary assets of covered bonds collateralised by primary assets other than public claims. 19 Counting of cover assets in the measurement of the basic collateralisation, supervisory overcollateralization and contractual overcollateralization. 20 Limit as to the counting of complementary assets in the basic collateralisation. 21 Use of cash inflows derived from cover assets. 22 Addressing of set-off risk. 23 Cover pool adequacy criteria. 2

3 CENTRAL BANK OF CYPRUS 24 Basic collateralisation. 25 Supervisory overcollateralization. 26 Restriction in maturity mismatch. 27 Maintenance of liquidity for servicing and repayment of the covered bonds. 28 Additional cover pool adequacy criteria for an institution with covered bond obligations removed from the register of approved institutions 29 Cover pool adequacy on segregation of cover assets from the estate of an institution which is subject to dissolution proceedings. 30 Cover pool adequacy assessment of an institution subject to dissolution proceedings 31 Safeguarding of compliance with the cover pool adequacy criteria. 32 Hedging contract Terms and conditions for inclusion in the cover pool. 33 Qualifications of a counterparty in hedging contracts. 34 Cover pool register - general conditions. 35 Form of the cover pool register. 36 Content of the cover pool register Recording of entries. 37 Connection between the main part and supplementary part(s) of the cover pool register. 38 Entry data. 39 Transparency- Disclosure of information. 40 Additional information for residential and commercial loans. 41 Additional information for public claims. 42 Additional information for maritime loans. 43 Submission of information to the Central Bank. PART V COVERED BOND MONITOR 44 Necessary qualifications of a covered bond monitor. 45 Process for the appointment of a covered bond monitor. 46 Additional functions of the covered bond monitor. 47 Submission of information and reports to the Central Bank. 48 Termination of appointment of covered bond monitor. PART VI - MISCELLANEOUS 49 Date of entry into force. 3

4 DIRECTIVE ON THE ISSUE OF COVERED BONDS APPENDIX 1 APPLICATION FOR REGISTRATION IN THE REGISTER OF APPROVED INSTITUTIONS APPENDIX 2 - APPLICATION FOR REGISTRATION IN THE REGISTER OF COVERED BONDS APPENDIX 3 COVER POOL ADEQUACY CRITERIA APPENDIX 4 COVER POOL REGISTER APPENDIX 5 INFORMATION SUBMITTED TO THE CENTRAL BANK 4

5 CENTRAL BANK OF CYPRUS DIRECTIVE TO BANKS, COVERED BOND MONITORS AND COVERED BOND BUSINESS ADMINISTRATORS FOR THE ISSUE OF COVERED BONDS BY APPROVED INSTITUTIONS AND THE CONDUCT OF COVERED BOND BUSINESS BY INSTITUTIONS WITH COVERED BOND OBLIGATIONS The Central Bank of Cyprus, exercising the powers conferred to it by virtue of the provisions of sections 5(1)-(2), 6(2), 7(1), 12(1)-(2), 13(2), 14(1), 15, 18(3)-(4) and (6), 19, 20, 23(2), 26(1), 27, 28(4), 31, 40(1)-(2), 49(2), 51(4), 52(2), 54(2), 56(1), 69 and 72 of the Covered Bonds Law of 2010, issues this Directive to banks, covered bond monitors and covered bond business administrators relating to the issue of covered bonds by approved institutions and the conduct of covered bond business. 5

6 DIRECTIVE ON THE ISSUE OF COVERED BONDS PART I PRELIMINARY Short title and scope of application. 1. (1) This Directive is issued pursuant to the provisions of the Law and shall be cited as the Covered Bonds Directive of (2) This Directive is applicable to: (c) banks incorporated in the Republic which are registered as approved institutions and issue covered bonds in accordance with the provisions of the Law; the covered bond monitors; and the covered bond business administrators. (3) The provisions of this Directive are interpreted and applied in conjunction with the provisions of the Law. Purpose of the Directive. Interpretation. 66(Ι) of (Ι) of (Ι) of (Ι) of (Ι) of (Ι) of (Ι) of (Ι) of (Ι) of (Ι) of (Ι) of (Ι) of The purpose of this Directive is to provide rules and guidance in relation to the issuance of covered bonds by approved institutions and the conduct of covered bonds business. 3. For the purpose of this Directive the interpretations referred to in the Law shall apply, unless the context otherwise requires. In addition, the following interpretations shall apply, unless the context otherwise requires: bank shall have the meaning given to the term in section 2 of the Banking Laws of 1997 to (No. 2) of 2009 and additionally includes the Central Cooperative Bank Ltd and the Housing Finance Corporation; basic collateralisation means the required by the Central Bank, as provided for in paragraph 24, basic cover of the outstanding balance of covered bonds with assets and hedging contracts that fulfil the conditions determined in this Directive; 6

7 CENTRAL BANK OF CYPRUS Administrative Decision 463/2006 (Κ Π 463/2006) Administrative Decision 328/2007 (Κ Π 328/2007) Administrative Decision 140/2010 (Κ Π 140/2010) Administrative Decision 470/2010 (Κ Π 470/2010) Administrative Decision 471/2010 (Κ Π 471/2010) Administrative Decision 472/2010 (Κ Π 472/2010) Administrative Decision 473/2010 (Κ Π 473/2010) Capital Requirements Directive means the Directives of the Central Bank to banks for the calculation of the capital requirements and large exposures of 2006 to (no. 5) of 2010, as further amended or replaced; Central Bank means the Central Bank of Cyprus; complementary assets mean the assets defined in paragraph 16 of this Directive; contractual overcollateralisation means the enhancement of the cover pool, over and above the basic collateralisation and the supervisory overcollateralization, with additional assets, as required by the terms of issue of the covered bonds; Official Gazette of E.U. L page 1. Directive 2006/48/EC means the act of the European Community entitled Directive 2006/48/EC of the European parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast) as amended thereafter and as further amended or replaced; duration in relation to a cover asset or covered bond, means the weighted period of repayment of the principal amount of the cover asset or of the covered bond, as the case maybe, in accordance with the method determined in paragraph 26, taking into consideration any relevant hedging contract; 7

8 DIRECTIVE ON THE ISSUE OF COVERED BONDS foreign currency means any currency other than euro; group means a business group consisting of parent company, the subsidiary entities, (c) the entities in which the parent company or its subsidiaries hold participation, and (d) the undertaking or undertakings which are affiliated companies; the words "parent", "subsidiary" and "affiliated" shall have the meaning ascribed to them by section 2 of the Banking Law of 1997 and (No.2) 2009; institution means an institution with covered bond obligations, unless the context otherwise requires; 130(I) of Law means the Covered Bonds Law of 2010; LTV means: in relation to a residential or commercial loan, the value of the loan as to the value of the mortgaged immovable property; in relation to a maritime loan, the value of the loan as to the value of the mortgaged ship; mortgage has the meaning assigned to that term in section 2 of the Immovable Property (Transfer and Mortgage) Laws from 1965 to 2010 or in section 31 of the Merchant Shipping (Registration of Ships, Sales and Mortgages) Laws of 1963 to 2008, as the case maybe; mortgaged in relation to an immovable property or ship indicates the existence of a relationship between the property indicated and a mortgage or other equivalent charge; supervisory overcollateralisation means, the enhancement of the cover pool over the basic collateralisation, as required by the Central Bank as provided for paragraph 25, by assets that fulfil the requirements determined in this Directive; value means: (c) in relation to covered bonds, the nominal value plus accrued interest; in relation to cover assets that are not traded, the nominal value plus accrued interest; in relation to cover assets that are traded, the market value; 8

9 CENTRAL BANK OF CYPRUS (d) (e) (f) in relation to hedging contracts, the marked-to-market value; in relation to properties, the value estimated in accordance with subparagraph (10) of paragraph 13; in relation to ships, the value estimated in accordance with subparagraph (10) of paragraph 15; weighted duration in relation to cover assets counted in the basic collateralisation and supervisory overcollateralization or covered bonds collateralised by a cover pool as part of a programme, means the weighted average duration of those cover assets or of those covered bonds, as the case maybe, in accordance with the method determined in paragraph 26. PART II REGISTRATION OF APPROVED INSTITUTIONS Register of approved institutions. 4. (1) In the register of approved institutions, which the Central Bank establishes and keeps in accordance with section 5 of the Law, the following information shall be recorded: (c) (d) the name of the approved institution and the address of its registered office; the date of registration in or removal from the register; the registration number; and annual confirmation of the management of the approved institution to the effect that the requirements for the registration as an approved institution are satisfied. (2) The register is kept in electronic form and is accessible in the website of the Central Bank. Application for registration as an approved institution. 5. (1) Banks shall apply for registration as an approved institution by submitting to the Central Bank duly completed and signed the form attached to this Directive as Appendix 1. (2) The application for registration is submitted with any of the following means: 9

10 DIRECTIVE ON THE ISSUE OF COVERED BONDS by post, or by hand delivery to the Central Bank offices against a dated receipt with the stamp of the Central Bank. (3) A bank which applies for registration to the register of approved institutions shall fulfil the following conditions: (c) (d) (e) (f) (g) (h) it is incorporated in the Republic; it maintains Core Tier 1 capital of, at least, 50 million euros and meets the capital adequacy ratios required by the Central Bank both under Pillar I and Pillar II of the Capital Requirements Directive; its activities include the granting of residential loans and/or commercial loans and/or maritime loans and/or incurring public sector exposures; the conduct of covered bonds business is integrated in the corporate strategy of the bank, approved by its board of directors, and the support of this activity is ensured through well-documented policies and procedures; it has the necessary organisational structure ensuring a clear delegation of functions and responsibilities and assignment of authority limits for each bank section involved for the support and effective performance of the said activity; It has the necessary automated infrastructure for the support of the covered bond business; it has the required resources, systems, policies and procedures for the recognition, management, monitoring and control of the risks that may arise from the conduct of covered bonds business (e.g. interest rate risk, counterparty risk, operational risk, currency risk, liquidity risk); and it has in place procedures, policies and systems for the support of any other relevant business of the said activity such as the issue of covered bonds, the servicing of the covered bonds and the valuation of collaterals. Application fee for the registration in the register of approved institutions. 6. For the submission of an application for registration in the register of approved institutions a bank shall pay to the Central Bank a fee of euro. The application fee is paid at the time of submission of the application for registration. 10

11 CENTRAL BANK OF CYPRUS PART III ISSUANCE OF COVERED BONDS Maintenance of covered bonds register. 7. (1) In the covered bonds register, which the Central Bank establishes and keeps in accordance with section 12 of the Law, the following information shall be recorded for each issue of covered bonds: (c) (d) (e) (f) (g) (h) (i) the name of the institution with covered bond obligations; the name of the issue or of the relevant programme of issue; in case of a programme of issue, the serial number of the issue; the date of registration in the covered bonds register; the currency and amount of the issue; the corresponding amount of the issue in Euro; if applicable, the contractual over-collateralisation; the international specific number for the identification of the bonds (ISIN); the date of issue; (j) (k) (l) (m) (n) (o) (p) the maturity date of the covered bonds; whether there is an option for extension of the repayment of the principal amount of the covered bonds; the coupon; the Stock Exchange in which the issue is listed; the credit rating assigned to the issue by recognised External Credit Assessment Institutions (ECAIs); the hedging contracts included in the cover pool and the risks hedged; the identity of the counterparties in the hedging contracts. Submission of application for registration in the 8. (1) The application for registration in the covered bonds register is submitted to the Central Bank using the form attached to this Directive as Appendix 2. 11

12 DIRECTIVE ON THE ISSUE OF COVERED BONDS covered bonds register. (2) The application for registration is submitted with any of the following means: by post, or by hand delivery to the Central Bank offices against a dated receipt with the stamp of the Central Bank. Application fee for the registration in the covered bonds register. 9. For each application for the registration of a bond issue in the covered bonds register an approved institution shall pay to the Central Bank an one-off registration fee of euro. Annual supervision fee. Limits as to the charge of assets in favour of cover pool creditors. 10. For the supervision of the issues registered in the covered bonds register an approved institution shall pay to the Central bank an annual fee of 0.01% on the total amount of the outstanding amount of covered bonds secured by the same cover pool with a maximum annual amount of euro and minimum annual amount of euro The fee is calculated on the basis of the monthly average outstanding amount of the covered bonds and is payable within one month from the close of each calendar year. 11. An approved institution is not permitted to issue covered bonds, if such an issue would result to: the total value of the primary assets which, as a minimum, are required to be included in the institution s cover pools for each covered bond category exceeding 90% of total value of the institution s eligible assets for that covered bond category, or the total value of the cover assets that must be included in all cover pools and counted in the cover pool adequacy, exceeding 25% of the total value of the institution s assets. PART IV COVERED BONDS BUSINESS General criteria, terms and conditions in relation to the cover pool. 12. Without prejudice to subsection (7) of section 18 of the Law, an institution may include in a cover pool as part of the basic collateralisation and the supervisory overcollateralization assets that are owned by it, are registered in its books, are free of charges and fulfil the 12

13 CENTRAL BANK OF CYPRUS criteria, terms and conditions referred to: (c) (d) in paragraph 13 as regards a primary asset that is a residential or commercial loan; in paragraph 14 as regards a primary asset that is public claim; in paragraph 15 as regards a primary asset that is a maritime loan; in paragraphs 17 and 18 as regards complementary assets. Criteria, terms and conditions in relation to residential or commercial loans. 13. (1) The following terms and conditions shall apply for the inclusion of a residential or commercial loan in a cover pool as part of the basic collateralisation. (2) Only loans the terms of which do not prohibit their inclusion in a cover pool are governed by the laws of member states may constitute primary assets of a cover pool of covered bonds secured by residential or commercial loans. (3) Only loans which meet the following criteria may form part of a cover pool of covered bonds secured by residential or commercial loans: (c) The loans are secured, until they are fully repaid, by mortgages or equivalent charges on immovable property created in accordance with the laws of the Republic or in accordance with the laws of other member states. The inclusion of a loan in the cover pool shall include all the legal claims and rights that the institution may have on the underlying immovable property. the loans are secured by a first mortgage or, in the case of an equivalent charge on immovable property, by a charge that is ranked first in terms of priority. in case where the mortgages/equivalent tangible charges held are at customer bank level, i.e. in addition to the cover asset they secure also other obligations and exposures of the customer, loans secured by subsequent mortgages/equivalent tangibles charges may also be included as cover assets in the cover pool, provided that: (i) all preceding mortgages on the underlying property are in favour of the same institution and they are included in the same cover pool; and (ii) the institution with covered bond obligations ensures that the loans included in the cover pool have priority over the collateral against all other loans/obligations of the customer to the institution which are not included in the cover pool. 13

14 DIRECTIVE ON THE ISSUE OF COVERED BONDS (d) the mortgage or the equivalent charge on immovable property securing the loan is created for an amount, at least, equal to the value of the loan. (4) The mortgage or other equivalent charge on the underlying immovable property securing the loan must meet the following conditions: (i) (ii) ensures a clear and complete tangible charge over the property; is registered properly and in a timely manner; (iii) all necessary legal requirements, concerning completion and registration of the mortgage, to ensure that the mortgage is legally effective and enforceable in all relevant jurisdictions, have been met; and (iv) enables the institution or, as the case maybe, the covered bond business administrator of the cover pool to realise the underlying property within a reasonable timeframe. The Central Bank expects the institutions to obtain a legal confirmation to the effect that the above requirements are met, especially, in cases where the mortgaged property is not situated within the Republic. (5) The immovable property securing the loan must be situated in the territory of the Republic or in the jurisdiction of other member states. The total amount of loans secured by immovable property located in member states that the institution has no physical presence (i.e. a subsidiary or branch) shall not exceed 10% of the total value of the cover pool. Subject to the restriction referred to in point, approved institutions are encouraged to separate the issues of covered bonds on the basis of domestic and non-domestic cover pools. Buildings under construction (6) An institution may include in the cover pool a residential or commercial loan secured by buildings under construction provided that the total value in each cover pool of the loans secured by buildings under construction does not exceed 10% of the cover pool value: Provided that, the required, under subparagraph (8), loan to value (LTV) 14

15 CENTRAL BANK OF CYPRUS is calculated on the basis of the value of the land on which the building is constructed, and. For the purposes of this subparagraph buildings under construction are considered: (i) (ii) for buildings intended for residential purposes, those which are not yet ready for residence, and for buildings intended for commercial purposes, those which are not yet ready for commercial use. (7) In case of rescheduling of a loan, the loan may be included in the cover pool only after the lapse of six months from the payment date of the first rescheduled loan instalment and provided that at the time of its inclusion in the cover pool the loan does not present any loan instalments, principal and/or interest, in arrear for a period of over one month. For the purposes of this subparagraph: (i) (ii) rescheduled loans are considered to be all loans which presented one or more instalment(s) in arrear and the bank had proceeded with revision of their repayment programme (extension of the grace period, suspension of payment of one or more loan instalment(s), reduction in the amount of instalment, write off of instalments of principal and/or interest in arrear) and loans whose interest and/or principal instalments have been repaid from the proceeds of a new loan, instalment in arrear shall mean the failure to meet an amount of 10% or more of the loan instalment set in terms of the repayment programme of the loan. (c) Residential and commercial loans which have been rescheduled more than three times are not eligible for insertion in the cover pool. (8) Residential and commercial loans are subject to the following limits with regard to their inclusion in a cover pool as part of the basic collateralisation: Residential loans: The value of the loan or, where the same property secures more than one loans included in the cover pool, the total value of the loans shall not exceed 75% of the value of the 15

16 DIRECTIVE ON THE ISSUE OF COVERED BONDS underlying immovable property on the basis of valuation conducted by the institution in accordance with subparagraph (10). Loans whose value or, as the case maybe, the total value exceeds 75%, but below 100%, of the value of the underlying immovable property may be included in the cover pool provided that the total value of all such loans included in the cover pool as a percentage of the value of the covered bonds secured by the cover pool does not exceed 25% and their inclusion would not result to the weighted LTV of the cover pool exceeding 80%. Commercial loans: The value of the loan or, where the same property secures more than one loans included in the cover pool, the total value of the loans shall not exceed 60% of the value of the underlying immovable property on the basis of valuation conducted by the institution in accordance with subparagraph (10). Loans whose value or, as the case maybe, the total value exceeds 60%, but below 80%, of the value of the underlying immovable property may be included in the cover pool provided that the total value of all such loans included in the cover pool as a percentage of the value of the covered bonds secured by the cover pool does not exceed 25% and their inclusion would not result to the weighted LTV of the cover pool exceeding 65%. (9) Throughout the term of the loan the underlying buildings shall be insured against all relevant risks, taking into consideration the location and type of the property, for an amount equal, at least, to the lower of the replacement cost of the buildings and the loan amount. The institution shall ensure that the insurance cover is assigned in favour of the cover pool. It shall, also, have in place adequate procedures enabling it to monitor, on an on-going basis, whether the underlying property is adequately insured against possible damage. (10) The valuation of the underlying property for the purposes of calculating compliance with the LTV limits referred to in subparagraph (8) above shall be carried out by an independent valuer. Independent valuer means a person who possesses the necessary qualifications, ability and experience to execute a valuation and is independent from the credit decision process. For the monitoring and review of the value of the property, the provisions of paragraph 8 of Part 2 of Appendix VIII of Unit A of the Capital Requirements Directive shall apply. (11) The institution shall have a clearly documented policy for the 16

17 CENTRAL BANK OF CYPRUS prevention of excessive concentration in the cover pool, at least, in relation to exposures to a single customer, collateral type, geographical area, maturity and LTVs. The Central Bank expects that the cover pool will not include loans whose value, per individual borrower, is greater than 2% of the total value of the cover pool. Criteria, terms and conditions in relation to public claims. 14. (1) Only credit claims resulting from the granting of loans, the terms of which do not prohibit their inclusion in a cover pool, from bonds, or from comparable claims which are acknowledged in writing and are legally binding against the persons referred to in subparagraphs (2) and (3) may constitute primary assets in a cover pool, as part of the basic cover, of covered bonds secured by public claims: Provided that, the inclusion in the cover pool of the claims referred to in this paragraph comprises also any economic interest and/or rights derived from the ownership of the said claims. (2) Subject to the provisions of subparagraph (4), direct claims against the following persons may be included in the cover pool: The Government of the Republic, the Central Bank of Cyprus and the central governments and central banks of other member states; Domestic local authorities, public sector entities the exposures to which are treated, in accordance with paragraph 15 of Annex VI of Unit A of the Capital Requirements Directive, as exposures to the Government of the Republic, and public sector entities which in accordance with paragraph 14 of Part I of Annex VI of Unit A of the above Directive, fall within the definition of public sector entities as defined in paragraph 1 of Unit A of the same Directive; (c) (d) (e) Regional governments and local authorities of EU member states; The European Central Bank as well as the multilateral development banks and international organisations the exposures against thereof are assigned a 0% risk weight, for the purposes of Annex VI of the Directive 2006/48/EC; Public sector entities of the member states falling within the definition of public sector entities in accordance with article 4(18) of the Directive 2006/48/EC; 17

18 DIRECTIVE ON THE ISSUE OF COVERED BONDS (f) (g) (h) Central governments and central banks of the countries referred to in paragraph 5 of Part 1 of Annex VI of Unit A of the Capital Requirements Directive (Australia, Canada, Japan, Switzerland and USA), where the claims are denominated and funded in the domestic currency of the said countries or their credit assessment by recognised ECAIs is assigned in credit quality step 1 in accordance with Table 1 of Annex VI of the Directive 2006/48/EC; Regional governments and local authorities of the countries referred to in point (f), where the national authorities of the said countries that are responsible for the implementation of the framework agreement International Convergence of Capital Measurement and Capital Standards of the Basel Committee on Banking Supervision (Basel II) treat the exposures to these regional governments and local authorities as exposures to their central government or the credit assessment of the said regional governments and local authorities by recognised ECAIs correspond to the credit quality step 1 of Table 3 of Annex VI of the Directive 2006/48/EC in accordance with the national regulations enacted by these countries for implementing Basel II; Public sector entities, within the meaning given to that term in article 4(18) of the Directive 2006/48/EC of the countries referred to in point (f) provided that they meet the requirements set out in point (g); (3) Subject to the provisions of subparagraph (4), claims guaranteed by the bodies referred to in points to (d) of subparagraph (2) and points (f) and (g) of the same subparagraph may be included in a cover pool as public claims provided that the guarantee of the claim fulfils the following conditions: (c) (d) is clearly defined in writing; is irrevocable and unconditional; It cannot be cancelled unilaterally by the guarantor; is enforceable immediately after the default or non-payment by the debtor; and is legally effective and enforceable. (4) The total amount of claims on or, where applicable, guaranteed by the following bodies shall not exceed 20% of the outstanding balance of the covered bonds collateralised by public claims: 18

19 CENTRAL BANK OF CYPRUS (c) Central governments, central banks, regional governments, local authorities and public sector entities of the countries referred to in point (f) of subparagraph (2); multilateral development banks; and international organisations. (5) The institution shall have a clearly documented policy in writing for the prevention of excessive concentration in the cover pool, at least, in relation to the aggregate claims against individual debtors and guarantors, the geographical distribution of claims, (c) the type of claim, and (d) the maturity of claims. Criteria, terms and conditions in relation to maritime loans. 15. (1) The following terms and conditions shall apply for the inclusion of maritime loans in a cover pool as part of the basic collateralisation. (2) Only loans the terms of which do not prohibit their inclusion in a cover pool and are secured by ships governed by the laws of the Republic or of the member states may be included, as primary assets, in a cover pool of covered bonds collateralised by maritime loans. (3) The maritime loans are secured, until they are fully repaid, by a first mortgage on ships or equivalent charge on ships created in accordance with the laws of the Republic or in accordance with the laws of another member state or of a third country and ranks first in terms of priority. (c) The inclusion of a maritime loan in the cover pool extends also over all legal rights and/or claims arising from the use/disposition of the underlying collateral, e.g. from the lease or the charter of the ships or the transfer or/and the sale of the ships. In case where the mortgages/equivalent tangible charges held are at customer bank level, i.e. in addition to the cover asset they secure also other obligations and exposures of the customer, loans secured by subsequent mortgages / equivalent tangible charges may also be included as cover assets in the cover pool provided that: (i) (ii) all preceding mortgages on the underlying ship are in favour of the same institution and they are included in the same cover pool, and The institution with covered bond obligations ensures that the loans included in the cover pool have priority over the 19

20 DIRECTIVE ON THE ISSUE OF COVERED BONDS collateral against all other loans/obligations of the customer to the institution which are not included in the cover pool. (d) (e) Loans granted after the twentieth year of use of the ship shall not be included in the cover pool. This period may be shorter, depending on the expected useful economic life of the ship. The mortgage or the equivalent charge on ship securing the loan is created for an amount, at least, equal to the value of the loan. (4) The mortgage or, as the case maybe, other equivalent charge on the underlying ships securing the loan shall: (i) (ii) ensure clear and complete tangible collateral rights over the ships is registered properly and in a timely manner, (iii) all necessary legal requirements concerning completion and registration of the mortgage ensuring that the mortgage is legally effective and enforceable are met, and (iv) enable the institution, or as the case maybe, the covered bond business administrator to realise the underlying ships within a reasonable timeframe. The Central Bank expects the institution to obtain a legal confirmation to the effect that the above requirements are met, especially, in cases where the underlying ships are registered in the ship register of member states other than the Republic or of a third country. (5) The ships securing maritime loans shall be registered in the public ship register of the Republic or of another member state or of a third country. (6) An institution shall not include in the cover pool loans secured by ships which are under construction. (7) For the inclusion in the cover pool of maritime loans that have been rescheduled, the provisions of paragraph 13 (7) shall apply. (8) The value of the loan or, where the same ship(s) secures more than one loans included in the cover pool, the total value of the loans shall not exceed 60% of the value of the underlying ship(s) on the basis of valuation conducted by the institution in accordance with subparagraph (10). Loans whose value or, as the case maybe, the total value exceeds 20

21 CENTRAL BANK OF CYPRUS 60%, but below 70% of the value of the underlying ship, may be included in the cover pool provided that the total value of all such loans included in the cover pool as a percentage of the value of the covered bonds secured by the cover pool does not exceed 25% and their inclusion would not result to the weighted LTV of the cover pool exceeding 65%. (9) Throughout the term of the loan the underlying ship or ships shall be insured against the applicable risks, for an amount equal to, at least, 110% of the outstanding balance of the loan plus any ship mortgages, or equivalent charges, of equal ranking over the same ships, of third parties. The institution shall ensure that the relevant insurance cover is assigned, unconditionally, in favour of the cover pool. It shall, also, have in place adequate procedures enabling it to monitor, on an on-going basis, whether the underlying ship(s) is/are adequately, insured against the applicable risks. (10) The valuation of the underlying ship for the purposes of calculating compliance with the LTV limits referred to in subparagraph (8) above shall be conducted by an independent valuer. Independent valuer means a person who possesses the necessary qualifications, ability and experience to execute ship valuations and is independent from the credit decision process. (11) The institution must have a clearly documented policy for the prevention of excessive concentration in the cover pool, at least, in relation to individual customers, collateral, maturity and LTVs. The Central Bank expects that the cover pool will not include loans whose value, per individual borrower, is greater than 5% of the total value of the cover pool. Definition of complementary assets. 16. The following assets are defined as complementary assets: traded claims against or guaranteed by central or regional governments; Official Gazette (c) (d) deposits with the European Central Bank and central banks; deposits with multilateral development banks and international organisations the exposures against thereof are assigned a 0% risk weight for the purposes of Annex VI of the Directive 2006/48/EC; deposits with institutions, as the latter are defined in article 3 (1) (c) of the Directive 2006/49/EC of the European parliament and of the 21

22 DIRECTIVE ON THE ISSUE OF COVERED BONDS of E.U. L page 201. (e) Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast) as amended thereafter and as further amended or replaced; and traded debt securities issued by the institutions defined in point (d). Complementary assets of covered bonds collateralised by public claims. 17. The following complementary assets may be included in a cover pool as part of the basic collateralisation and the supervisory overcollateralization for covered bonds collateralised by public claims as primary assets: (c) government bonds, treasury bills or securities issued by the Republic; deposits with the European Central Bank or central banks of other member states; and deposits with credit institutions of the member states and of the countries referred to in paragraph 5 of Part 1 of Annex VI of Unit A of the Capital Requirements Directive (Australia, Canada, Japan, Switzerland and USA) whose credit assessment is assigned to the first credit quality step in accordance with point 29 of Part 1 of Annex VI of the Directive 2006/48/EC. Deposits with credit institutions in member states with a maturity not exceeding 100 days shall not be comprised by the step 1 requirement but those institutions must, as a minimum, qualify for credit quality step 2. The deposits with each credit institution shall not exceed 2% of the outstanding balance of covered bonds secured by public claims. Complementary assets of covered bonds collateralised by primary assets other than public claims. 18. In addition to the complementary assets referred to in paragraph 17, an institution with covered bond obligations may also include in a cover pool the following complementary assets as part of the basic collateralisation and the supervisory overcollateralisation for covered bonds collateralised by primary assets other than public claims: (c) sovereign bonds, treasury bills or securities issued by a member state other than the Republic; sovereign bonds, treasury bills or securities whose issuer is the central government of a country referred to in point (f) of subparagraph (2) of paragraph 14, provided that all conditions referred to in the same point are fulfilled; securities guaranteed by any of the bodies referred to in points and above; 22

23 CENTRAL BANK OF CYPRUS (d) (e) deposits with the central banks of the countries referred to in point (f) of subparagraph (2) of paragraph 14 provided that the conditions referred to in the same point are fulfilled; deposits with multilateral banks and international organisations the exposures against thereof are assigned a 0% risk weight for the purposes of Annex VI of the Directive 2006/48/EC. Counting of cover assets in the measurement of the basic collateralisation, the supervisory overcollateralisation and contractual overcollateralisation. 19. (1) Subject to the provisions of subparagraphs (2) and (3), a cover asset shall be counted in the measurement of the basic collateralisation or the supervisory overcollateralisation only if its counting is necessary for complying with the provisions of paragraph 24 and 25 respectively. Cover assets in excess of those required for complying with the said paragraphs shall be counted in the calculation of any contractual overcollateralisation only if their counting is necessary for the institution s compliance with the contractual overcollateralisation. As regard assets governed by the law of any jurisdiction other than the Republic and assets in the form of bonds which the institution intends to include in a cover pool, the Central Bank expects the institution to take legal advice in order to confirm that these assets were actually included in the cover pool and to ensure that paragraph of section 16 of the Law applies to them. (2) A cover asset ceases to be counted in the measurement of the basic collateralisation or the supervisory overcollateralization, in case where it is charged in favour of a person other than a cover pool creditor, is itself, or its underlying collateral, the subject of foreclosure or realisation or it no longer fulfils any of the criteria, terms or conditions determined: (c) (d) (e) (f) in paragraph 13, as regards a residential or commercial loan; in paragraph 14, as regards a public claim; in paragraph 15, as regards a maritime loan; in paragraph 14 as regards a complementary asset which is a public claim; in point (c) of paragraph 17 as regards a deposit with a credit institution; in point (e) of paragraph 18 as regards a deposit with multilateral banks and international organisations. 23

24 DIRECTIVE ON THE ISSUE OF COVERED BONDS (3) A cover asset ceases to be counted in the measurement of the basic collateralisation or of the supervisory overcollateralization, in case where a repayment instalment of the asset or, as the case maybe, the interest payment thereon is in arrear, as follows: if a residential or commercial loan, for a period of three months or more; if a public claim: (i) where the claim is against to or guaranteed by a central government, for a period of 10 days or more; (ii) where the claim is in the form of a bond, for a period of 10 days or more; (iii) where the claim is in the form of a loan, without prejudice to the provisions of sub-point (i), for a period of three months or more; (c) (d) if a maritime loan, for a period of three months or more; if a complementary asset: (i) (ii) where it constitutes a sovereign claim, for a period of 10 days or more; where it is a deposit with central banks or credit institutions or multilateral banks or international organisations, immediately after default of the deposit repayment. Limit as to the counting of complementary assets in the basic collateralisation. Use of cash inflows derived from cover assets. 20. Without prejudice to the provisions of paragraph 27, the total value of all complementary assets included in the cover pool and counted in the measurement of the basic collateralisation, including claims under hedging contracts that fulfil the conditions mentioned in paragraph 32 and 33, shall not exceed 15% of the total value of covered bonds that the cover pool collateralises. 21. (1) The institution shall ensure that the cash inflows derived from the cover assets are used for the purposes defined in section 28 of the Law. (2) In the context of subparagraph (1): The institution shall keep, separately for each issue or programme of issue, a Special Transaction Account, the name of which must 24

25 CENTRAL BANK OF CYPRUS clearly mention the issue and the cover pool it relates to. (c) The Special Transaction Account, shall record all cash inflows derived from the cover assets as well as all outflows from the account together with the purpose of their use and present, at any time, the unutilised amount. The institution must ensure that all transactions channelled through the said account can be reproduced and traced at any time irrespective of whether they relate to inflows or outflows. The operation of the Special Transaction Account shall be conducted only by a person or by persons that are specifically authorised, for this purpose, by the institution. The authorisation of these persons and any subsequent changes shall be clearly documented in writing. The relevant documentation shall be kept for a period of, at least, five years after the expiry or cancellation of the authorisation. The operation of the account is subject to the supervision of the cover pool monitor. (3) Without prejudice to the provisions of point of subparagraph (2), for the purposes of subsection (3) of section 40 of the Law, the institution must define procedures which ensure, at any time, the ability of tracing and calculation of the cash inflows from the cover assets that have not been used in accordance with section 28 of the Law. Addressing of set-off risk. Cover pool adequacy criteria. 22. For the purposes of section 20 of the Law, the Central Bank requires institutions to maintain, throughout the life of the covered bonds, a set-off reserve in the form of additional cover assets included in the cover pool to compensate the amount that is subject to set-off, as provided for in paragraphs 24 and 25 of this Directive. 23. (1) An approved institution shall ensure that the cover pool includes: (c) primary assets, complementary assets and hedging contracts fulfilling the criteria and conditions determined in this Directive, as basic collateralisation in accordance with the provisions of paragraph 24; complementary assets, fulfilling the criteria and conditions determined in this Directive, as supervisory overcollateralization in accordance with the provisions of paragraph 25; if required by the terms of the issue, additional assets as contractual overcollateralization. 25

26 DIRECTIVE ON THE ISSUE OF COVERED BONDS (2) The institution shall ensure that the weighted duration of the cover assets counted in the basic collateralisation and supervisory overcollateralization is longer than the weighted duration of the covered bonds collateralised by the cover pool in accordance with the method determined in paragraph 26. (3) The institution shall ensure sufficient liquidity for the servicing of the obligations under the covered bonds, excluding capital repayments, as provided in subparagraph (1) of paragraph 27. In addition, the institution shall ensure sufficient liquidity for the repayment of the covered bonds on their maturity, as provided for in subparagraphs (2) and (3) of paragraph 27. (4) In case where the institution is removed from the register of approved institutions, it shall, in addition, ensure the adequacy of the cover pool on a fair value basis in accordance with paragraph 28. Basic collateralisation. 24. (1) An institution shall include in the cover pool primary assets, complementary assets and hedging contracts fulfilling the requirements determined in this Directive of which: the total value, calculated in accordance with the provisions of subparagraphs (2) and (3), covers the value of the outstanding amount of the covered bonds by 100%; and the total present value, calculated in accordance with the provisions of subparagraphs (4) and (5), covers the total present value of the payments to cover pool creditors by 105%. (2) The value of a cover asset counted for the purposes of point of subparagraph (1) is equal to: for a cover asset that is a residential loan: (i) (ii) in case where it is not subject to set-off and its LTV is lower or equal to 75%, the value of the residential loan; in case where it is subject to set-off and its LTV is lower or equal to 75%, the value of the residential loan net of the setoff amount; (iii) in case where it is not subject to set-off and its LTV is higher than 75%, up to 100%, the value that corresponds to a 75% LTV; 26

27 CENTRAL BANK OF CYPRUS (iv) in case where it is subject to set-off and its LTV is higher than 75%, up to 100%, the value that corresponds to a 75% LTV or the value of the residential loan net of the set-off amount where this is lower; for a cover asset that is a commercial loan: (i) (ii) in case where it is not subject to set-off and its LTV is lower or equal to 60%, the value of the commercial loan; in case where it is subject to set-off and its LTV is lower or equal to 60%, the value of the commercial loan net of the setoff amount; (iii) in case where it is not subject to set-off and its LTV is higher than 60%, up to 80%, the value that corresponds to a 60% LTV; (iv) in case where it is subject to set-off and its LTV is higher than 60%, up to 80%, the value that corresponds to a 60% LTV or the value of the commercial loan net of the set-off amount where this is lower; (c) for a cover asset that is a maritime loan: (i) (ii) in case where it is not subject to set-off and its LTV is lower or equal to 60%, the value of the maritime loan; in case where it is subject to set-off and its LTV is lower or equal to 60%, the value of the maritime loan net of the set-off amount; (iii) in case where it is not subject to set-off and its LTV is higher than 60%, up to 70%, the value that corresponds to a 60% LTV; (iv) in case where it is subject to set-off and its LTV is higher than 60%, up to 70%, the value that corresponds to a 60% LTV or the value of the maritime loan net of the set-off amount where this is lower; (d) for a cover asset that is a public claim: (i) in case where it is not subject to set-off, the value of the public claim; 27

28 DIRECTIVE ON THE ISSUE OF COVERED BONDS (e) (ii) in case where it is subject to set-off, the value of the public claim net of the set-off amount; for a cover asset that is a complementary asset: (i) (ii) in case where it is not subject to set-off, the value of the complementary asset; in case where it is subject to set-off, the value of the complementary asset net of the set-off amount; (3) For the purposes of point of subparagraph (1), the value of the cover assets, as provided in subparagraph (2), is converted in the same currency in which the covered bonds are denominated, taking into account the effect of any hedging contract included in the cover pool. (4) For the purposes of point of subparagraph (1): the inflows from a cover asset shall be estimated: (i) in case where the cover asset is not subject to set-off, on basis of the nominal value; (ii) in case where the cover asset is subject to set-off, on the basis of the nominal value net of the set-off amount; the calculation of the present values shall be initially performed for each currency on the basis of swap yield curves for that specific currency and then converted in the currency used for the servicing of the covered bond by applying the euro reference rates published by the European Central Bank. In case where the cash flows are in currencies for which no euro reference rates are published by the European Central Bank, the conversion shall be made on the basis of buying and selling mean rates as published by reliable sources of information. In this connection, the following calculation shall be applied: k FX PV ( CB k i FX PV ( CA ) + k i ) + l i FX PV ( CPC ) + l j FX l j HC + j m FX m HC m 105% where: 28