Ireland To Improve Asset Covered Securities Law

by Jason Gorringe, for LawAndTax-News.com, London

27 February 2007

Irish Minister for Finance, Brian Cowen, has announced that the government has approved the publication of the Asset Covered Securities (Amendment) Bill 2007, which will amend and update the Asset Covered Securities Act 2001.

The 2001 Act laid down a statutory and regulatory framework for covered bond issuance in Ireland. Covered bonds – or asset covered securities (ACS), as they are referred to in the Irish legislation – are a very cost-efficient form of funding for banks engaged in mortgage and public sector lending activities. Over recent years, the ACS market has become one of the great success stories of the Irish financial services sector. The Bill adds the following key features to the ACS Act code:

• Mandatory overcollateralisation of the residential mortgage loan or public sector loan cover assets pools of 3% to further enhance investor protection;
• Permits the use of commercial mortgages as backing for covered bonds, with a mandatory overcollateralisation level of 10% (backing is currently effectively limited to residential mortgage loans and public sector loans);
• It will ensure that the Irish ACS regime is in compliance with the new Capital Requirements Directive (CRD) provisions relating to covered bonds;
• The use of securitised mortgage loans as backing for the bonds will be permitted, in line with the CRD’s provisions;
• It will allow the inclusion in the public sector loan cover assets pools of debt instruments of highly-rated multilateral development banks and international organisations, in line with the CRD’s provisions
• It will improve the operation and flexibility of certain provisions of the 2001 Act, such as those relating to the use of cover assets hedge contracts and the holding of cover hedge collateral; and
• It also includes a range of technical adjustments so as to improve the ACS legal framework and to reflect developments in financial services, both here and in other jurisdictions.

“Ireland is moving quickly to update the provisions of the 2001 Act in response to the developing nature of the business and to comply with new EU provisions relating to covered bonds," Cowen noted.

He added:

"While the provisions of this Bill are quite technical, its importance and priority standing are attributable to a number of factors. Firstly, it helps to provide a very competitive source of funding for mortgage lending by financial institutions and it is the method by which our major mortgage lenders raise a considerable proportion of the funds they use for mortgage lending.

"Secondly, it will help to maintain the competitiveness of Irish-based banks engaged in covered bond issuance. It is a highly-competitive activity and Ireland must move quickly if we are to realise the potential of these reforms. We now have a ‘window of opportunity’ to be among the first movers in terms of exploiting some recent reforms introduced under the EU’s Capital Requirements Directive.

"Finally, it is of strategic importance that we safeguard this important niche but growing sector as a source of high-level employment for Irish graduates and financial services professionals and confirm Ireland’s standing as a centre of excellence for innovative financial services activity.”

The minister said that the legislation will be considered by the Dail in the coming weeks and that he expects to bring it though the Oireachtas before the end of this legislative session.

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