Regulated Cvered Bnds. Cvered. In frce: The Regulated Cvered Bnds Regulatins 2008 (the Regulatins ) cme int frce n 6 March 2008. Click here t g t a cpy f the Regulatins. UCITS-cmpliant cvered bnds: The Regulatins, tgether with the new Regulated Cvered Bnds Specialist Surcebk f the FSA Handbk, establish a legal and regulatry framewrk fr the issue f UCITS-cmpliant cvered bnds in the UK. Advantages f UCITS-cmpliant cvered bnds: Investments in UCITS-cmpliant cvered bnds enable certain institutinal investrs t take advantage f mre favurable regulatry capital rules and higher prudential investment limits cmpared with investments in nn-cmpliant cvered bnds. Issuers: Under the Regulatins, regulated cvered bnds may nly be issued by UK credit institutins. An issuer must be authrised t accept depsits under Part 4 f the Financial Services and Markets Act 2000 and must als have its registered ffice in the UK. As a result, EEA credit institutins and credit institutins established in third cuntries utside the EEA are currently unable t issue regulated cvered bnds, althugh it is understd that this plicy may be subject t review in the future. Fr the time being, EEA and third cuntry credit institutins may, hwever, cntinue t issue nn-cmpliant cvered bnds in the UK utside the new regime (Regulatin 9). Structure: The regime prvides fr regulated cvered bnds t be issued under the existing UK cvered bnd market s structured cvered bnd mdel. Under this mdel, assets which will cmprise the asset pl are transferred t a separate wner in rder t ring-fence them frm the issuer s general creditrs in its inslvency, fr the benefit f regulated cvered bndhlders. Owner: An wner must be incrprated as a cmpany r a limited liability partnership in England and Wales, Sctland r Nrthern Ireland with its registered ffice in the UK. It must als have its centre f main interests in the UK (Regulatin 21). Types f eligible prperty: Assets which can be held by the wner in an asset pl include: all eligible cllateral fr cvered bnds listed in paragraph 68 f Annex VI f the Banking Cnslidatin Directive (Directive 2006/48/EC) (with the exceptin f any such cllateral qualifying fr credit quality step 2). This includes: 1
expsures t r guaranteed by EU gvernments, central banks and ther public sectr entities; expsures t r guaranteed by nn-eu gvernments, central banks r internatinal rganisatins which are rated with credit quality step 1; certain expsures t nn-eu public sectr entities which are rated with credit quality step 1; residential and cmmercial mrtgages up t maximum LTV ratis f 80% and 60% respectively; residential mrtgage-backed securities r cmmercial mrtgage-backed securities issued by special purpse vehicles incrprated in the UK r anther EEA state, subject t maximum LTV ratis f 80% and 60% respectively and which are rated with credit quality step 1; and ship mrtgages subject t an LTV rati f 60%; lans t a scial landlrd registered under the Husing Act 1996 (r t a persn which n-lends t such a registered scial landlrd) which in each case are secured ver husing accmmdatin r rental incme frm husing accmmdatin; and lans t a public-private partnership prject cmpany (as defined in the Inslvency Act 1986) (r t a persn which n-lends t a public-private partnership prject cmpany) where the lans are secured by payments made by a public bdy with step-in rights. Residential mrtgage-backed securities and cmmercial mrtgage-backed securities must be riginated by, r transferred t the asset pl by, the issuer r a cnnected persn f the issuer. A cnnected persn fr these purpses includes a parent r subsidiary r ther grup cmpany f the issuer incrprated in the UK and (1) whse centre f main interests is als lcated in the UK, r (2) which is authrised by the FSA in the UK t accept depsits (Regulatin 2(1)). Lcatin f eligible prperty: Assets in the asset pl must be situated in an EEA State (the 27 Member States f the Eurpean Unin tgether with Iceland, Liechtenstein and Nrway), Switzerland, USA, Japan, Canada, Australia, New Zealand, the Channel Islands r the Isle f Man (Regulatin 2(2)). Asset pl: This includes: sums derived frm the issue f regulated cvered bnds and lent t the wner, in additin t eligible prperty acquired with these sums (under the Regulatins, an issuer is required t lend sums derived frm the issue f a regulated cvered bnd t an wner t enable it t acquire eligible prperty); eligible prperty transferred t the asset pl by the issuer r a cnnected persn t ensure, amngst ther things, that the asset pl cmplies with relevant asset cverage tests, FSA directins r a curt rder; cntracts relating t the asset pl r t a regulated cvered bnd; sums derived frm any f the abve, e.g. incme frm securities held in the asset pl; and 2
credit made available t the wner (ther than by the issuer) t meet, amngst ther things, relevant asset cverage tests. These assets (with the exceptin f sums derived frm assets in the asset pl) will nly frm part f the asset pl if they are recrded as belnging t that asset pl by the issuer, the wner r by an administratr n their behalf (Regulatin 3). Applicatin prcedure: A new specialist surcebk in the FSA Handbk, the Regulated Cvered Bnds Surcebk, sets ut detailed requirements regarding the prcedure fr applicatin and nging bligatins f issuers and wners. An issuer may apply fr admissin t the register f issuers and fr a prpsed cvered bnd r cvered bnd prgramme t be admitted t the register f regulated cvered bnds. As part f this applicatin prcedure, an issuer must give details f r cnfirm: the prvisins f the prgramme which are designed t ensure that the asset pl will at all times cntain sufficient assets t meet all f the claims f regulated cvered bndhlders and sums required fr the maintenance, administratin and winding-up f the asset pl (e.g. asset cverage test, ver-cllateralisatin requirements and asset pl mnitring prvisins, and prvisins requiring capital cntributins r the sale f cllateral if an asset cverage test is breached). The issuer and wner must make arrangements fr mnitring the asset pl (Regulatins 17 and 23) and the FSA has an bligatin t give general guidance n the factrs it will take int accunt in determining the issuer s and wner s cmpliance with requirements related t sufficiency f the asset pl (Regulatin 42); arrangements fr the replacement f service-prviders; the type and lcatin f the assets which the wner is allwed t hld under the terms f the regulated cvered bnd r prgramme, asset valuatin methds, the prvisins triggering the winding-up f the asset pl and the prcedure fr such winding-up; the receipt f a legal pinin cnfirming that the prgramme cmplies with the Regulatins and which als addresses certain key pints, including the true sale f assets t the wner, the risk f clawback f assets n inslvency, enfrceability f security and the enfrceability f prgramme dcuments; and the receipt f accuntants advice cnfirming that the asset pl meets the prgramme s ver-cllateralisatin requirements and that due diligence sampling prcedures have been carried ut t verify the cmpsitin f the asset pl. The applicatin must be supprted by a cnfirmatin given by a senir manager f the issuer that n the basis f advice received, the cvered bnd r prgramme will cmply with the Regulatins and the RCB surcebk. The cnfirmatin will be available fr public inspectin n the FSA s website. Onging cmpliance bligatins: The issuer must send infrmatin n the asset pl t the FSA as frequently as it sends investr reprts t regulated cvered bndhlders, and at least quarterly. An annual cmpliance cnfirmatin must be given by a senir manager f the issuer, cnfirming in particular that the asset pl is sufficient t meet all f the claims f regulated cvered bndhlders and sums required fr the maintenance, administratin and winding-up f the asset pl. Accuntants advice and legal pinins must als be updated as necessary. 3
Timing: The FSA must reach a decisin n new applicatins within 6 mnths frm the date f applicatin r submissin f any further infrmatin required by it (Regulatin 13). The FSA has indicated that all issuers applying fr admissin t the register f issuers by 31 March 2008 will all be admitted t the register n the same date. Material changes and change f issuer r wner: Requests t make material changes t an issue r prgramme r t substitute a new wner must be ntified t the FSA and dealt with by the FSA within 3 mnths (Regulatins 20 and 25). An issuer may transfer its rights and bligatins under a regulated cvered bnd r regulated cvered bnd prgramme t a substitute issuer withut applying t the FSA, prvided that the substitute issuer has already been admitted by the FSA t the register f issuers (Regulatin 19). Winding up f asset pl: The Regulatins set ut hw the asset pl shuld be distributed in the event that the wner is wund up. Bradly, they prvide fr the asset pl t be used t pay the claims f regulated cvered bndhlders, persns prviding services in the transactin fr the benefit f bndhlders, hedge cunterparties and liquidity prviders (ther than the issuer), subject t the prir payment f vluntary r cmpulsry liquidatin expenses. The claims f regulated bndhlders must rank at least pari passu with the claims f the transactin service-prviders, hedge cunterparties and liquidity prviders ( super-senir creditrs ). Hwever, the Regulatins als prvide that amunts prperly payable by varius inslvency fficials (including a liquidatr, prvisinal liquidatr and administratr) t super-senir creditrs may be cnsidered as expenses incurred in a winding up, administratin, administrative receivership r receiver. In the cntext f a liquidatin f the wner, these expenses wuld effectively be payable in pririty t amunts due t regulated cvered bndhlders (Regulatins 27 and 29). Prir security ver assets in the asset pl: The Regulatins als specify the rder f distributin where a third party is fund t have taken prir security ver assets cntained in the asset pl. The Regulatins prvide that the prceeds f realisatin f the prir security must be applied twards the payment f bndhlders and super-senir creditrs claims in pririty t the third party s secured claims (but subject t the payment f supersenir creditrs expenses by certain inslvency fficials, e.g. by an administrative receiver r receiver and manager, and subject t the payment f any ther expenses relating t that charge). This prvisin des nt apply if the wner is being wund up (Regulatins 28 and 29). Cntractually agreed pririty f payments: Where assets in the asset pl are charged as security fr several claims and the creditrs f that charge agree t give pririty t the claims f a third party abve the claims f the bndhlders and the super-senir creditrs, the prceeds f realisatin f that charge must first be applied in payment f the claims f the bndhlders and super-senir creditrs (subject again t the payment f expenses f certain inslvency fficials and t the payment f any ther expenses relating t that charge). This prvisin des nt apply if the wner is being wund up (Regulatins 28 and 29). Supervisin f issuers and wners: The FSA is respnsible fr supervising issuers and wners cmpliance with the Regulatins and the Regulated Cvered Bnds Surcebk, with the aim f ensuring that all regulated cvered bnds which are issued in the UK in practice cntinue t cmply with the requirements f the UCITS Directive at all times. Amngst ther things, the FSA must take int accunt the need t preserve investr cnfidence in, and the desirability f maintaining the gd reputatin f, the regulated cvered bnds sectr in the United Kingdm by the issuance f high quality regulated 4
cvered bnds. The FSA has bradly the same enfrcement pwers as it has under the Financial Services and Markets Act 2000 and it has cnfirmed that it will exercise these enfrcement pwers in the same manner as set ut in Decisin Prcedure and Penalties Manual and Enfrcement Guide. It is specifically required t take int accunt the impact n bndhlders f impsing a financial penalty n any party (Regulatins 6 and 30 t 40). Nn-cmpliance by an issuer r wner: In additin t its general enfrcement pwers, the FSA can remve an issuer frm the register f issuers and can direct the winding up f an wner, if it appears that the issuer r wner, as the case may be, is failing r has failed t cmply with any requirement impsed n it by the Regulatins. A regulated cvered bnd cannt be remved frm the register f regulated cvered bnds until its maturity date. FSA funding: The FSA s supervisry duties under the Regulatins are utside its statutry functins in cnnectin with the financial markets in general under the Financial Services and Markets Act 2000, and will be funded by an annual levy impsed n registered issuers f regulated cvered bnds. The initial annual levy has been estimated by the FSA t be in the regin f 20,000 per issuer. Interests f bndhlders: As part f the applicatin prcedure, an issuer must demnstrate that its cvered bnd prgramme cntains prvisins which enable the views f bndhlders t be taken int accunt in a timely way, e.g. thrugh a trustee. Mdificatin f existing legislatin: Several prvisins f the Cmpanies Act 1985, the Cmpanies Act 2006, the Inslvency Act 1986, the Inslvency Rules 1986 and the Crss Brder Inslvency Regulatins 2006 have been disapplied t ensure that n existing statutry prvisins will affect the peratin f the Regulatins, and in particular t make sure that n statutry prvisins cnflict with the prescribed rder f distributin f the prceeds f realisatin f security and the pririty f payments t be applied in a winding up f an wner. Click here t g t a cpy f the Regulatins. Linklaters advised the Internatinal Capital Market Assciatin in cnnectin with the Regulatins during extensive plicy and drafting discussins with HM Treasury and the Financial Services Authrity. Fr further infrmatin speak t Jim Rice r Nicla Kemp r yur usual cntact at Linklaters. 5