UK Overseas Recognition Regimes

UK Overseas Recognition Regime

The UK Government today published a response to the Policy Update 2025 setting out HM Treasury’s approach to replacing the existing equivalence regimes inherited from the EU and in the UK CRR with legislation which is tailored to the UK’s needs, and which fully reflects the government’s outcomes-focused approach to the unilateral regulatory recognition of overseas jurisdictions. These are called ‘Overseas Recognition Regimes’.

HM Treasury explained its intention to restate existing equivalence decisions made under the UK CRR equivalence regimes so that jurisdictions currently deemed equivalent are treated as designated under the Overseas Prudential Requirements Regime (OPRR) and generally to preserve the effects of the current decisions, except regarding exposures to exchanges.

HM Treasury has today published the draft regulations for the OPRR and is seeking industry views by 2 April 2026. These regulations are intended to legislate for the approach set out below. Responses can be sent by email to Prudential.Consultation@hmtreasury.gov.uk. 

HM Treasury agrees that ensuring an appropriate prudential treatment of overseas covered bonds is important for the safety and soundness and growth and competitiveness of the UK financial services sector and the UK as a whole.

HM Treasury stated that it considers that the most timely, prudent and proportionate way to achieve these objectives in respect of the categorisation of covered bonds for liquidity purposes is to maintain the approach whereby firms are able to use certain non-UK covered bonds to meet their LCR requirements, within the criteria specified in PRA rules. The PRA statement on 15 July 2025, clarified that the PRA does not expect firms to alter their approach to the inclusion of non-UK covered bonds in Level 2A HQLA under the Liquidity Coverage Ratio (CRR) Part of the PRA Rulebook. That statement remains applicable. Since then, PRA has completed a review of the current liquidity treatment of non-UK covered bonds, and intends to consult on changes to PRA rules to confirm firms’ role in assessing the equivalence of non-UK covered bonds included in Level 2A HQLA.

HM Treasury and the PRA will work together to explore the most appropriate prudential treatment of overseas covered bonds for capital purposes. To facilitate options to address this, HM Treasury intends to introduce a power to designate jurisdictions through the OPRR for overseas covered bonds. This would allow HM Treasury, including through advice provided by the FCA and PRA, to consider whether the designation of a particular jurisdiction would advance HM Treasury’s policy objectives and introduce the most appropriate capital treatment for overseas covered bonds. The draft OPRR legislation, published today, will introduce this power in regulation 5..

GSE Change Status?

GSE Change in Status?

Will the status of the GSEs ever change? It is questionable whether any change can be accomplished in a midterm election year. We have seen some action in 2025. There is a strong concern whether the private residential mortgage market has the capacity to pick up any reduction in the market percentage currently handled by the GSEs. The private market for securitization of residential mortgage loan (“RMBS”) is only about 20% of its pre-crisis size. SEC registered RMBS is non-existent today, likely as a result of an ABS rule change in 2014 that requires disclosure of up to 270 data point for every mortgage loan. This disclosure is required at the time of issuance and periodically thereafter for the life of the securitization. There has not been a single SEC registered RMBS since this requirement became effective. So the private market today in RMBS consists solely of private placements, for which the market is more restrictive.  

Relying on this more restrictive market to take up the slack caused by a reduced GSE footprint would seem unlikely. Without the more robust SEC registered RMBS market functioning, reducing the GSE footprint would seem risky; any significant impairment of the ability to finance single family homes would adversely affect the economy and be politically fatal.

The new administration at the SEC has taken a step in resolving this dilemma with the publication of a concept release seeking comment generally on the Commission’s ABS rule and particularly on the loan level data requirements. See Release 33-11391, Sept. 26, 2025. The comment period closed in early December, so the comments are now available online. If the SEC is able to find a disclosure solution acceptable to the market, it may be able to restart the SEC registered RMBS market. Only then would change in the status of the GSEs be possible.

GSE Reform Coming?

GSE Reform Coming?

The Wall Street Journal (6 Feb 2025) reported that the newly confirmed Secretary of HUD (Housing and Urban Development), Mr. Scott Turner, will be “quarterbacking” an effort to privatize Fannie Mae and Freddie Mac, working with the Treasury and Congress.  The Journal said that “it remains to be seen how much of a priority privatization is for President Trump.”  Skeptics warn of damage to the forward market for MBS that permits lenders to lock in mortgage rates for borrowers at the time of application for a loan. 

If there is movement on the two GSEs, there is likely to be a wider discussion of housing finance, which opens the door for discussing covered bonds as an element of a stronger private market to support housing if the roles of Fannie Mae and Freddie Mac are reduced.  As noted previously, SEC registered RMBS is also seen as an important contributor to a stronger private market for financing residential mortgage loans.

Videos

These are videos from recent covered bond conferences and other events that relate to Canadian or U.S.$ covered bonds.


ECBC Covered Bond Video Series | Denmark • ECBC

ECBC Covered Bond Video Series | Norway • ECBC

2025 SF Conversations • Fitch

European Covered Bond Directive • Euromoney

Covered bonds and securitisations are easily confused • Euromoney

TCB Roadshow 2022 | The implications of growth: Canadian covered bonds in 2022 and beyond

Mayer Brown Webinar • 2020
Covered Bonds Update in the United States
Jerry Marlatt and Laura Drumm

US $ covered bonds – back again • Euromoney 2019

Equal treatment for non-EU covered bonds? What’s needed? • Euromoney 2018

Euromoney/ECBC Covered Bond Congress 2018, 13 September 2018 • Munich
Concerns about the Covered Bond Directive.

Euromoney/ECBC Covered Bond Congress 2018, 13 September 2018 • Munich
Outlook for the Canadian covered bond market and prospects for the U.S. market

Euromoney/ECBC Covered Bond Congress 2018, 13 September 2018 • Munich
Impact of MREL and TLAC on covered bond issuance.

Euromoney/ECBC North America Covered Bond Forum, 19 April 2018 • Vancouver
Keynote Address by Sandra Johnson, FHFA

Euromoney/ECBC North America Covered Bond Forum, 19 April 2018 • Vancouver
Interview with Sandra Johnson, FHFA

Euromoney/ECBC North America Covered Bond Forum, 19 April 2018 • Vancouver
Interview with Jerry Marlatt on "What Hope for America".

Congressman Jeb Hensarling On Covered Bonds • 2010

Congressman Scott Garrett On Covered Bonds • 2010

Garrett Introduces Covered Bonds Amendment • 2010


Resiliency of Canadian Covered Bonds

Resiliency of Canadian Covered Bonds

In the current world of sharply rising interest rates and a possible recession, questions have arisen about the resiliency of the cover pools for Canadian covered bonds. Additional focus is brought to this question by the declining housing values in Canada — Vancouver and Toronto in particular have seen reported 15 to 20 per cent declines in house prices from recent peaks.

Canadian covered bonds take their strength from several factors, not the least of which is the conservative nature of property investors in Canada, combined with fairly strict underwriting standards set by OSFI. This has resulted historically in a typical annual loss rate for residential mortgage pools for most banks in basis points in the single-digit or low double-digit range.

This low loss experience is supported by the full recourse nature of Canadian mortgage loans. A mortgagor under Canadian law is personally liable for full payment of the mortgage loan if the loan is foreclosed on and liquidated at a loss. Unlike the case in many U.S. States, a Canadian property owner cannot turn over the keys to house and walk away free of the debt.

Another protection for Canadian cover pools is the monthly Asset Coverage Test that each program must pass. If the value of eligible mortgage loans in the cover pool does not exceed the outstanding amount of covered bonds by the required overcollateralization amount, the test is failed. Defaulted mortgage loans are not included in test. If the test is failed, the issuing bank is required to transfer additional, non-defaulted eligible mortgage loans to the cover pool. Thus, the cover pool is constantly refreshed with performing mortgage loans protecting the value of collateral backing the covered bonds.

More protection is provided by the requirement that an eligible mortgage loan for Canadian cover pools must have a loan to value ratio not exceeding 80%, measured each month based on an index of current property values in the location of the property. If the loan to value ratio exceeds 80% at any time, only only the portion of the loan not exceeding 80% of the value of the property is included in the cover pool for the calculation. This means that the value of the cover pool is protected from declining property values.

Moreover, the typical average loan to value ratio of mortgage loans in cover pools for Canadian covered bonds is between 50% and 60%, which provides a substantial buffer before loan amounts are reduced in the cover pool because they fail the loan to value maximum for eligibility. Statistical information on cover pools is available in the monthly report provided to investors by each of the Canadian banks.

Lastly, in addition to strong cover pools, investors in Canadian covered bonds hold exposures to banks that operate in a conservative banking environment. Canadian banks came through the financial crisis of 2008 in excellent shape and continue to be highly regarded in international capital markets. Banking regulation in Canada contributes to the conservative environment with a with a regulatory approach that prioritizes stability. The recent tightening of mortgage loan underwriting evidences this caution.

This collection of protections is what supports the perception of quasi-sovereign risk for Canadian covered bonds.

Stellar Year for Canadian Covered Bonds

A Smashing Year for the Canadians

2022 was a remarkable year for Canadian covered bond issuers. The Canadians issued 68 series of covered bonds in 2022 for an equivalent total of C$100,515 million, more than doubling the 30 offerings of 2021. There were 58 offerings in 2020, but 25 of those were retained offerings for repo with the central bank, so don’t count as public offerings.

In 2021, the Canadians were 20 per cent of the global market in covered bond issuance. While the final numbers for 2022 are not yet available, with 68 offerings it is likely that the Canadian banks have not slipped from that position.

In 2022, the Canadians issued in six different currencies: USD, A$, C$, CHF, £, and €. Euro was the most popular currency, with 29 offerings for €32,368 million, followed by the USD with 14 offerings for $24,705 million. RBC was the most active issuer with 18 offerings, followed by BNS with 14 offerings.

Some of the motivation for issuance likely was replacing funding obtained at the beginning of the pandemic from the Canadian central bank in 2020, when about C$90,000 million of covered bonds was taken to the central bank by the Canadian banks. Most of those loans from the central bank were two-year loans.

The elevated Canadian covered bond issuance was also responsible in large part for the largest U.S. dollar covered bond issuance since 2012. With a total U.S. dollar covered bond issuance of $32,500 million in 20 offerings in 2022, the Canadian banks accounted for $24,705 million in 14 offerings, well above their typical 50% of the market.

In 2023, Canadian banks have 43 series of covered bonds maturing, 16 of which are in euros and 13 in Canadian dollars. Of the maturing Canadian dollar series, ten of the series, representing C$33,500 million, were retained covered bonds transferred by repo to the central bank. With so many series maturing next year, it likely that 2023 is going to be another very active year for Canadian banks in covered bonds.

1Q22 – A Blistering Pace in 1st Quarter



A Blistering Pace in 1Q22

It was a notable first quarter for Canadian covered bond issuers: 19 issuances across dollars, sterling and euros [see the table below].  All six of the major Canadian banks issued bonds.  On a Canadian dollar equivalence basis, the banks issued C$38.7 billion. Continuing a trend set last year, the Canadians represented 20% of covered bond offerings for the quarter — punching well above their weight. This activity is probably partly attributable to the heavy retained issuance by the banks at the start of the pandemic in March and April 2020, when nearly C$90 billion was taken to the central bank for funding. This was the inaugural covered bond repo program by the central bank. Issuance limits were temporarily increased at the time to support the central bank program and provide enhanced liquidity to the banks. Most of those covered bonds had two year maturities and are running off this year.
Pricing Issuer Series Cur. (mm) Coupon Maturity Tenor Spread Type
2022-03-30 National Bank of Canada CBL18 $ 1250 2.900 2027-04-06 5yr +65 144A
2022-03-29 Bank of Montreal CBL28 € 1750 1.000 2027-04-05 5yr +8 Reg S
2022-03-17 Toronto-Dominion Bank CBL34 € 2500 0.864 2027-03-24 5yr +11 Reg S
2022-03-17 Royal Bank of Canada CB69 € 150 1.296 2037-03-24 15yr +15 Reg S
2022-03-17 Royal Bank of Canada CB70 $ 1500 2.600 2027-03-24 5yr +65 144A
2022-03-15 Royal Bank of Canada CB68 € 2000 0.625 2026-03-25 4yr +9 Reg S
2022-03-08 Bank of Nova Scotia CBL42 € 2000 0.450 2026-03-16 5yr +10 Reg S
2022-03-03 CIBC CBL40 $ 100 SOFR+45 2025-03-10 3yr +45 144A
2022-03-03 CIBC CBL39 € 2500 0.375 2026-03-10 4yr +6 Reg S
2022-03-02 Bank of Nova Scotia CBL41 $ 2250 2.170 2027-03-09 5yr +58 144A
2022-03-02 Bank of Montreal CBL27 £ 600 SONIA+40 2027-03-09 5yr +40 Reg S
2022-02-02 Bank of Nova Scotia CBL36-2 € 100 0.623 2041-10-15 20yr +16 Reg S
2022-02-01 FCDQ CBL14 € 750 0.250 2027-02-08 5yr +5 Reg S
2022-01-20 National Bank of Canada CBL17 € 1000 0.125 2027-01-27 5yr +5 Reg S
2022-01-19 Bank of Montreal CBL26 € 2750 0.125 2027-01-26 5yr +6 Reg S
2022-01-18 Royal Bank of Canada CB67 € 2000 0.125 2027-01-25 5.25yr +6 Reg S
2022-01-17 Bank of Nova Scotia CBL39 £ 1300 SONIA+100 2026-01-26 4yr +28 Reg S
2022-01-17 Bank of Nova Scotia CBL40 € 1250 0.375 2030-03-26 8yr +10 Reg S
2022-01-11 CIBC CBL38 $ 2500 1.846 2027-01-19 5yr +48 144A/Reg S

Covered Bonds – Flight to Quality


Critical Liquidity Source in Times of Stress

In the past ten days, covered bonds have shown their value in a crisis for the Canadian banks. They have issued covered bonds in Europe at least seven times in that last ten days. When senior debt and ABS is difficult to bring to market, covered bonds have a ready investor base. Covered bonds represent a flight to quality when markets are difficult. The Canadians have been so successful that they have irritated European funding officials. See the story in Global Capital.

Canadian banks survived the last financial crisis in better condition than perhaps any other OECD banking system. And the Canadian banking system, although relatively small, remains one of the preeminent banking systems in the world. The six major Canadian banks dominate the banking market in Canada. They are quite conservative. They tend to follow each other and particularly the traditional leader, Royal Bank of Canada. Compared, for example to the banking system in the United States, the Canadian banks have had remarkably few crises. It is a close-knit community and a comfortably profitable business in Canada.

When the crisis created by the coronavirus COVID-19 began to envelope the Western world, the Canadian banks moved quickly to shore up their liquidity. An important tool for accomplishing this has been covered bonds. In uncertain times, investors tend to seek sovereign paper in a flight to quality. Covered bonds provide an attractive alternative to sovereign paper. Covered bonds have a similar risk profile to sovereign bonds but generally provide better yields.

Why did the banks choose Europe to issue their bonds? Because of favorable currency swap costs. And the market proved quite receptive. Even though there were at times two or three Canadian banks in the market at same time, they all managed to issue benchmark-size offerings at favorable rates. There was clearly an investor hunger for safe assets with a decent yield and the Canadians met that need quickly. They were in and out of the market before their European competitors had even contemplated challenging the market turmoil.

And although the Canadians deserve credit for moving quickly, the moral of the story is really the value of covered bonds in stressful times. As it did during the financial crisis, the covered bond market continues to be open and available to provide critical liquidity when other finding sources are spotty or not available at all. And just to note, this is a funding tool that U.S. banks do not have access to.

Sub-Prime Mortgage Loans

A New Narrative

A lot of ink has been spilled assigning liability for the financial crisis to sub-prime mortgage loans.The role of sub-prime mortgage loans was so prominent that it has been called the ‘sub-prime crisis’. But a recent study by the New York Federal Reserve Bank shows how wrong this conclusion is.

In a paper published on Liberty Street Economics, “Did the Subprime Borrowers Drive the Housing Boom?” the authors demonstrate quite clearly, for example, that inflated appraisals were not concentrated in sub-prime mortgages.

They also demonstrate that the boom in house prices and sub-prime mortgage loans occurred in different places (see the maps below). They show a clear negative correlation between house price appreciation and the sub-prime share of home purchase mortgages.

As the authors say, “Our analysis contributes to a ‘new narrative‘ that rapid U.S. house price appreciation during the 2000s was mainly driven by prime borrowers. Hence, policy prescriptions intended to limit access to credit for marginal borrowers may be insufficient by themselves to prevent a future housing boom.”

Reg AB II — BNS SEC Filing Expires

BNS SEC Filing Expires

On September 9, 2016, the SEC registration statement of Bank of Nova Scotia for its covered bonds expired without renewal.*  This was followed by the pricing on September 13, 2016, of a $1.5 billion offering of five year covered bonds by BNS in a 144A private placement.  Apparently BNS, like BMO, has abandoned the SEC registered format for its covered bonds. 

On inquiry, BNS stated that …….  This action now leaves Royal Bank of Canada as the sole Canadian bank with an SEC registered covered bond program.* 

The RBC program was inaugurated in September 2012 to much acclaim.  While RBC has not publicly stated what action it will take regarding the loan-level disclosure requirements imposed under Regulation AB starting in November 2016, the response of BMO and BNS suggest that there may be no further issuances of SEC registered covered bonds after November.  This will certainly be a disappointment to investors and will increase the funding costs of the banks.

Reg AB II — BMO Abandons SEC Filing

BMO Abandons SEC Filing

On December 16, 2015, Bank of Montreal quietly withdrew its SEC registration statement for covered bonds.  The registration statement became effective on November 8, 2013.   The registration statement was originally filed in July 2013.   Prior to the filing, BMO had obtained a no-action letter from the SEC staff to permit the Guarantor to register its Guarantee on the same shelf registration statement as the bond to be issued by the bank. 

On inquiry, BMO reports that there were a number of reasons for their withdrawal of the registrations statement.  One of the reasons for the withdrawal was the prospect of needing to comply with the loan-level disclosure requirements of Regulation AB beginning in November 2016.   That compliance requirement arose from the conditions imposed on BMO by the no-action letter.   BMO cited the uncertainty of its ability under Canadian law to provide the information required and the significant cost of altering its systems nationwide to collect the information.

This is the first of the three Canadian banks with SEC registration statements to react publicly to the new loan-level disclosure requirements imposed by the SEC.   (See Regulation AB II and Canadian Covered Bonds– the end of SEC registered covered bonds?).   This action suggests that the other two banks, Bank of Nova Scotia and Royal bank of Canada, may cease issuing SEC registered covered bonds by the November 2016 date.   Neither of the two banks, however, has publicly stated its intent in this regard.

EU Covered Bond Framework

EU Covered Bond Framework

December 2019 saw the enactment in European Union of a Covered Bond Framework consisting of a Covered Bond Directive and a Covered Bond Regulation to harmonize covered bond legislation across the Member States of the EU. Member States are required to adopt and publish laws, rules and regulations by July 8, 2021 necessary to comply with the Directive, which shall be effective not later than July 8, 2022. Covered bonds compliant with the Covered Bond Directive are treated preferentially under the Capital Requirements Directive (as amended by the Covered Bond Regulation) and may qualify for credit quality step 1 under the Liquidity Coverage Requirement Regulation. Covered bonds are defined under the Directive to be covered bonds issued by credit institutions subject to the Capital Requirements Directive. Accordingly, covered bonds issued by Canadian or Australian or other third-country issuers of covered bond will not qualify for preferential treatment under the Capital Requirements and will therefore be less attractive to investors that are EU credit institutions than covered bonds issued by EU credit institutions. This disadvantage is addressed under the Directive by a requirement that “[t]he Commission should therefore, in close cooperation with EBA, assess the need and relevance for an equivalence regime to be introduced for third-country issuers of, and investors in, covered bonds”. And that “[t]he Commission should, no more than two years after the date from which Member States are to apply the provisions of national law transposing this Directive, submit a report thereon to the European Parliament and to the Council, together with a legislative proposal, if appropriate.” The report of the Commission on the need for an equivalence regime therefore needs to be delivered to the European Parliament no later than July 8, 2024. There is no basis to predict when equivalence legislation, if any, might be adopted. The bottom line is that third-country issuers from Canada, Australia and other jurisdictions are likely to be at a disadvantage until at least 2025.

U.S. Legislation in 2020

U.S. Legislation in 2020

Where are we with U.S. legislation for covered bonds starting 2020?

First, we are in a highly contentious and partisan presidential election year. A few days ago CNN reported that there was a tie for the most admired person in the United States: Donald Trump and Barak Obama. The division is deep and wide.

Second, the possibility for bi-partisan legislation is not high, but there has been some bi-partisan legislation, even during the impeachment hearings in the House. For example, the amended North America Free Trade Agreement was passed. So there is some possibility of passage of legislation, as there always is even in an election year.

Third, it is unlikely that covered bond legislation will be separated from GSE reform, because GSE reform will inevitably examine housing finance and the role of the government in housing finance. Until that is settled it probably makes little sense to initiate a new form of housing finance in the form of covered bonds.

It seems very unlikely that covered bonds would not be a viable form of housing finance in a post-GSE reform world, but why put the cart before the horse.

That leaves us with the question of the prospects for GSE reform in 2020. The GSEs have now been in conservatorship for more than 10 years. The current situation of the GSEs is obviously acceptable to many sectors. Nevertheless, there remains a desire to resolve the situation and clean up this unfinished business.

In June 2018, the President of the United States released a reform and reorganization plan entitled “Delivering Government Solutions in the 21st Century.” This plan includes a proposal to convert Fannie Mae and Freddie Mac into private sector entities, to provide an express government guarantee of mortgage loans to Fannie, Freddie and other qualifying entities, and to restructure financial support for low and moderate income family mortgage loans into the Department of Housing and Urban Development.

In March 2019, the President issued a Presidential Memorandum directing the Secretary of the Treasury to develop a plan to reform housing finance. In September 2019, the Department of the Treasury issued The Treasury Housing Reform Plan. While the Plan provides many specifics for the resolution of the conservatorship of Fannie Mae and Freddie Mac, much of the Plan is dependent on enabling legislation, the prospects for which appear rather bleak in this strained political environment. As part of the plan, the Federal Housing Finance Agency, as Conservator of Fannie and Freddie, exercised its administrative power in the fall of 2019 to permit the GSEs to retain their profits and begin rebuilding their capital as an initial step to resolving the conservatorships. This step increases the pressure on Democrats in Congress to agree to a resolution of Fannie and Freddie.

In 2020, we may see additional administrative action from FHFA that will increase pressure on the Democrats to come to the table on GSE reform. Democrats will be reluctant however to agree to any significantly undesirable changes to the GSEs while there exists a fair prospect for taking over the White House this year and taking more control of GSE reform. Accordingly, we are most likely waiting until 2021 to see any real movement in GSE reform.

U.S. Housing Overview

U.S. Housing Overview

The continued conservatorship of Fannie Mae and Freddie Mac exposes taxpayers to continued risk. &nbsp The failure to address the GSEs and release them from the conservatorship evidences a significant failure of political will.

This chart from the latest monthly report from the Housing Finance Policy Center at the Urban Institute provides a fine summary of the government dominance of U.S. residential housing finance.   This imbalance with private sector financing is imposing significant risk on the GSEs and therefore on the government and taxpayers without analysis or justification.   There should be a fundamental analysis of the government’s housing policy and how much risk needs to be taken by the taxpayers in order to achieve the government’s goals.  

Regulation AB II and Canadian Covered Bonds — the end of SEC registered covered bonds?

The recent amendments to Regulation AB (commonly referred to as “Reg AB II”) were a policy response to the perceived inadequacy of securitization disclosure prior to the financial crisis and a response to a request by very large investors for extensive, detailed information about the assets in a securitization.  The adoption of the changes to Regulation AB was only possible after the SEC negotiated protection from the Consumer Financial Protection Bureau (the “CFPB”) for issuers filing the data required by the SEC.  The CFPB statement provides that an issuer filing data in accordance with the SEC rules will not be in violation of the financial privacy laws. 

The result of the amendment is a package of regulations that call for the disclosure of loan-level data that varies by asset class.  In the case of assets that are residential mortgage loans, the rules call for the disclosure of 272 data fields for each mortgage loan, including the first two digits of the postal zip code for the property. 

In a study conducted by the SEC staff prior to the adoption of the amendments, the staff calculated that disclosure of the full five digit postal zip code for a property would result in an 80% likelihood that the identity of the borrower would be discernable.  With the reduction to disclosure of only the first two digits of the postal zip code, the staff concluded that there was still a 20% likelihood that a borrower could be identified.  Thus the need for the SEC to obtain CFPB protection for issuers. 

But what has this to do with covered bonds? After all, covered bonds are not securitizations, but rather special form of secured debt.  The answer is somewhat complex.