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Why regulate registered covered bonds in the Netherlands?

Q&A

Question:

Why regulate registered covered bonds in the Netherlands?

Published: 02 March 2009

Answer:

Various European Directives contain regulations on covered bonds: the UCITS Directive1, the Recast Banking Directive2, the Recast Capital Adequacy Directive3, the Third Non-life Insurance Directive4 and the Life Insurance Directive5.

Section 22(4) of the UCITS Directive states that the limit imposed on investments by a UCITS in securities or money market instruments issued by a single issuer to 5% of its assets, may be raised by a Member State to a maximum of 25% in the case of certain bonds:

  1. that are issued by a credit institution having its registered office in a Member State;
  2. which credit institution is subject by law to special public supervision designed to protect bond-holders;
  3. where, in particular, sums deriving from the issue of the bonds must be invested in conformity with the law in assets which, during the whole period of validity of the bonds, are capable of covering claims attaching to the bonds;
  4. which assets, in the event of failure of the issuer, will be used on a priority basis for the reimbursement of the principal and payment of the accrued interest.

The Recast Banking Directive provides for a relaxed solvency regime in the case of positions in covered bonds, i.e. bonds as defined in Article 22(4) of the UCITS Directive covered by means of the assets described in Annex VI, points 68–70, of the recast Banking Directive. These points list the assets qualifying as assets covering the said bonds and the relating limits to be observed.

Article 22(4) of the Third Non-Life Insurance Directive and Article 24(4) of the Life Insurance Directive permit life and non-life insurers, in deviation from the basic rule, to invest up to 40% of their technical provisions assets in registered covered bonds.

The European Directives relating to covered bonds have, over the years, been implemented in almost all EU Member States. The Netherlands, following in the footsteps of the United Kingdom, implemented them on 1 July 2008, motivated by the wish to enable Dutch banks, like their counterparts elsewhere, to use registered covered bonds as a finance instrument. The introduction of regulations relating to registered covered bonds in the Netherlands thus also contributes to creating a level playing field vis-à-vis other European Member States such as Germany, France, Denmark and Spain.

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[1] Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), OJ L 375, as amended by Directive 2001/108/EC of the European Parliament and of the Council or 21 January 2002, OJ L 41.
[2] 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), PB L 177.
[3] Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast), PB L 177.
[4] Council Directive 92/49/EEC of 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC, OJ L 228, (third non-life insurance Directive).
[5] Directive 2002/83/EC of the European Parliament and of the Council of 5 November 2002 concerning life assurance, PB L 345.

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