Coleman Jonathan: Reserve Bank of New Zealand (Covered Bonds) Amendment Bill — Second Reading 
Text is incorporated into the Bound Volume 
Coleman Jonathan: Reserve Bank of New Zealand (Covered Bonds) Amendment Bill — Second Reading 
[Sitting date: 14 February 2013. Volume:687;Page:7908. Text is incorporated into the Bound Volume.] 
Hon Dr JONATHAN COLEMAN (Associate Minister of Finance) 
 on behalf of the Minister of Finance 
: 
 I move  
That the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill be now read a second time 
. I want to begin by thanking the members of the Finance and Expenditure Committee for their prompt handling of the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill. The committee received six submissions and heard from four submitters. 
The bill amends the Reserve Bank of New Zealand Act 1989 to establish a legislative framework for the issuance of covered bonds. This framework aims to provide legal certainty as to the treatment of cover pool assets in the event that an issuing bank was to be placed into statutory management or liquidation. The bill also enhances the Reserve Bank’s supervision of covered bond programmes. 
This bill is important as it will improve the access of New Zealand banks to offshore covered bond markets. Covered bonds have proven to be an important source of finance for New Zealand banks over recent years when funding markets have been volatile. Banks have been able to issue covered bonds at a reasonable cost when it has been difficult to issue other forms of debt. Further covered bonds provide New Zealand banks with a source of long-term funding which is important to reduce the vulnerability of the New Zealand economy to sudden changes in investment sentiment. This helps to promote overall financial stability and as such benefits all New Zealanders. 
The committee has recommended some minor drafting changes to the bill but I will highlight the more substantive changes now. These changes are largely in the nature of clarification. The main obligations imposed by the bill remain the same. The definition of “issuer” in the bill has been redrafted to make it clearer as to whom the bill applies. An issuer is a registered bank that issues intends to issue or guarantees covered bonds. The definition has been amended to cover the situation where a bank that is the issuer of a registered covered bond programme has its bank registration cancelled. Such an entity would continue to be treated as an issuer unless and until it transferred all the rights and obligations under the covered bond programme to another issuer. 
The first step towards providing legal certainty is requiring the registration of covered bond programmes with the Reserve Bank. An issuer commits an offence if it issues covered bonds other than under a registered programme. The committee has widened the scope somewhat by making it an offence for the issuer to permit the issue of a covered bond other than under a registered programme. This is to address the situation where the issuer is not issuing but is guaranteeing the covered bonds. 
The bill gives the Reserve Bank the power when registering a programme to designate the covered bond programme to particular programme classes based on the assets in the cover pool. This power has been amended so that the designation can take into account assets that are yet to be transferred to the cover pool. In order to be registered the programme must meet certain registration requirements. The committee has added an express registration requirement that the issuer maintain a register of the cover pool assets that are owned by the special purpose vehicle or SPV. The issuer must also have prescribed certain internal controls in the programme to ensure that this register is accurate and that it is consistent with any asset class designation. 
It is also a registration requirement that a cover pool monitor be appointed to the covered bond programme. Although the appointment will be under contract the committee has made some clarifications to the bill to specify the respective duties of the issuer and the cover pool monitor. Firstly the bill has been amended to clarify that the onus is on the issuer to ensure that reporting requirements in the bill are met. Secondly the issuer is required to keep the register of cover pool assets up to date and the contract must require the cover pool monitor to assess the issuer’s compliance with that requirement as well as the issuer’s associated internal controls. Thirdly the cover pool monitor is now required to assess compliance at a given point in time rather than at any point in time as the committee did not consider that the intention was to require continuous assessment. This does not change the frequency of the cover pool monitor’s reporting from the original requirement in the bill as introduced. 
The bill also imposes ongoing requirements on issuers of covered bonds—in particular reporting requirements. The committee has introduced a new provision to clarify that in the event of issuer default the issuer’s obligations end and the special purpose vehicle is then required to provide the Reserve Bank with any information it requests regarding the covered bond programme. Once registered the covered bond programme can be removed from the register only once certain conditions are met. An amendment has been made so that the Reserve Bank can remove a covered bond programme from the register if the security interest over the cover pool has been enforced subject to the consent of the relevant bond trustee and security trustee. 
The second step to providing legal certainty in respect of registered covered bond programmes is clarifying the application of the law in relation to the assets held by a covered bond special purpose vehicle in the event the issuer is placed into statutory management or liquidation. The bill as introduced did not address the statutory management regime in the Insurance (Prudential Supervision) Act 2010 so the committee has recommended an amendment to make it clear that a covered bond special purpose vehicle is not an associated person or subsidiary of an issuer for the purpose of the statutory management regime in that Act. 
 The bill includes a transition period that delays the application of the bill to existing covered bond programmes to allow time for amendments to be made to the programmes to meet the registration requirements. The committee has recommended extending the transition period from 6 months to 9 months to take into account 60 working days allowed for the Reserve Bank to consider applications for registration. 
I note that the committee discussed the appropriateness of the issuance limit for covered bonds that is currently imposed by the Reserve Bank. The limit set by the Reserve Bank by condition of registration limits the assets of the bank encumbered in favour of covered bond holders to 10 percent of the total assets of the bank. The committee considered that this limit provides an appropriate balance between the benefits of covered bonds in terms of reducing the risk of bank defaults in New Zealand by improving the ability of New Zealand banks to source long-term funding against any risks to unsecured creditors in terms of covered bond holders having priority over cover pool assets in the unlikely event that the bank failed. 
Once again I would like to thank the committee members for the work that they have undertaken on this bill. It has been significantly enhanced through the committee process. This bill will improve the resilience of the New Zealand financial system to volatility in international markets. I commend this bill to the House.