Irish Finance Minister Announces Launch Of New Financial Products

by Amanda Banks, Tax-News.com, London

26 July 2001

Ireland's Minister for Finance, Mr Charlie McCreevy, announced last week the imminent publication of the Asset Covered Securities Bill, 2001, which enables the introduction of new financial instruments in the Irish market - mortgage and public credit covered securities similar in nature to the long standing German Pfandbriefe securities. Ireland follows in the footsteps of other European countries such as France, Spain and Luxembourg which have also introduced the enabling legislation to facilitate the issuance of similar securities in recent years.

In a statement released by the Finance Ministry, Mr McCreevy explained: 'The introduction of the euro has led to the development of an integrated and competitive money market in the euro area. This Bill will enable Irish lenders to finance their activities as efficiently as their European counterparts and demonstrates the Government's commitment to the further development of Irish capital markets and the IFSC.'

Under the Bill the new financial products - mortgage and public credit covered securities - will be secured on a pool of underlying assets (also known as cover assets) held by the institution issuing the securities, likely to be in the form of mortgages or public sector loans. Unlike conventional securitisation, the assets remain the property of the institution issuing the securities and remain on that institution's balance sheet. The cover asset pools will also be "dynamic" in that they are assets which can disimprove in quality and may be replaced by new and better assets.

The key feature of the new product is the enhanced security offered to the holders of the securities. In the event of the insolvency of the issuing institution, the cover assets must be used first to meet the claims of the holders of the securities. Ordinary creditors of the institution may not make a claim against these assets until the full obligation due to the investors in the securities has been discharged.

The enhanced security afforded by the preferential creditor status, the specification of strict matching of assets and liabilities and the regulatory environment for the product have resulted in the German Pfandbriefe attaining a AAA credit rating and becoming an extremely popular investment. They are the largest single bond type in Europe.

The product provided for in this legislation builds on the existing Pfandbriefe type product in existence across Europe, but also contains some innovative features. These include: specific interest rate risk management requirements; express powers to enter into hedging contracts to manage risk; tiered regulatory protection for investors; and clear provisions on what must happen in the event of an institution getting into financial difficulties.

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