Opinion of the European Central Bank of 9 April 2018 on the legal framework for covered bonds (CON/2018/18)
Date: 2018-04-09
Institutions: European Central Bank
Subjects: Czechia, banking supervision, bond, financial stability, national law, real estate credit

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., on 
Bonds 1 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  Article 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 harmonise national laws with those adopted by other Member States. In this 

respect, the draft law aims to ensure that covered 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  explanatory  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 makes mortgage covered bonds currently issued by Czech banks 

1  
2  

zákon č. 190/2004 Sb., o dluhopisech.  

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). 

 
 
 
 
                                                      
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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  establishes  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 which is guaranteed by one of the abovementioned public 

entities;  bank  account  receivables;  ancillary  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  covered  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 

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Regulation  (EU)  No  575/2013  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on  prudential 
requirements  for  credit  institutions  and  investment  firms  and  amending  Regulation  (EU)  No  648/2012  (OJ  L  176, 
27.6.2013, p. 1). 

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receivables and bank account receivables. The draft law also proposes to remove the 70% loan-to-

value covenant calculated 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 covered 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  clarifies  the  insolvency  regime  applicable  to  the  cover  pool  and  covered  blocks.  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  liabilities  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  

5  

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). 

See  Art.  1  of  the  Act  No.  6/1993  Coll.,  on  the  Czech  National  Bank  (§  1  zákona  č.  6/1993  Sb.,  o  České  národní 
bance)  in  conjunction  with  Regulation  (EU)  No  1092/2010  of  the  European  Parliament  and  of  the  Council  of 
24 November 2010  on  European  Union  macro-prudential  oversight  of  the  financial  system  and  establishing  a 
European Systemic Risk Board (OJ L 331, 15.12.2010, p. 1). 

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for  macroprudential  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 bonds 7.  

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  Authority 
(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  financial 

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,  the  European  Commission  published  a  legislative  proposal  for  a  Union 
framework on covered bonds10. The Czech authorities are invited to take 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  

7  

8   

9  
10  

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). 

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  bond 
issuer (vyhláška č. 164/2014 Sb., o evidenci krytí hypotečních zástavních listů a informačních povinnostech emitenta 
hypotečních zástavních listů). 

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. 

See also paragraph 4.1 of Opinion CON/2017/36.  
Proposal for a Directive of the European Parliament and of the Council on the issue of covered bonds and covered 
bond 
2014/59/EU: 
https://ec.europa.eu/info/law/better-regulation/initiatives/com-2018-94_en.  

amending  Directive 

and  Directive 

2009/65/EC 

supervision 

public 

and 

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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,  the  regime  applicable  to  derivatives  collateral  should  be  clarified,  mainly  to 

reflect  the  market  practice  of  collateralisation  in  derivatives  trading  and  the  effects  of  close-out 

netting in this regard. Third, the 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 may also 

be in the form of derivatives. Fourth, the new regime should adequately reflect exposures in default 

for the purpose of calculating compliance with the cover 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 

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