Opinion of the European Central Bank of 3 January 2019 on the legal framework for covered bonds (CON/2019/1)
Date: 2019-01-03
Institutions: European Central Bank
Subjects: Estonia, bond, capital market, credit institution, financial stability, financial supervision, issue of securities, national law

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 3 January 2019  

on the legal framework for covered bonds  

(CON/2019/1) 

Introduction and legal basis 

On 27 November 2018 the European Central Bank (ECB) received a request from the Estonian Ministry 
of Finance for an opinion on a draft law on a covered bonds framework1 (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 sixth indent of Article 2(1) of Council Decision 98/415/EC2, as 

the draft law relates to the rules applicable to financial institutions insofar as they materially influence the 

stability  of  financial  institutions  and  markets  and  to  the  basic  task  of  the  European  System  of  Central 

Banks (ESCB) to implement monetary policy pursuant to the first indent of Article 127(2) of the Treaty. 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 purpose of the draft law is to set up a legal framework for the issuance of covered bonds by 

credit institutions and to foster the Estonian capital markets and increase financial stability. 

1.2  The  draft  law:  (a)  defines  the  institutions  permitted  to  issue  covered  bonds,  i.e.  credit  institutions 

with  an  additional  authorisation  for  the  issuance  of  covered  bonds;  (b)  outlines  the  additional 

authorisation  procedures  concerning  issuers  and  applicable  additional  requirements  including  the 

powers of the cover pool monitor; (c) outlines the general conditions for issuing covered bonds and 

specifies when the term covered bonds may be used; (d) specifies the types of covered bonds, i.e. 

mortgage covered bonds and mixed asset covered bonds, and the assets eligible for inclusion into 

the  cover  pool;  (e)  sets  out  rules  on  valuation,  composition  and  structure  of  the  covered  bond 

portfolio; (f) sets forth special provisions for the separation of the covered bond portfolio, e.g. in the 

event of an issuer’s insolvency, the requirements for a cover pool administrator and the liquidation 

and  transfer  of  a  separated  covered  bond  portfolio;  (g)  sets  out  transparency  and  disclosure 

requirements; and (h) establishes rules regarding supervision of covered bonds. 

1.3  According  to  the  draft  law,  in  order  to  issue  covered  bonds,  the  issuer  must  be  authorised  as  a 

credit  institution  and  have  an  additional  authorisation  for  the  issuance  of  covered  bonds.  The 

1  
2  

Pandikirjaseadus, eelnõu. 
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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additional authorisation must be obtained from the Estonian Financial Supervision Authority (EFSA) 

prior to the first issuance of covered bonds and is granted for an indefinite period. The additional 

authorisation  may  be  revoked,  inter  alia,  where  the  issuer  has  provided  false  or  misleading 

information  or  documents,  has  repeatedly  or  significantly  breached  the  requirements  of  the  draft 

law, is unable to meet its obligations under the covered bonds, its activities endanger the interests 

of the investors or other clients of the issuer, or the issuer has not issued covered bonds within five 

years from receiving the additional authorisation or since the last redemption of previous covered 
bonds 3. 

1.4  The draft law lists the following assets as primary assets eligible for inclusion into the cover pool: 

(a)  for  mortgage  covered  bonds:  loans  issued  to  natural  persons,  secured  by  mortgages  over 

residential  real  estate  located  in  the  European  Union;  (b)  for  mixed  asset  covered  bonds:  loans 

issued  to  natural  or  legal  persons,  secured  by  mortgages  over  residential  and  commercial  real 

estate located  in the  European Union, as well as credit to or debt securities of Member States of 
the European Union, their regional or local authorities and bodies governed by public law4. These 

assets  are  regarded  as  primary  assets  of  the  cover  pool  and  must  represent  at  least  80%  of  the 

total value of the cover pool; the remaining part of the cover pool may be composed of substitute 
assets5. 

1.5 

In addition to primary assets, the cover pool may include substitute assets. The draft law lists which 

assets may be used as substitute assets. These assets are (a) claims against or claims backed by 

members of the ESCB or central governments, public sector institutions, regional governments or 

local municipal government units of Union member states; (b) claims against or claims backed by 

third-country  central  banks,  central,  regional  and  municipal  governments  and  various  public 

institutions, multilateral development banks and international organisations – the draft law does not 

impose  any  additional  quantity  restrictions  if  the  assets  correspond  to  credit  quality  step  1  and 

imposes a limit of 20% of nominal value of the outstanding covered bonds for assets corresponding 

to credit quality step 2; (c) claims against credit  institutions and  investment firms that meet credit 

quality  step  1,  provided  that  such  claims  do  not  exceed  15%  of  the  nominal  value  of  the 

outstanding  covered  bonds;  (d)  claims  against  Union  credit  institutions  and  investment  firms  that 

meet  the  credit  quality  step  2,  which  have  a  maturity  date  of  up  to  100  days,  provided  that  such 

claims  do  not  exceed  15%  of  the  nominal  value  of  the  outstanding  covered  bonds;  and  (e)  net 

claims  arising  from  derivative  agreements,  provided  that  such  claims  do  not  exceed  12%  of  the 
nominal value of the outstanding covered bonds.6  

1.6  The  quality  of  the  cover  pool  must  be  ensured  by  the  issuer  throughout  the  entire  lifetime  of  the 

covered  bonds  by  monitoring  and  updating  the  valuation  of  the  covered  assets  secured  by 

mortgages.  At  all  times  the  cover  pool  must  exceed  the  sum  of  the  present  value  of  the  covered 
bonds  and  the  net  obligations  arising  from  derivatives  by  at  least  2% 7.  This  requirement  is 

3  
4  
5  
6  
7  

See Section 6 of the draft law. 

See Sections 25(1) and 30(1) of the draft law. 
See Sections 19(1) and 20(1) of the draft law. 
See Section 20(1) of the draft law. 

See Sections 18(1) of the draft law. 

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considered  to  be  fulfilled  if  the  aggregate  nominal  value  of  assets  in  the  cover  pool  exceeds  the 

aggregate nominal value of the covered bonds by at least 5%. In any case the nominal value of the 

cover pool must at all times at least equal or exceed the nominal value of the covered bonds.  

1.7  To mitigate the liquidity risk of the covered bonds portfolio, a liquidity reserve must be formed which 

may consist only of level 1 and 2A assets and certain exposures to credit institutions as listed in the 

draft law  which meet specified additional criteria. The minimum amount of liquidity reserves must 

be  calculated  for  the  following  180  days  based  on  the  difference  in  daily  cash  flow  between  the 

payments  for  the  covered  bonds  and  derivatives  entered  in  the  covered  bond  register  and  the 

revenue  from  underlying  assets.  Thereafter,  the  sum  of  such  accumulated  daily  differences  is 

calculated  for  the  next  180  days  and  the  largest  negative  result  of  such  calculations  must  be 
covered by the liquidity buffer.8 The liquidity reserve should be at least 2% of the nominal value of 

the assets in the cover pool. 

1.8  The  draft  law  allows  the  issuer  to  mitigate  risks  arising  from  covered  bonds  with  derivative 

instruments  and  to  include  such  agreements  in  the  cover  pool  subject  to  certain  requirements, 

including  that  derivative  transactions  are  made  under  a  framework  agreement  that  allows  for 

netting and that derivative  transactions do not  automatically terminate upon the insolvency of the 

issuer.  The  primary  and  substitution  assets,  the  liquidity  reserves  and  the  derivative  instruments 

must be entered in a cover pool register maintained by the issuer.  

1.9  For the purposes of ensuring sufficient collateral and compliance with applicable requirements, the 

draft  law  obliges  the  issuer  to  appoint  an  independent  cover  pool  monitor  whose  responsibilities 

include,  among  others,  ensuring  that  covered  bond  portfolio  stress  tests  are  conducted  in 

compliance  with  applicable  regulations  and  that  there  are  sufficient  cover  assets  and  that  these 
cover  assets  comply  with  the  requirements  9.  Under  the  draft  law,  the  authorisation  to  issue 

covered  bonds  can  be  sought  only  if  the  name  and  approval  of  a  person  to  act  as  a  cover  pool 

monitor have been included in the application for authorisation. 

1.10  The draft law pre-defines situations where the covered bond portfolio is separated from the issuer 

and specifies that in such cases the right to manage the covered bond portfolio is transferred to a 

cover pool administrator. One such circumstance is the insolvency of the issuer. Separation of the 

covered bond portfolio is intended to segregate the cover pool from the issuer, including from the 

bankruptcy  estate  of  the  issuer.  After  segregation,  the  cover  pool  will  constitute  a  pool  of  assets, 

which,  together  with  the  income  received  therefrom,  may  be  used  only  for  the  satisfaction  of  the 

claims of the respective covered bondholders and claims arising from derivative instruments, and 
to cover the costs of managing the cover pool10. To the extent that the proceeds of the cover pool 

are  insufficient  to  satisfy  in  full  the  claims  of  covered  bondholders,  covered  bondholders  have 

recourse  to  the  issuer’s  bankruptcy  estate  for  the  balance  of  the  claim,  ranking  pari  passu  with 
unsecured creditors 11. 

8  
9  
10  
11  

See Sections 21(3) of the draft law. 
See Sections 12 to 14 of the draft law. 
See Section 33 and 34 of the draft law. 

See Section 53(2) of the draft law. 

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1.11  The  draft  law  allows,  with  the  approval  of  the  EFSA,  the  whole  covered  bond  portfolio  to  be 

transferred to another Estonian credit institution that has been granted a licence to issue covered 

bonds and which has not during the last five years repeatedly or materially breached requirements 

applicable to it as an issuer. The covered bond portfolio may also be transferred, with the approval 

of  the  EFSA,  to  a  credit  institution  incorporated  in  another  Member  State.  A  transfer  to  a  credit 

institution  incorporated  in  another  Member  State  is  allowed  if  that  credit  institution  proves  that  it 

meets  certain  conditions:  (a)  the  credit  institution  fulfils  the  requirements  applicable  to  a  credit 

institution and to an issuer and has not during the last five years repeatedly or materially breached 

such requirements; (b) the rights of bondholders and derivative counterparts are secured at least to 

the same extent as they are in Estonia; (c) the rights of the debtors of claims in the cover pool are 

protected  at  least  to  the  same  extent  as  they  are  in  Estonia  and  the  transfer  would  not  cause 

additional  costs  or  other  burden  to  the  debtors;  (d)  the  acquirer’s  home  state  law  permits  the 

acquisition of the covered bonds portfolio; and (e) the acquirer has all the required approvals and 

licences. The acquirer must present a legal opinion in order to satisfy conditions (b), (c) and (d).  

1.12  The EFSA is tasked with supervising the issuer of the covered bonds and the activities of the cover 

pool  administrator  to  ensure  compliance  with  the  standards  of  the  draft  law  and  requirements 

stipulated  in  other  applicable  legal  acts.  The  supervisory  powers  of  the  EFSA  are  the  same  as 

envisaged  in  other  relevant  legal  acts.  The  EFSA  specifically  has  the  additional  right  to  request 

transfer of additional assets into the cover pool, the removal from the cover pool of assets that do 

not  meet  the  requirements  of  the  law,  the  conduct  of  a  stress  test,  the  change  of  cover  pool 
monitor, etc.12 

1.13  For the draft law to take effect, several delegated regulations still need to be adopted. 

2. 

General observations  

2.1  The  ECB  welcomes  the  aim  of  the  draft  law  to  establish  a  legal  framework  for  issuing  covered 

bonds,  thereby  diversifying  the  sources  of  potential  financing  for  credit  institutions  and  further 

developing  the  financial  markets  in  Estonia.  As  previously  noted,  the  ECB  is  in  favour  of  a 
developed,  harmonised,  high-quality  and  transparent  covered  bond  market  in  the  Union.13  The 

Eurosystem  accepts  covered  bonds  which  fulfil  the  eligibility  criteria  for  collateral  in  Eurosystem 

monetary policy operations. The ECB has issued several opinions expressing its views on covered 
bonds  legislation  in  various  Members  States 14  with  the  aim  of  ensuring  further  convergence 

towards common high standards in covered bonds in all Member States.  

2.2  The  Union  is  taking  considerable  steps  to  ensure  harmonised  and  common  high  standards 

regarding  covered  bonds  across  Members  States.  To  this  end,  the  Commission  has  published  a 

legislative  proposal  for  the  Union  framework  on  covered  bonds  on  12  March  2018  including  a 

12  
13 

14 

See Section 56(4) of the draft law. 

See  paragraph  2.1  of  the  Opinion  CON/2018/37.  All  ECB  opinions  are  published  on  the  ECB’s  website  at 
www.ecb.europa.eu. 
See  Opinion  CON/2007/3,  Opinion  CON/2010/47,  Opinion  CON/2010/73,  Opinion  CON/2011/27,  Opinion 
CON/2012/92, Opinion CON/2013/94, Opinion CON/2015/11, Opinion CON/2017/36, Opinion CON/2018/39. 

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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/EU15 (hereinafter the ‘proposed directive’) and a proposal for a regulation of the European 

Parliament and of the Council on amending Regulation (EU) No 575/2013 as regards exposures in 
the form of covered bonds 16, on both of which the ECB has opined17. Also, the European Banking 
Authority  (EBA)  has  identified  best  practices  in  relation  to  covered  bonds.18  Nevertheless,  Union 

legislative proposals are still developing. The Estonian authorities are invited to continue to follow 

the  ongoing  drafting  of  the  proposed  directive  and  to  take  this  into  account  in  the  Estonian 

legislative process, including as regards the various delegated regulations that are to be introduced 

under the draft law, as appropriate.  

3. 

Specific observations on the draft law 

3.1 

In order to ensure a continuously high  level  of supervision  over the issuers of covered bonds, an 

appropriate oversight system should be in place. Thus, the ECB welcomes the additional licencing 

and supervisory regime to be introduced in relation to credit institutions intending to issue covered 
bonds.19 The ECB notes that the draft law’s provisions regarding the right to both issue and revoke 

additional general authorisations for the issuance of covered bonds must be interpreted in line with 
Council  Regulation  (EU)  No  1024/2013 20.  In  particular,  Article  4(1)(a)  of  Regulation  (EU)  No 

1024/2013  gives  the  ECB  the  exclusive  task  of  authorising  credit  institutions  and  withdrawing 

authorisations  of  credit  institutions.  In  accordance  with  Article  6(4)  of  Regulation  (EU)  No 

1024/2013, the ECB exercises this responsibility both for significant and less significant institutions. 

The  ECB  understands  that  this  task  is  exercised  for  all  banking  activities  listed  in  Annex  I  of  the 
Directive 2013/36/EU of the European Parliament and of the Council21 as well as for any additional 

activity  allowed  under  national  law,  such  as  the  general  authorisation  to  issue  covered  bonds  as 

provided for under the draft law. Furthermore, the ECB is competent to ensure that the prudential 

risks  arising  from  covered  bond  issuances  as  well  as  from  investments  in  covered  bonds  are 

adequately  managed  and  assessed  by  credit  institutions.  For  the  sake  of  clarity,  any  possible 

authorisation for a specific covered bond programme or supervision of covered bonds as a financial 

product  would  be  considered  as  a  product-specific  regulation  and,  as  such,  to  fall  under  the 

supervision of a national competent authority.  

15  
16 
17 
18 

19 
20  

21  

COM(2018) 94 final. 

COM(2018) 93 final. 
Opinion CON/2018/37. 

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 Section 3 et seq. of the draft law. 
Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank 
concerning policies relating to the prudential supervision of credit institutions (OJ L 287, 29.10.2013, p. 63). 
Directive  2013/36/EU  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on  access  to  the  activity  of 
credit  institutions  and  the  prudential  supervision  of  credit  institutions  and  investment  firms,  amending  Directive 
2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p.338). 

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3.2  As  regards  publication  requirements 

the  covered  bonds 
authorisation, 22  the  ECB  understands  that  these  will  be  duly  exercised  in  line  with  the  ECB’s 

the  granting  of 

in  relation 

to 

confidentiality and data protection regime. 

3.3 

It is the understanding of the ECB that the referred licencing regime would require an application 

prior  to  the  first  issuance  of  covered  bonds  and  that  no  obligation  to  give  the  EFSA  an  ex  ante 

notification  prior  to  the  issuance  of  subsequent  covered  bonds  or  prior  to  the  establishment  of  a 

new covered bond programme will be introduced. The attention of the Estonian legislature is drawn 

to the best practices  and recommendations identified by  the  EBA; an ex ante  approval obligation 

prior to any new covered bond programme and a notification obligation for subsequent issuances 

are  recommended  even  in  cases  where  a  special  licencing  regime  exists  for  credit  institutions 
aiming to issue covered bonds.23  

3.4  The ECB welcomes the mandatory appointment of the cover pool monitor and its specified duties 

which  include,  among  others,  to  ensure  that  the  stress  tests  conducted  on  portfolios  of  covered 

bonds comply with applicable regulations and that there are sufficient cover assets and that these 
cover assets comply with the requirements set out in the law.24 In order to further facilitate investor 

due  diligence  and  enhance  transparency,  consideration  should  be  given  to  making  the  results  of 

the portfolio stress tests, including the parameters used, publicly available. 

3.5  The draft law does not include any statutory maturity extension triggers and allows for contractual 
maturity  extension  triggers  if  they  meet  specific  conditions.25  Moreover,  the  draft  law  does  not 

specify  those  circumstances  which  the  issuer  cannot  control  which  would  be  a  pre-condition  for 

maturity  extension.  In  the  ECB’s  experience,  it  is  not  possible  to  fully  exclude  discretionary 

triggering of a maturity extension. By allowing the extension triggers to be contractually defined, the 

proposed  directive  could  result  in  significant  heterogeneity  across  covered  bonds,  which  hinders 
harmonisation 26. Since the proposed directive will be a minimum harmonisation directive, Member 

States  are  free  to  go  further  when  transposing  the  proposed  directive  into  national  law.  The 

Estonian  legislature  is  therefore  invited  to  consider  further  limiting  the  conditions  under  which  a 

maturity  extension  of  covered  bonds  can  occur,  and  to  allow  only  statutory  maturity  extension 

triggers with a set of specific conditions as proposed by the EBA. These measures strengthen the 

high  quality  of  the  cover  pool  and  harmonisation.  According  to  the  EBA’s  proposal,  the  maturity 

extension may only be effected upon the following triggers taking place (both triggers must  occur 

simultaneously):  (i)  the  covered  bond  issuer  must  have  defaulted  and  (ii)  the  covered  bond 

breaches  certain  pre-defined  criteria/tests,  indicating  a  likely  failure  of  the  covered  bond  to  be 
repaid  at  the  scheduled  maturity  date.27  The  Estonian  legislature  could  consider  replacing  the 

22  
23 

24  
25 

26 
27 

See Section 8(1) of the draft law. 

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), page 72 and 131. 

See Section 14(1) of the draft law. 
The ECB understands that under Section 17(4) the contractual maturity extension triggers are severely limited, the 
triggers must not be influenceable by the issuer and it must be possible to determine the maturity date at all times. 
See paragraph 4 of Opinion CON/2018/37. 
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), page 137. See also paragraph 4.3 of Opinion CON/2018/37. 

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condition  requiring  an  ‘issuer  default’  with  a  condition  which  refers  to  the  circumstances  in  which 

the covered bond portfolio is considered to be separated (as specified in Section 33(1) of the draft 

law).  Alternatively,  it  could  consider  requiring  that  any  extension  of  maturity  must  have  the 

permission of the cover pool administrator.  

3.6  The  ECB  welcomes  the  detailed  specification  of  the  requirements  for  the  cover  pool  assets 

including the primary cover pool assets, the substitution assets and the liquid assets – this should 

help ensure that the covered bonds are of high quality. 

3.7  The proposed directive specifies that a Member State shall ensure investor protection by providing 

for a sufficient level of homogeneity of the assets in the cover pool so that they shall be of a similar 
nature  in  terms  of  structural  features,  lifetime  of  assets  or  risk  profile28.  The  need  to  ensure 

homogeneity  has  been  emphasised  by  both  the  ECB  and  the  EBA  and  therefore  primary  cover 
assets consisting of one asset class are preferable.29 The draft law introduces two different types of 

covered bonds: (a) mortgage covered bonds, whereby the primary assets in the cover pool must be 

only  residential  mortgage  loans,  i.e.  credit  provided  to  natural  persons  which  is  secured  by 
mortgages over residential real estate; 30 and (b) mixed asset covered bonds, whereby the primary 

assets  in  the  cover  pool  may  be  residential  mortgages  as  well  as  other  assets  listed  in  the  draft 
law,  such  as  commercial  mortgages  and  public  sector  assets.31  Although  primary  cover  assets 

consisting  of  one  asset  class  are  preferable  for  mixed  asset  covered  bonds,  the  Estonian 

legislature should consider including further provisions to ensure that the assets in the cover pool 

are  of  a  sufficiently  similar  nature  and  that  the  composition  of  the  cover  pool  does  not  materially 

change  over  time.  The  legislature  is  also  invited  to  introduce  requirements  to  better  ensure  the 

homogeneity of the cover pool over time. 

3.8  The  ECB  notes  that  the  cover  pool  liquidity  buffer  should  cover  the  entire  net  liquidity  outflow  for 
180  calendar  days,  as  liquidity  buffers  should  also  cover  potential  issuer  insolvency  scenarios.32 

Therefore,  it  is  suggested  that  Section  21(3)  of  the  draft  law  be  clarified  to  make  it  clear  that  the 

cover  pool  liquidity  buffer  covers  the  full  net  liquidity  outflow  of  the  covered  bond  programme  for 

180 days, and not just the largest negative result on a daily basis over the next 180 days. The ECB 

appreciates the introduction of a minimum cover pool liquidity buffer of at least 2% of the nominal 

value  of  the  cover  pool  assets.  The  ECB  welcomes  the  fact  that  the  Estonian  legislature  has  not 

resolved  to  use  the  option  under  the  proposed  directive  that  would  enable  disapplication  of  the 

covered  bond  portfolio  liquidity  requirements  for  certain  periods,  subject  to  rules  on  liquidity 
specified in other Union legal acts 33 and understands that under the draft law, liquid assets in the 

form  of  securities  may  be  held  on  the  account  of  the  issuer  in  a  manner  that  these  assets  are 

deemed  to  be  unencumbered  in  accordance  with  Commission  Delegated  Regulation  (EU) 

28  
29  

30 
31 
32  
33  

See Article 10 of the proposed directive. 
See  paragraphs  2.3,  3.1  and  Amendment  21  of  Opinion  CON/2018/37;  the  EBA  Report  on  Covered  Bonds: 
Recommendations on harmonisation of covered bond frameworks in the EU of 20 December 2016 (EBA-Op-2016-
23), page 36. 

Section 25 of the draft law. 
Section 30 of the draft law. 
See paragraph 3.3 of Opinion CON/2018/37. 

See Article 16(4) of the proposed directive. 

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2015/61 34 to avoid potential double liquidity requirements. In this respect it should be clarified that 

such liquid assets may only contribute towards those liquidity requirements up to the amount of the 

net liquidity outflow of the covered bond programme.  

3.9  Consideration should be given to clarifying that for the calculation of the cover pool liquidity buffer 

in  the  case  of  principal  redemptions  for  covered  bonds  with  extendable  maturity  structures,  the 

scheduled maturity date instead of extended maturity date is to be used, unless the maturity date 

has been extended. 

3.10  The  ECB  welcomes  the  fact  that  level  2B  assets  are  not  permitted  as  contributions  to  the  cover 

pool liquidity buffer and that assets cannot be own-issued. In order to enable a rapid liquidation  if 

necessary,  the  Estonian  legislature  may  consider  provisions  ensuring  a  sufficient  level  of 

diversification of the cover pool liquidity buffer. 

3.11  The high quality of assets in the cover pool is one of the key elements in ensuring confidence in the 

whole asset class and ensuring the dual-recourse nature of the claims by bondholders. The draft 
law specifies that claims should not be  in  default at the time of inclusion in the  cover pool.35 The 

ECB  would suggest that the Estonian  legislature should also consider obliging issuers to exclude 

on  an  ongoing  basis  from  the  calculation  of  coverage  any  claims  already  in  default  or  likely  to 
default. 36  

3.12  Under  the  proposed  directive,  Member  States  are  to  lay  down  rules  for  derivative  contracts  that 

could be included in the cover pool. This would include at least the eligibility criteria applicable to 
hedging  counterparties.  The  draft  law  lays  down  general  conditions  for  eligible  counterparties.37 

The  drafting  notes  to  the  draft  law  specify  that  the  aim  of  these  conditions  is  to  ensure  that  a 

counterparty  of  any  hedging  arrangement  is  also  sufficiently  solvent  during  turbulent  market 
conditions.38 The ECB welcomes the consideration given to this issue, but more specific qualitative 

and  quantitative  conditions  could  be  introduced  to  ensure  that  the  hedging  counterparty  used  is 

sufficiently solvent and that potentially costly re-hedging would not have to be undertaken. These 

could  include  triggers  related  to  the  creditworthiness  of  the  hedging  counterparty  (i)  for 

collateralising the derivative exposure or (ii) for the replacement of the hedging counterparty.  

3.13  For an instrument such as a covered bond to be effective, the title over the assets in the cover pool 

must be transferable following the separation of the covered bond portfolio from the originator (e.g. 
to enable the transfer of the entire covered bond portfolio under the draft law39). The assets in the 

34  

35 
36 
37 

38 
39 

Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of 
the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions (OJ L 
11, 17.1.2015, p. 1). 

See Section 25(4) and Section 30(3) of the draft law. 
See paragraph 3.1 of Opinion CON/2018/37. 

Under Section 23(1)(2) of the draft law the following entities are considered to be suitable counterparties: (i) credit 
institutions, investment firms, management companies, investment funds, insurance undertakings and other financial 
institutions subject to financial supervision; (ii) the Republic of Estonia, foreign states, regional governments or the 
central banks of Estonia or a foreign state; (iii) international institutions or organisations, including the International 
Monetary  Fund,  the  ECB,  and  the  European  Investment  Bank;  and  (iv)  financial  institutions  whose  only  business 
activity is investment in securities, market traders in commodities and commodity derivatives. 
Page 40 of Seletuskiri. Pandikirjade Eelnõu juurde. 14. november 2018, available at www.riigikogu.ee.  

See Section 45 et seq. of the draft law. 

8 

                                                 
ECB-PUBLIC 

cover pool consist of credit agreements. In general, national contractual laws require approval to be 

obtained  from  the  counterparty  to  the  agreement  prior  to  transferring  it  to  a  third  party.  The  ECB 

understands that for Estonian law-governed agreements such counterparty approvals are excluded 
by the draft law40. For agreements governed by other national laws than Estonian law it is unclear, 

and perhaps unlikely, that an obligation to seek approval from the counterparty can be overridden 

by Estonian national law. Hence, the issuer of covered bonds must itself ensure that the transfer of 

non-Estonian law-governed agreements in the cover pool is valid and enforceable. It is suggested 

that the Estonian legislature includes a specific obligation to this effect in the draft law. In addition, 

the  legislature  is  invited  to  consider  encouraging  issuers  to  obtain  pre-approvals  from  all  debtors 

under the credit agreements it wishes to include in the cover pool, in order to ensure legal certainty 

regarding the transferability of the covered bond portfolio after separation of the portfolio from the 

originator. 

3.14  The ECB welcomes the fact that the draft law clarifies the cases in which the right to manage the 

covered  bond  portfolio  is  transferred  to  a  separate  cover  pool  administrator.  The  draft  law  could 

clarify that in the  event of transfer of the  entire covered  bond portfolio this transfer of the right to 

manage  covers  all  forms  of  overcollateralisation,  as  well  as  overcollateralisation  provided  on  a 

voluntary basis. 

3.15  The  existence  in  any  covered  bond  law  of  obligations  that  require  sufficient  information  to  be 

provided  to  investors  to  facilitate  adequate  due  diligence  by  investors  is  a  key  feature  in 
encouraging  investor  confidence.41  The  ECB  welcomes  the  disclosure  obligations  introduced  into 

the draft law but considers that the issuers should be obliged to include further information in their 
reports.42  This  could  include  in  addition  various  levels  of  overcollateralisation,  separate  lists  of 

international  securities  identification  numbers  (ISINs)  for  covered  bonds  issued,  loan-to-value 

distributions  and  the  valuation  and  indexation  method,  an  overview  of  transaction  parties  and  in 

addition  a  glossary  with  definitions.  In  addition,  the  disclosure  standards  are  still  evolving  in  the 

Union and it is important to ensure that the level of disclosure remains sufficient over time and in 

keeping with market practices. This requires that the national authorities monitor the type and level 

of  detail  of  information  that  must  be  disclosed  as  a  minimum  requirement.  To  enable  flexible 

amendments  to  these  provisions  of  the  draft  law,  the  Estonian  legislature  could  consider 

introducing  a  right  for  an  appropriate  national  body  to  modify  the  specific  scope  of  disclosure 

obligations, for example by authorising such a body to issue a disclosure template in the form of a 

delegated regulation under the draft law. 

3.16  The  draft  law  envisages  the  adoption  of  several  delegated  regulations  which  have  not  been 

provided to the ECB. These includes regulations on (i) maintaining the covered bonds register; (ii) 

the calculation of the present  value of collateral assets; (iii) the methodology of  stress testing the 

covered  bond  portfolios;  and  (iv)  the  additional  requirements  relating  to  the  independent  value  of 

real  estate  securing  a  mortgage  loan,  including  the  reporting,  methodology  and  procedure  for 

40 
41 
42 

See Section 45(8) of the draft law.  
See paragraph 4.3 of Opinion CON/2017/36. 

Section 55 of the draft law.  

9 

                                                 
valuation43.  The  use  of  delegated  regulations  would  provide  an  effective  means  to  ensure  the 

flexibility of the draft law in this respect. The national authorities should remain mindful of regulatory 

developments in the Union when drafting such regulations. 

ECB-PUBLIC 

This opinion will be published on the ECB’s website. 

Done at Frankfurt am Main, 3 January 2019. 

[signed] 

The President of the ECB 

Mario DRAGHI 

43 

See Sections 11(9), 18(8), 22(3) and 28(2) of the draft law.  

10