EN ECB -PUBLIC  
 
OPINION OF THE EUROPEAN CENTRAL BANK  
of 9 April  2018  
on the legal framework for covered bonds  
(CON/2018/ 18) 
 
Introduction and legal basis  
On 28 February  2018 the European Central Bank (ECB) received a request from the Ministry of Finance 
of the Czech Republic for an opinion on a draft law  proposing amendments to Act  No. 190/2004 Coll., o n 
Bonds1 and certain other laws  (hereinafter the ‘draft law ’). 
The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 
Functioning of the European Union and the third and sixth indents of A rticle  2(1) of Council 
Decision  98/415/EC2, as the draft law  relates to Česká národní  banka (CNB)  and rules applicable to 
financial institutions insofar as they materially influence the stability of financial institutions and markets. 
In accordance with the first sentence of Article  17.5 of the Rules of Procedure of the European Central 
Bank, the Governing Council has adopted this opinion.  
 
1. Purpose of the draft law  
1.1 The main purpose of the draft law is to comprehensively reform the current system of covered 
bonds in the Czech Republic. The draft law seeks  primarily  to eliminate identified deficiencies 
within  the current covered mortgage bonds regime, to modernise the regulatory framework for 
covered bonds and to harmoni se national laws with those adopted by other Member States. In this 
respect , the draft law aims to ensure that cover ed bonds are (a) financial instruments which meet  
European standards and market requirements; (b) of good quality and tradeable on the financial 
market; (c) an attractive investment opportunity for investors, including those outside the banking 
sector and abroad; (d) of high liquidity and credit quality on the markets, even in times of financial 
distress; and (e) a suitable and effective source of long- term funding, which support the liquidity 
position and financial stability of issuers.  
1.2 As noted in the expl anatory memorandum accompanying the draft law, both investors and credit 
rating agencies consider the current legal framework in the Czech Republic for the issuance of 
covered bonds  to be inadequate for a number of reasons , particularly  in comparison with the legal 
framework in place in many other  Member States . The existence of  deficiencies  within the current 
covered mortgage bonds regime make s mortgage covered bonds currently issued by Czech banks 
                                                      
1  zákon č. 190/2004 Sb., o dluhopisech.   
2  Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national 
authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42).  
ECB -PUBLIC  
2 under Czech law  less attractive  to international investors . The most material deficiencies include 
(a) the ambiguous status  of cover pools (cover assets) as part  of the insolvency estate of an issuer  
under Czech insolvency law ; (b) potential conflicts of interest between the interests of an 
insolvency trustee and the holders of mortgage covered bonds ; and (c) the acceleration of the 
liabilities of an issuer under mortgage covered bonds that occurs by operation of law in case of a 
declaration of bankruptcy by the insolvency court . 
1.3 The draft law  establish es a category of ‘ covered bonds ’ that will serve as an umbrella category 
encompassing mortgage covered bonds ( as provided for under the current Act No. 190/2004 Coll., 
on Bonds ), public covered bonds and mixed covered bonds .  
1.4 Under  the draft law, covered bonds may only be issued by  banks incorporated under  Czech law  
and which have their registered office in the Czech Republic . Other EU credit institutions or 
branches of other EU credit institutions  may not issue covered bonds . 
1.5 The draft law clarifies that the cover pool can be formed by various specified assets, including:  
assets listed  under Article 129 of Regulation (EU) No 575/2013  of the European Parliament and of 
the Council3; mortgage loan receivables ; receivables from a member state (or central bank of a 
member state) of the Organisation for Economic Co- operation and Development (OECD), a 
multilateral development bank or international organisation of which an OECD member state is a 
member ; receivables the repayment of whi ch is guaranteed by one of the abovementioned public 
entities ; bank account receivables ; ancillar y derivative receivables ; in rem  collateral security 
provided to an issuer in connection with such derivative contracts ; rights to collateral security 
provided in connection with the assets constituting the cover pool (primarily mortgages  created in 
connection with mortgage loan receivables) ; rights arising under insurance policies ; and rights 
arising from contracts entered into in connection with the administration of the cover ed block 
constituted by the assets contained in the respective cover pool. These assets must be either 
registered in a cover pool register maintained by the issuer, or , if not in a cover pool register, 
assets must be appropriately recorded by the  issuer.  
1.6 The draft law also introduces the concept of a covered block, consisting of the cover pool and the 
liabilities of the issue arising under the respective covered bonds. Issuers may create more than 
one covered block, which allows them to create different collateralisation levels for different parts of 
covered bond  issues. The draft law allows for transfers of covered blocks  subject to the approval of 
CNB . 
1.7 The draft law introduces several  collateralisation covenants.  In particular, the covenants applicable 
on a portfolio basis require  that the ratio between the aggregate value of the assets included  in the 
respective cover pool and the aggregate nominal amount of the respective covered liabilities does 
not fall below 102% when excluding assets referred to under Article 129(2) of Regulation (EU) 
No 575/2013 and ancillary derivative receivables or below 85% when excluding assets referred to 
under Articles 129(1)(c)  and 129(2) of Regulation (EU) No 575/2013 and ancillary derivative 
                                                      
3  Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential 
requirements for credit ins titutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 
27.6.2013, p. 1).  
ECB -PUBLIC  
3 receivables and bank account receivables. The draft law also proposes to remove the 70% loan- to-
value covenant c alculated on a portfolio basis as against the whole cover pool,  which is currently 
applicable under Act No. 190/2004 Coll. , on Bonds . Finally, the draft law  also includes a stand -
alone collateralisation covenant in which the ratio of  the nominal amount (face value) of a mortgage 
loan included in the cover pool to the value of the respective mortgaged property must not exceed 
100% . Under Act No. 190/2004 Coll., on Bonds , the current permissible ratio is 200%.  
1.8 The draft law provides  a legal basis according to which covered blocks may be subject to a pro rata  
haircut where this is beneficial to holders of covered bonds  for which the value of the respective 
covered liabilities exceeds  the value of the respective cover assets.  
1.9 The draft law incorporates the concepts of a security agent and a cover ed bond monitor into Czech 
law, and clearly ring-fences assets held by the security agent from the security agent’s insolvency 
estate for the benefit of covered bondholders . 
1.10 The draft law  clarif ies the insolvency regime applicable to the cover pool and covered block s. In 
particular , the draft law explicitly stipulates that the cover pool does not form a part of the 
insolvency estate of the issuer and that the commencement and operation of insolvency 
proceedings do not affect covered blocks.  The draft law  further  clarifies that  no bail -in or similar 
measures , generally applicable under  either  Directive 2014/59/EU  of the European Parliament and 
of the Council4 or associated Union law , are admissible with respect to covered blocks.  
1.11 Under the draft law, CNB is required to appoint a forced administrator for all covered blocks of an 
issuer  where ( a) insolvency or winding- up proceedings  have been initiated  with respect to the  
issuer ; (b) the issuer is  unable to discharge its l iabilities as they fall due;  (c) CNB applies any 
corrective measure in relation to the issuer which, in CNB’s opinion, might have an adverse effect 
on the timely discharge of the issuer’s liabilities under the covered bonds ; or (d) where CNB applies 
any measure under Directive 2014/59/EU  with respect to such issuer.  
1.12 Finally, the draft law introduces  the concept  of contingent convertibles (CoCos)  into Czech law . 
 
2. Preliminary comment  
This opinion focuses on the provisions of the draft law relating to the tasks conferred upon CNB and the 
new regime for covered bonds.  
 
3. Tasks of the Czech National Bank  
3.1 The draft law does  not extend the current supervisory mandate of CNB. CNB is already the 
national authority competent for financial market supervision5, as well as the authority competent 
                                                      
4  Directive 2014/59/EU  of the European Parliament and of the Council of 15 May 2014 establishing a framework for 
the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, 
and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC,  2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 
2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the 
Council (OJ L 173, 12.6.2014, p.190) . 
5  See Art. 1 of the Act No. 6/1993 Coll., on the Czech Nati onal Bank (§ 1 zákona č. 6/1993 Sb., o České národní 
bance) in conjunction with Regulation (EU) No 1092/2010 of the European Parl iament and of the Council of 
24 November  2010 on European Union macro- prudential oversight of the financial system and establis hing a 
European Systemic Risk Board (OJ L 331, 15.12.2010, p. 1) . 
ECB -PUBLIC  
4 for macr oprudential policy  in the Czech Republic6. CNB also has the supervisory and 
macroprudential powers necessary to fulfil these functions.  
3.2 The new powers related to the supervision of the issuance of covered bonds under the draft law 
are not intrinsically different from CNB’s existing powers with respect to the issuance of mortgage 
bonds and supervision over issuers of mortgage bonds7.  
3.3 It follows that the draft law does not confer genuinely new tasks on CNB,  but rather specifies 
certain new powers that CNB  may use when carrying out the same tasks already discharged by 
CNB under its existing supervisory responsibilities. Consequently, the issue of assessing the 
conferral of new tasks on a national central bank from the perspective of  the monetary financing 
prohibition does not arise in the case at hand . 
 
4. Covered  bonds law reform  
4.1 The ECB welcomes the draft law’s reform of the legal regime for covered bonds in the Czech 
Republic, taking into account the best practices identified by the European Banking Authori ty 
(EBA)8, which aims  to eliminate identified deficiencies in the current regime,  modernise the existing 
Czech regulatory framework , contribute to the development of the Czech capital market and 
improve the level of protection and legal certainty for investors. In particular, the ECB welcomes the 
draft law’s objective to ensure that covered bonds issued under the draft law are financi al 
instruments of good quality and that they provide a suitable and effective source of long- term 
funding, supporting banks’ business models and overall stability9.  
4.2 On 12 March 2018, t he European Commission published a legislative proposal for a Union 
framework on covered bonds10. The Czech authorities are invited to tak e the proposal into account 
in the Czech legislative process , as appropriate .  
4.3 The ECB  welcomes the various elements of the draft law , including : the new concept of  covered 
bonds ; the possibility to  create multiple covered blocks ; the introduction of a covered block  monitor  
and a security agent (including the ring- fencing of assets held by the security agent  from the 
security agent’s insolvency estate  for the benefit of covered bondholders) ; the clarification of the 
insolvency  treatment of covered blocks  in the event of the issuer’s insolvency ; the clarification that 
no bail -in or similar resolution measures are possible in relation to covered bonds ; and the 
requirement for issuers to maintain separate records on cover pools .  
                                                      
6  See Art. 2a of the Act No. 6/1993 Coll., on the Czech National Bank  (§ 2a zákona č. 6/1993 Sb., o České národní 
bance) . 
7  See Art. 1 and 44 of Act No. 6/1993 Coll., on the Czech National  Bank  (§ 4 a 44 zákona č. 6/1993 Sb., o České 
národní bance) , Act No. 190/2004 Coll., on Bonds ( zákon č. 190/2004 Sb., o dluhopisech) and CNB Decree 
No. 164/2014, on keeping records of the coverage of mortgage bonds and information duties of a mortgage bon d 
issuer  (vyhláška č. 164/2014 Sb., o evidenci krytí hypotečních zástavních listů a informačních povinnostech emitenta 
hypotečních zástavních listů) . 
8   See the EBA Report on Covered Bonds: Recommendations on harmonisation of covered bond frameworks in the 
EU of 20 December 2016 (EBA -Op-2016- 23), available on the EBA’s website at www.eba.europa.eu.  
9  See also paragraph 4.1 of Opinion CON/2017/36.  
10  Proposal for a Directive of the European Parliament and of the Council on the issue of covered bonds and covered 
bond public supervision and amending Directive 2009/65/EC and Directive 2014/59/EU : 
https://ec.europa.eu/info/law/better -regulation/initiatives/com -2018- 94_en.   
ECB -PUBLIC  
5 4.4 The ECB would welcome further clarification of the draft law in a number of specific  respects . First, 
the positive value of derivatives in the cover pool , not only their nominal values , should be taken 
into account  in calculating  compliance with the covenants  to avoid undue volatility of the coverage 
ratios due to currency fluctuations , which may lead to unnecessary demands for additional 
collateral.  Second, t he regime applicable to  derivatives collateral  should be clarified, mainly to 
reflect the market practice of collaterali sation in derivatives trading and the effects of close- out 
netting in this regard. Third, th e rules applicable to derivatives in the cover pool should also apply 
to exposures specified in Article 129 of Regulation (EU) No 575/2013, as such exposures m ay also 
be in the form of derivatives . Fourth, t he new regime should adequately reflect  exposures in default  
for the purpose of calculating  compliance with the c over pool covenants .  Finally, the conditions  
under which CNB appoints the forced administrator of cover blocks should be specified very clearly  
(e.g., by deleting point  d) and e) of  Art. 32a of the draft law)  in order to avoid a situation where  CNB 
is forced to determine if a  specific supervisory measure would have an adverse effect on  the timely 
fulfilment of liabilities resulting from the covered bonds , or when a bank is safeguarded through a 
resolution measures and only after that a forced administrator needs to be appointed.  
 
This opinion will be published on the ECB’s website.  
 
 
Done at Frankfurt am Main, 9 April 2018.  
 
[signed]  
 
The President of the ECB  
Mario DRAGHI