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.
OSFI to Reconsider 4% Limit?
According to reports in The Cover and The Covered Bond Report, Canada is considering whether to increase the 4% limit imposed on covered bond issuance. This limit was imposed by the Office of the Superintendent of Financial Institutions (OSFI) at the inception of covered bond issuance by Canadian banks in 2007 and remains unchanged today. While the limit is the most stringent currently applied in the covered bond world, Canadian banks have nevertheless been active issuers of covered bonds as can be seen by the table below.
| US$ | EUR | GBP | CHF | A$ | C$ | |
|---|---|---|---|---|---|---|
| Issued (mm)* | 71,600 | 44,037 | 4,375 | 2,075 | 7,450 | 4900 |
| Outstanding (mm)* | 39,600 | 38,613 | 4,375 | 1,400 | 5,100 | 3,300 |
Source: www.us-covered-bonds.com/cdn_issue_details
* As of January 28, 2016.
The current 4% limit is measured as the Canadian dollar equivalent amount of covered bonds outstanding divided by total assets. The table below shows the covered bond issuance capacity remaining for each Canadian covered bond issuer as of December 2015.
| BMO | BNS | CCDQ* | CIBC | NBC | RBC | TD | TOTAL | |
|---|---|---|---|---|---|---|---|---|
| Total Assets (mm)** | 641,881 | 856,497 | 1,318 | 463,309 | 216,090 | 1,074,208 | 862,532 | 4,115,835 |
| Maximum Amount (mm) | 26,100 | 33,600 | 7,400 | 18,200 | 8,300 | 43,500 | 42,400 | 179,700 |
| Outstanding Amount (mm) | 11,600 | 22,200 | 5,400 | 10,700 | 7,300 | 31,300 | 20,900 | 109,400 |
| Used Capacity | 44.3% | 66.0% | 73.1%* | 59.0% | 87.8% | 71.6% | 60.9% | 60.9% |
| Remaining Amount (mm) | 14,500 | 11,400 | 2,000 | 7,500 | 1,000 | 12,400 | 21,500 | 70,300 |
Source: CMHC, Covered Bond Business Supplement, September 2015.
*Note that CCDQ is subject to a different limit, which is set by Autorité des marchés financiers at EUR 5.0 billion.
** As of October 31, 2015.