EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 14 October 2010 
on a legislative framework enabling credit institutions to issue covered bonds  
(CON/2010/73) 
 
Introduction and legal basis  
On 13 September 2010, the European Central Bank (E CB) received a request fro m the Cypriot Ministry 
of Finance for an opinion on a draft law on c overed bonds (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 on the third, fi fth and sixth indents of Article 2(1) of Council 
Decision 98/415/EC of 29 June 1998 on the consu ltation of the European Central Bank by national 
authorities regarding draft legislative provisions1, as the draft law contains provisions concerning 
the Central Bank of Cyprus (CBC) and relates to paym ent and settlement systems and to rules applicable 
to financial institutions insofar as they materially influence the stability of financial institutions and 
markets. In accordance with the firs t sentence of Article 17.5 of the Rules of Procedure of the European 
Central Bank, the Governing Council has adopted this opinion. 
 1.  Purpose and outline of the draft law The purpose of the draft law is to set up the legal basis for the issuance of covered bonds in Cyprus 
complying with Union legislation
2. Accordingly, and in line with in ternational legislative practice, the 
draft law regulates, in particular, (a) the eligibility of the issuers of covered bonds (all credit institutions, 
including cooperative credit institutions, incorporated  in Cyprus are to qualif y as ‘eligible issuers’)3, 
(b) the eligibility of assets, primary or comp lementary, for inclusion in the cover pool4, (c) the 
registration, in Cyprus, of foreign covered bonds  (in case of a cross-border merger, involving the 
absorption of an issuing credit institution incorporat ed under European Economic Area law by another 
credit institution incorporated in Cyprus)5, (d) the covered bonds’ issuance model (covered bond pools are 
                                                 
1   OJ L 189, 3.7.1998, p. 42.  
2   Directive 2009/65/EC of the European Parliament and of  the Council of 13 July 2009 on the coordination of laws, 
regulations and administrative provisions relating to undertakings for collective investment in transferable securities 
(UCITS) (recast) (OJ L 302. 17.11.2009, p. 32) and 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) (OJ L 177, 30.6.2006, 
p. 1) (hereinafter ‘CRD’). 
3   Article 6(1) of the draft law. 
4   Article 2 (definition of the term ‘asset ’) read in conjunction with Article 14(1)(d ) and Article 18(2) of the draft law. 
CRD-compliance criteria for covered bonds w ill be the subject matter of the CBC Directive referred to in paragraph 2.2. 
of this opinion. 
5   Article 14(4) of the draft law. 
2 to remain separately identifiable in the issuer’s ba lance sheet, rather than being transferred to a special 
purpose vehicle)6, (e) the registration and supervision of e ligible issuers and covered bonds (these tasks 
are to be the responsibility of the CBC, where the i ssuer is a bank, and of the Cooperative Societies’ 
Supervision and Development Authority, where the i ssuer is a cooperative credit institution), and (f) the 
impact of insolvency proceedings on the rights of the covered bond holders and their preferential 
treatment (in the event of the issu er’s insolvency, the covered bond holders are to have priority on the 
proceeds of the cover pool vis-à-vis all of th e issuing bank’s secured or unsecured creditors)7. 
 2. General observations  
2.1 The ECB welcomes the draft law and, in particul ar, its thorough, rules-based approach, reflecting 
the shared intention of the consulting authorit y and the CBC of setting up a comprehensive legal 
framework, permitting credit institutions incorpor ated in Cyprus to issue UCITS and CRD-
compliant covered bonds under terms and conditions  equivalent to those applicable to credit 
institutions incorporated elsewhere in the Union.  At the same time, the ECB stresses the significant 
role of Union covered bonds fo r Union financial markets, the conditionality to which their 
privileged treatment under Annex VI to the CRD is subject and the importance of sound legal rules, 
allowing some measure of discretion to the compet ent authorities, for the safety, liquidity and 
transparency of covered bonds, both from the point  of view of their conditional eligibility for 
Eurosystem monetary policy operations and fro m a broader, financial stability perspective. 
2.2 The introduction to the explanatory memorandum  states that the national authorities will 
complement the draft law with a CBC direc tive, which is currently undergoing a national 
consultation process. The directive in question would, inter alia , address issues of relevance to the 
assessment of the adequacy and quality of the cover pool, the CRD compliance of the covered 
bonds, and the issuers’ disclosure requirements. Th e directive has not yet been submitted to the 
ECB for consultation. Taking into account the importance of the issues to be addressed in the directive for a meaningful assessment of the safety,  liquidity and transparency of the covered bonds 
to be issued by credit institutions in Cyprus , the ECB will only address those aspects of the 
proposed legal and regulatory framework once the directive has been submitted to it for 
consultation.  
2.3 The draft law disapplies, under ‘Miscellaneous’,  specific sections or parts of the Laws on 
companies, banking and cooperative companies
8. Moreover, as mentioned in the explanatory 
memorandum, the application of specific sections of the draft law, including those of relevance to 
the exercise by bondholders of their proposed right of  recourse to the estate of the issuer, in case of 
the latter’s insolvency, is conditional on the prio r amendment to other relevant laws. However, 
neither the requisite amendments to the Law on banking9 (expressly referred to in the explanatory 
                                                 
6  Article 14(1) read in conjunction with Article 18(1), (2) and (5) to (7) of the draft law.   
7  Article 40(5) and (6), Article 41 and Article 43(1) of the draft law. 
8  Articles 74 and 75 of the draft law. 
9   Law 66(I)/1997, Episimi Efimerida tis Dimokratias,  Annex I(I), No 3168, 18.7.1997. 
3 memorandum), nor those that the ECB would expect to the Law on real estate10 and transfer of 
banking business and collateral11 have been made available to th e ECB for its consideration. In 
light of the above, this opinion does not assess all the parameters for the eventual implementation 
of the draft law in Cyprus nor of its interplay with  other relevant Cypriot legislation that may have 
an impact on the rights of bondholders, in particular, vis-à-vis the issuers of Cypriot law-governed covered bonds.  
 3. Specific observations The draft law empowers the CBC and the Cooperative So cieties’ Supervision and Development Authority 
(CSSDA) to act as supervisors of eligible issuer s and covered bonds. In order for the CBC and the 
CSSDA to be in a position to perform their registrati on and supervisory tasks e ffectively, it is essential 
that they dispose of sufficient human and material resources in addition to tho se that the CBC devotes to 
the pursuit of its ESCB-related tasks. The ECB notes, in this regard, that the draft law empowers the CBC 
and the CSSDA to require institutions to pay fees
12. It also provides for the payment of a fee for 
inspecting the registers of appr oved institutions and covered bonds13. Moreover, given the separate 
supervision of banks and cooperativ e credit institutions, the ECB sees th e need for close cooperation by 
the CBC and the CSSDA as supervisory authorities to en sure that the same material standards apply to 
the registration and supervision of eligible issuer s and covered bonds in Cyprus, irrespective of their 
corporate organisation as banks or as cooperative credit institutions.  
 This opinion will be published on the ECB’s website.    Done at Frankfurt am Main, 14 October 2010 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET 
                                                 
10  Cap. 224. 
11  Law 64 (I)/1997, Episimi Efimerida tis Dimokratias , Annex I(I), No 3168, 18.7.1997. 
12  Article 71 of the draft law. 
13  Articles 5(2) and 12(2) of the draft law, respectively.