OPINION OF THE EUROPEAN CENTRAL BANK
of 25 April 2001
at the request of the Irish Department of Fi nance on a draft legislative proposal on a
Mortgage and Public Credit Bond Bill 
CON/2001/6
1. On 14 March 2001 the European Central Bank (ECB) received a request from the Irish
Department of Finance for an ECB opinion on a preliminary draf t Mortgage and Public Credit
Bond Bill.
2. The ECBs competence to deliver an opi nion is based on Article 2 of Council
Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by
national authorities regarding draft legislative provisions1, as the legislative proposal contains
provisions concerning a national central bank , as well as rules applicable to financial
institutions insofar as they ma terially influence the stability of financial institutions and
markets. In accordance with Article 17.5, first se ntence, of the Rules of Procedure of the
European Central Bank, this ECB opinion has been adopted by the Governing Council of the
ECB.
3. The draft Bill makes provision for the designation and regulation by the Central Bank of Ireland
(CBI) of special-purpose credit institutions de signated by the CBI as a mortgage credit
institution and/or a public credit institution, respectively. Such designated mortgage and
public credit institutions may issue mortgage and public credit securities, and these securities or
any related hedge contracts would be secured on pools of underlying mortgage or public credit
assets and other specified assets (i.e., deposits, tier one assets for ESCB monetary policyoperations and other assets acceptable to the CB I). The CBI would be empowered to designate
as a mortgage and/or public credit institution a credit institution which is carrying on relevant
qualifying activities only, which relate broadly to dealings in mortgage and public credit and
related financing (including deposit-taking) and hedging activities. The ECB notes that, under
the draft Bill, qualifying activities also include dealings in tier one assets for ESCB monetary
policy operations and/or property which is, fr om time to time, included by a NCB, with
approval of the ECB, in its national list of e ligible tier two assets for ESCB monetary policy
operations. The qualifying activities requirement would imply that the majority of Irish credit
                                                          
1OJ L 189, 3.7.1998, p. 42-43.
2institutions would have to establish special purpose credit institutions in order to issue
mortgage or public credit securities.
4. The ECB welcomes this initiative to lay the legi slative foundations for the issuance of mortgage
and public credit bonds by Irish credit instituti ons. The ECB notes that the legislative and
regulatory framework envisaged for the issuance of these asset-backed securities shares many
common characteristics with similar structures  in other member states of the European
Community, including Austria, Denmark, Finland, France, Ge rmany, Luxembourg and Spain.
The ECB notes that the legislation has been e xplicitly designed by the Irish Government to
bring Ireland in line with best practices in ot her European financial centres, taking into account
that the introduction of the euro and the new monetary policy framework have led to thedevelopment of an integrated and competitive money market in the euro area. In this regard, the
ECB understands that this initiative enjoys the support of both domestic Irish banks andbuilding societies as well as  credit institutions conducting cross-border operations out of
Dublins International Financial Services Centre. The ECB considers that the Irish
Governments initiative will make a positive contri bution to the integration of capital markets
in the euro area.
5. The ECB draws attention to the criteria which a ssets must fulfil in order to be eligible as
collateral for Eurosystem monetary policy a nd intra day credit operations. Under the ECB
Guideline of 31 August 2000 on monetary policy in struments and procedures of the Eurosystem
(ECB/2000/7)2, Annex I (General Documentation on Eurosystem monetary policy operations
and procedures), Chapter 6.2 (Eligible Assets  Ti er one assets), a number of eligibility criteria
are specified to tier one assets consisting of ma rketable debt instrume nts fulfilling uniform euro
area-wide eligibility for Eurosystem monetary policy and intra day credit operations. 
First, the assets must be debt instruments. It  is understood that the mortgage and public credit
securities envisaged by the draft Bill will be structured as mortgage and public credit bonds
only, and would therefore fulfil this requirement.  
Second, the assets must meet high credit standard s, and in the assessment of the credit standard
of debt instruments, the ECB takes into account, inter alia , available ratings by market agencies
as well as certain institutional criteria which woul d ensure particularly high protection of the
holders. In this regard, debt instruments i ssued by credit institutions which do not comply
strictly with the criteria set out in Article 22(4) of the UCITS Directive3 are accepted in tier one
only if each issue as such is awarded a rating (by a rating agency) which indicates, in the view
of the Eurosystem, that the debt instrument m eets high credit standards. The ECB notes that it
                                                          
2 OJ L 310, 11.12.2000, p. 1.
3Council Directive 88/220/EEC of 22 March 1988 amending, as regards the investment policies of certain UCITS,
Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings forcollective investments in transferable securities (UCITS), OJ L 100, 19.04.1988 p. 31.
3is the intention of the Irish Government that cer tain features of the instruments, including the
high quality of the underlying assets and the pref erential creditor status af forded to investors in
the bonds, are designed to achieve a triple A rating.
Third, the assets must be located in the euro area (so that realisation is subject to the law of a
Member State of the euro area), transferable in book-entry form and deposited with a national
central bank or with a central securities de pository which fulfils the minimum standards
established by the ECB. The description of the standards for the use of eligible SSSs in the euroarea can be found on the ECBs website (www.ecb.int). The ECB assumes that, following theestablishment of mortgage and public credit institu tions pursuant to the provisions of the draft
Bill, further information will become availabl e regarding the proposed procedures surrounding
the issuance, custody and settlement of mortgage and public credit bonds.
Fourth, the assets must be denominated in euro.
Fifth, the assets must be issued (or guar anteed) by entities established in the EEA. In this
regard, the ECB notes that under the draft B ill the CBI may only designate credit institutions
that are incorporated in Ireland.  
Sixth, the assets must, at least, be listed or quoted on a regulated market as defined according to
the Investment Services Directive,4 or listed, quoted or traded on certain non-regulated markets
as specified by the ECB. In this regard, debt instruments issued by credit institutions which do
not comply strictly with the criteria set out in  Article 22(4) of the UCITS Directive are accepted
in tier one only if they are listed or quoted on a regulated market as defined according to theInvestment Services Directive and comply with  the requirements of the Prospectus Directive
5.
Furthermore, market liquidity may be taken into account by the ECB when determining the
eligibility of individual debt instruments. The ECB assumes that, following the establishment of
mortgage and public credit institutions pursuant to  the provisions of the draft Bill, further
information will become availabl e regarding the listing, quotation or trading of issued mortgage
and public credit bonds on applicable markets.
Despite their eligibility, national central banks sh all not, in general, accept as underlying assets
debt instruments issued or guaranteed by the c ounterparty, or by any other entity with which the
counterparty has close links, as defined according to  Article 1(26) of the Banking Consolidation
Directive.6 However, exempt from the definition of close links are cases in which such debt
                                                          
4Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field, OJ L 141, 11.06.1993,
p. 27 ff.
5Council Directive 89/298/EEC of 17 April 1989 coordinating the requirements for the drawing-up, scrutiny anddistribution of the prospectus to be published when transf erable securities are offered to the public, OJ L 124, 5.5.1989,
p. 8 ff.
6Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up andpursuit of the business of credit institutions, OJ L 126, 26.5.2000, p. 1.
4instruments are protected by specific legal safe guards, e.g. instruments which comply strictly
with the criteria set out in Article 22(4) of the UCITS Directive.
Finally, all eligible assets must be usable in a cross-border context, implying that a counterparty
can receive credit from the national central bank of the Member State in which the counterparty
is established by making use of tier one instru ments located in another Member State. The ECB
assumes that, following the establishment of mo rtgage and public credit institutions pursuant to
the provisions of the draft Bill, additional in formation will become available regarding the
proposed cross-border usage of the mortgage and public credit bonds.
6. With respect to the question of close links, th e ECB notes that the mortgage and public credit
securities envisaged by the draft Bill would appear to be designed to comply strictly with the
three criteria set out in Article 22(4) of the UCIT S Directive. If, as laid down in Article 22(4) of
the UCITS Directive, the Irish Government sends the Commission a list of the categories ofbonds together with the categories of issuers au thorised, in accordance with the draft Bill and
the supervisory arrangements contemplated by th e draft Bill, to issue bonds complying with the
criteria set out in Article 22(4), and assuming  the procedure laid down in Article 22(4) is
applied, the mortgage and public credit bonds will normally, without further action,automatically qualify as tier one assets eligible  for Eurosystem monetary policy and intra day
credit operations both by the parent entity of th e relevant designated credit institution and by
other Eurosystem counterparties.  
7. The first criterion set forth in the UCITS Directive arises out of the reference in Article 22(4) to
certain bonds when issued by a credit instituti on which has its registered office in a Member
State and is subject by law to special public supervision designed to  protect bond-holders. 
In this regard, as noted above, under the draf t Bill the CBI may design ate any credit institution
that is established in Ireland and holds an au thorisation from the CBI as a mortgage or public
credit institution eligible to issue mortgage or public credit securities , and that the issuance of
such securities would be confined to such in stitutions. The ECB notes that, under the draft Bill,
it shall be a criminal offence for any person to act as a mortgage or public credit institution or
hold itself out as such unless designated as a mo rtgage and/or a public credit institution by the
CBI. The ECB also notes that the draft Bill makes provision for the revocation by the CBI of anentitys designated credit institution status, that the CBI may also apply to the Irish High Court
for an order revoking an institutions designati on in a wide variety of circumstances and that
such a revocation would be without prejudice to either a designated credit institutions
obligations in respect of any mortgage or public credit securities issued by  it prior to revocation
or the security of the holders of such secu rities over underlying mortgage or public credit
assets.
The ECB also notes that, under the draft Bill, every mortgage or public credit institution is
required to establish and maintain separate mortgage and public credit asset registers containing
5particulars of every pool asset securing its  obligations under mortgage or public credit
securities and related hedge contracts, as well as a separate hedge contract register, and that no
entries in these registers may be made or alte red without the approval of the cover asset
monitor, a person appointed by the designated cr edit institution with the approval of the CBI to
monitor observance by the credit institution of  its obligations under the draft Bill (and in
particular that the required level of assets is ma intained in the relevant asset pools following the
issuance of securities or entry into related he dge contracts). The ECB also notes that the CBI
may make regulations in respect of cover asse t monitors, including the qualification, selection,
appointment, removal and functions of cover asset monitors and requirements concerning
information reporting by the co ver asset monitor to the CBI.
The ECB also notes that, under the draft Bill, on the occurrence of a potential insolvency event
with respect to a designated credit institution or  a matured insolvency ev ent with respect to its
parent entity or the revocation by the CBI of a credit institutions designated status, the CBI
may request the Irish National Treasury Management Agency (NTMA) to locate an alternativeservice provider to perform the designated cr edit institutions functions in relation to the
administration and servicing of mortgage or pub lic asset securities, related hedge contracts,
assets, asset pools and registers, or locate a pare nt entity for the designated credit institution or
act itself as alternative service provider for the institution. 
Finally, the ECB notes that under the draft Bill, it shall be a criminal offence for any person to
knowingly provide false or misleading informa tion to the CBI, a cover asset monitor, the
NTMA or any alternative service provider in  the exercise of their respective functions.
8. The second criterion to which Article 22(4) of the UCITS Directive refers is that sums
deriving from the issue of these bonds must be in vested in conformity with the law in assets
which, during the whole period of the validity of the bonds, are capable of covering claims
attaching to the bonds.
In this regard, the ECB notes that the draft Bill specifies numerous conditions applicable to
mortgage or public credit securities and pools, including matching requirements in relation to
the duration, aggregate principal amount and curr ency denomination of, or interest payable on,
assets comprised in the mortgage or public cr edit pools, as compared to outstanding mortgage
or public credit securities issued. With respect to mortgage credit assets in particular, the draft
Bill contains required loan-to-value (LTV) ratios with respect to underlying property assets, as
well as an overall limitation on mortgage assets secured on commercial property. The ECBnotes that while no limit or restriction applies to  the inclusion in a mortgage or public credit
pool of mortgage or public credit assets situat ed in a member state of the European Economic
Area (EEA), an overall limitation applies to the inclusion of mortgage or public credit assets
situated in Canada, the U.S., Switzerland and/or Japan, while mortgage or public assets situated
in any other state which is a Zone A stat e for purposes of the Banking Consolidation
6Directive, as amended, supplemented or replaced) may only be included in the mortgage or
public credit pool if so provided in, and in acco rdance with, regulations made by the Minister
for Finance. The ECB also notes that, under the draft Bill, the CBI may by regulations provide
for the valuation basis, valuation methodology, time of valuation and any other matter relating
the prudent market valuation of mortgage cred it assets. Finally, it is noted that a designated
credit institution shall not at any time issue mortga ge or public credit securities if the aggregate
principal amount of such securities that are in issue would exceed a multiple of 50 (or such
other multiple as may be specified from time to time) of its own funds (determined inaccordance with the Banking Consolidation Dir ective and the Capital Adequacy Directive
7, as
amended, supplemented or replaced).
9. The third criterion to which Article 22(4) of the UCITS Directive refers is that in the event of
a failure of the issuer, [such assets] would be used on a priority basis for the reimbursement of
the principal and payment of the accrued interest. 
In this regard, the ECB notes that the draft Bill provides, inter alia,  that, notwithstanding any
rule of Irish insolvency law, or the occurren ce of a potential or matured insolvency event with
respect to a designated credit institution or rela ted company, the claims of a holder of mortgage
or public credit securities issued by that design ated credit institution sha ll continue to be valid
and legally enforceable against the issuer, and that the assets comprised in the cover asset
registers and related asset pools shall not form pa rt of the designated credit institutions assets
for the purpose of any insolvency proceeding. Th e ECB takes particular note of the draft Bills
provisions to the effect that the claims of a holder of mortgage or public credit securities issued
by a designated credit institution shall, subject to  considerations of fraud or misrepresentation
under Irish law, rank, as respects recourse to assets comprised in the relevant asset pools, (a)senior and in priority to all claims and rights  of any member, shareholder and other creditors of
whatever kind (whether secured, unsecured or pref erred by any other statute or laws) of that
institution; (b) rateably and pari  passu in all respects with other holders of mortgage or public
credit securities, related hedge counterparties a nd cover asset monitors; and (c) junior to any
fees or costs payable to the NTMA or any othe r alternative service provider appointed on the
occurrence of a potential or matured insolvency  event with respect to a designated credit
institution or its parent entity, or upon the re vocation by the CBI of a credit institutions
designated status.
Also, it is noted that while the draft Bill provid es that a designated credit institution which has
any mortgage or public credit securities outstandi ng shall not grant or suffer to subsist any
security over pool assets or property situated  in Ireland, a designated credit institution may
grant or permit to subsist security over mortgage  or public credit assets in an asset pool where
                                                          
7Council Directive 93/6/EEC of 15 March 1993 on the capital ad equacy of investments firms and credit institutions,
OJ L 141, 11.6.1993, p. 1 ff.
7the relevant assets are situated outside Irel and and the persons having the benefit of such
security are those entitled to security over th e relevant assets under the draft Bill (e.g., the
holders of securities). It is suggested that it may be appropriate to extend the prohibition on the
creation of security interests in favour of third parties to pool assets or property situated outside
Ireland. 
10. The ECB notes that the draft Bill provides that the Minister for Finance may, after consultation
with the CBI, by regulations (i.e., secondary le gislation) confer on the CBI such additional
functions connected with the CBIs functions  under the Bill as the Minister considers
appropriate, and that the draft Bill also prov ides that the Minister and the CBI may make
regulations in respect of designated credit in stitutions generally, and with respect to a wide
variety of specific matters addressed by the Bill.  The ECB notes that, insofar as any Ministerial
regulations affect the powers of the CBI as design ator and regulator of designated mortgage and
public credit institutions, consideration may n eed to be given to consulting the ECB in
accordance with Article 2 of Council Decision 98/415/EC of 29 June 1998 on the consultation
of the European Central Bank by national aut horities regarding draft legislative provisions.
11. The ECB understands that a number of the draf t Bills provisions, including some of the
provisions discussed in this opinion, are still unde r discussion by interested parties, including
the CBI and interested market participants. Inso far as those provisions of the draft Bill which
delineate the precise powers of the CBI as designat or and regulator of designated mortgage and
public credit institutions are the subject of s ubstantive amendments, the ECB would appreciate
being provided with the final draft Bill that will be presented by the Minister for Finance to the
Oireachtas. 
12. The ECB confirms that it has no objection to this ECB opinion being made public by the
competent national authorities at their discretion.
Done at Frankfurt am Main on 25 April 2001.
The President of the ECB
[signed]
Willem F. DUISENBERG