Opinion of the European Central Bank of 14 October 2010 on a legislative framework enabling credit institutions to issue covered bonds (CON/2010/73)
Date: 2010-10-14
Institutions: European Central Bank
Subjects: Cyprus, bond, financial stability, issue of securities, national law, payment system

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 (ECB) received a request from the Cypriot Ministry 

of Finance for an opinion on a draft law on covered 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,  fifth  and  sixth  indents  of  Article  2(1)  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  draft  law  contains  provisions  concerning 

the Central Bank of Cyprus (CBC) and relates to payment 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 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 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  legislation2.  Accordingly,  and  in  line  with  international  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  qualify  as  ‘eligible  issuers’)3, 
(b) the  eligibility  of  assets,  primary  or  complementary, 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  incorporated  under  European  Economic  Area  law  by  another 
credit institution incorporated in Cyprus)5, (d) the covered bonds’ issuance model (covered bond pools are 

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OJ L 189, 3.7.1998, p. 42.  
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’). 
Article 6(1) of the draft law. 
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 will be the subject matter of the CBC Directive referred to in paragraph 2.2. 
of this opinion. 
Article 14(4) of the draft law. 

 
 
 
 
                                                 
to  remain  separately  identifiable  in  the  issuer’s  balance  sheet,  rather  than  being  transferred  to  a  special 
purpose vehicle)6, (e) the registration and supervision of eligible issuers and covered bonds (these tasks 

are  to  be  the  responsibility  of  the  CBC,  where  the  issuer  is  a  bank,  and  of  the  Cooperative  Societies’ 

Supervision and Development Authority, where the issuer 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  issuer’s  insolvency,  the  covered  bond  holders  are  to  have  priority  on  the 
proceeds of the cover pool vis-à-vis all of the issuing bank’s secured or unsecured creditors)7. 

2. 

General observations  

2.1  The ECB welcomes the draft law and, in particular, its thorough, rules-based approach, reflecting 

the shared intention of the consulting authority and the CBC of setting up a comprehensive legal 

framework,  permitting  credit  institutions  incorporated  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  for  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  competent  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 from 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  directive,  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.  The  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  companies8.  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  prior  amendment  to  other  relevant  laws.  However, 
neither the requisite amendments to the Law on banking9 (expressly referred to in the explanatory 

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Article 14(1) read in conjunction with Article 18(1), (2) and (5) to (7) of the draft law.   
Article 40(5) and (6), Article 41 and Article 43(1) of the draft law. 
Articles 74 and 75 of the draft law. 
Law 66(I)/1997, Episimi Efimerida tis Dimokratias, Annex I(I), No 3168, 18.7.1997. 

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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  the  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 Societies’ Supervision and Development Authority 

(CSSDA)  to  act  as  supervisors  of  eligible  issuers  and  covered  bonds.  In  order  for  the  CBC  and  the 

CSSDA to be in a position to perform their registration and supervisory tasks effectively, it is essential 

that they dispose of sufficient human and material resources in addition to those 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  fees12.  It  also  provides  for  the  payment  of  a  fee  for 
inspecting  the  registers  of  approved  institutions  and  covered  bonds13.  Moreover,  given  the  separate 

supervision of banks and cooperative credit institutions, the ECB sees the need for close cooperation by 

the CBC and the CSSDA as supervisory authorities to ensure that the same material standards apply to 

the  registration  and  supervision  of  eligible  issuers  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 

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Cap. 224. 
Law 64 (I)/1997, Episimi Efimerida tis Dimokratias, Annex I(I), No 3168, 18.7.1997. 
Article 71 of the draft law. 
Articles 5(2) and 12(2) of the draft law, respectively. 

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