RCB 2.3 Determination of registration

To enable the FSA to be satisfied that the issuer and the proposed owner will comply with requirements imposed on the issuer or owner, as the case may be, by or under the RCB Regulations, the applicant should use the application form to provide relevant details of the proposed covered bond or programme and demonstrate how each of the requirements will be complied with.

1. (1)

   The FSA's application form covers both issuer registration and covered bond registration as the FSA will not normally consider applications for issuer registration in isolation from the application for registration of the covered bond.

2. (2)

   An issuer which has been admitted to the register of issuers should use the same form to apply for registration of subsequent covered bonds or programmes.

3. (3)

   The issuer does not need to apply for registration of individual issuances from a programme which has already been registered, but does need to notify the FSA of the issuance under RCB 3.4.1 D.

In relation to registration of an issuer of regulated covered bonds, the FSA will need to be satisfied that the issuer's compliance with the requirements of the regulatory system has been adequate and does not give rise to any material cause for concern over the issuer's ability to issue regulated covered bonds in compliance with the RCB Regulations.

To demonstrate that the issuer and the proposed owner will comply with Regulation 17, and Regulations 23 and 24 of the RCB Regulations (capability of the asset pool to cover claims), the issuer should set out what it considers to be the risks of the regulation not being complied with and show how those risks have been adequately mitigated by reference to the tests and provisions set out in the covered bond or programme documentation.

Regulations 17(2)(d) (requirements on issuer relating to the asset pool) and 23(2) (requirements on owner relating to the asset pool) require the issuer of a regulated covered bond and the owner of the relevant asset pool to make arrangements so that the asset pool is of sufficient quality to give investors confidence that in the event of the failure of the issuer there will be a low risk of default in the timely payment by the owner of claims attaching to a regulated covered bond.

The FSA will:

1. (1)

   expect the issuer to demonstrate that it has in place appropriate systems, controls, procedures and policies, including in relation to risk management, underwriting, arrears and valuation;

2. (2)

   expect the issuer to demonstrate that the cash-flows generated by the assets would be sufficient to meet the payments due in a timely manner including under conditions of economic stress and in the event of the failure of the issuer;

3. (3)

   take account of any over collateralisation used to mitigate these risks to achieve the desired outcome so that, for example, potential credit losses and mismatches are offset; and

4. (4)

   not only consider the probability of default in timely payment of claims, but also the loss in the event of a default. This will include consideration of recovery assumptions, timing and costs.

The risk factors which the FSA will take into account in assessing the issuer's and owner's compliance with Regulations 17(2)(d) (general requirements on issuer in relation to the asset pool) and 23(2) (requirements on owner relating to the asset pool) will include credit risk of the assets, concentration risk, market risk and counterparty risk.

1. (1)

   The credit risk of an asset is the risk of loss if another party fails to perform its obligations or fails to perform them in a timely fashion.

2. (2)

   Where, for example, the asset pool includes residential mortgages the relevant factors which the FSA may consider include:

   1. (a)

      whether the asset pool contains (or could contain) loans made to individuals who have been made bankrupt or have had court judgments made against them;

   2. (b)

      the extent to which the asset pool contains (or could contain) loans made to individuals whose earnings have been self-certified rather than independently verified;

   3. (c)

      whether the asset pool contains (or could contain) loans which have a higher credit risk in terms of individuals' willingness or ability to pay (for example, because they have high loan-to-value ratios, low debt service ratios or high income multipliers);

   4. (d)

      the quantity and duration of mortgages which are in arrears;

   5. (e)

      the length of time the loan has been in place; and

   6. (f)

      the purpose and terms of the mortgage (for example, owner occupied, buy-to-let, interest only, repayment, fixed rate, variable rate, off-set1 or endowment).

3. (3)

   Where, for example, the asset pool includes commercial mortgages, the relevant factors the FSA may consider in addition to any of the relevant residential mortgage factors described above, include:

   1. (a)

      the type of property to which the mortgage relates (for example whether it is office, retail, industrial);

   2. (b)

      the terms of the loans (including size, interest rate, maturity, options, representations and warranties); and

   3. (c)

      occupation levels, rental income and terms of rental agreements of the property secured.

Concentration risk is the risk of loss from exposures being limited in number or variety. The relevant factors the FSA may consider include:

1. (1)

   the level of granularity of the asset pool (i.e. what is the number and size distribution of assets in the pool);

2. (2)

   whether the borrowers or collateral is unduly concentrated in a particular industry, sector, or geographical region.

Market risk is the risk that arises from fluctuations in the values of, or income from, assets or in interest or exchange rates. The relevant factors the FSA may consider include whether the hedging agreements (defined in Regulation 1(2) of the RCB Regulations as agreements entered into or assets held as protection against possible financial loss) adequately protect against any adverse mismatched cash-flows due to changes in market variables.

Counterparty risk is the risk that the counterparty to a transaction could default before the final settlement of the transactions cash flows. The relevant factors the FSA may consider include whether the:

1. (1)

   counterparty has an appropriate credit rating;

2. (2)

   counterparty can unilaterally terminate the hedging agreement, and if so under what circumstances;

3. (3)

   contractual arrangements contain appropriate termination procedures (for example, what provisions apply in the event of default or in respect of the calculation of termination payments); and

4. (4)

   contractual arrangements provide adequately for what is to happen in the event of issuer default.

1. (1)

   The FSA will assess each risk factor separately and then assess any inter-dependencies and correlations to form a judgment on the quality of the asset pool as a whole. For example, an asset pool which is of high credit quality and so low risk due to a combination of factors such as owner occupation, low income multiples, full valuation methodologies, and a strong payments track record, may permit another factor such as high loan-to-value ratios, that would otherwise be considered as inconsistent with high quality, to be included.

2. (2)

   The more that an asset pool consists of loans involving risks such as high loan-to-value ratios, self-certification, borrowers with poor credit profiles, and low borrower affordability, the less likely it is, without other mitigating factors, to be of sufficiently high quality to meet the requirements in Regulations 17(2)(d) (general requirements on issuer in relation to the asset pool) and 23(2) (requirements on owner relating to the asset pool) of the RCB Regulations.

In assessing whether the asset pool is of sufficient quality, the FSA will have regard to the requirements about legal certaintyreferred to in BIPRU 3.4.64 R, the requirements about monitoring of property values in BIPRU 3.4.66 R and the valuation rules in BIPRU 3.4.77 R to BIPRU 3.4.80 R.

The FSA expects the issuer to demonstrate that there are provisions in the covered bond or programme that adequately deal with:

1. (1)

   the identification and rectification of any breach of Regulations 17(2) (general requirements on issuer in relation to the asset pool) and 24 (requirements on owner relating to the asset pool) of the RCB Regulations;

2. (2)

   the appointment of replacements for parties, for example servicers, cash managers or paying agents; and

3. (3)

   the orderly winding-up of the asset pool in the event that breaches of Regulations 17(2) and 24 are not rectified in a timely way.

The FSA expects the issuer to demonstrate, as part of showing that Regulations 17 (general requirements on issuer in relation to the asset pool) and 24 (requirements on owner relating to the asset pool) of the RCB Regulations will be complied with, that there are provisions in the covered bond or programme which enable the views and interests of investors in the regulated covered bond to be taken account of in an appropriate and timely way by a suitably qualified, adequately resourced, third party who acts independently, such as a bond trustee.

1. (1)

   The FSA expects legal advice to deal adequately with at least the following matters in relation to the actual or proposed arrangements:

   1. (a)

      whether the transfer of the assets to the owner would be upheld in the event of liquidation or administration, or similar collective insolvency proceedings, of the issuer or the transferor (if different from the issuer);

   2. (b)

      the risk of the transfer of an asset to the owner being re-characterised as the creation of a security interest;

   3. (c)

      the risk of an asset transferred to the owner being clawed back under insolvency law provisions (such as rules against preferences, or transactions at an undervalue);

   4. (d)

      whether the contractual arrangements limit eligible property to the items listed in Regulation 2(1) of the RCB Regulations (meaning of eligible property);

   5. (e)

      whether the contractual arrangements limit the situation of eligible property to locations permitted under Regulation 2(2) of the RCB Regulations (situation of eligible property);

   6. (f)

      whether the contractual arrangements limit the asset pool to items listed in Regulation 3 of the RCB Regulations (composition of asset pool);

   7. (g)

      if security is granted over the asset pool by the owner, the enforceability of that security and any relevant legal limitations;

   8. (h)

      whether the owner meets the requirements set out in Regulation 4 of the RCB Regulations (meaning of owner);

   9. (i)

      whether the owner is a company or limited liability partnership which has its registered office in the United Kingdom and whether the contractual arrangements support an analysis that the owner's "centre of main interests" (defined in Regulation 1(2) of the RCB Regulations as having the same meaning as in Article 3(1) of Council Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings) is also situated in the United Kingdom;

   10. (j)

       whether the contractual arrangements are consistent with the obligation of the issuer to lend sums derived from the issue of a regulated covered bond to the owner of the relevant asset pool under Regulation 16 of the RCB Regulations (sums derived from the issue of regulated covered bonds);

   11. (k)

       whether the contractual arrangements provide that if the owner is wound up, the asset pool will be used to reimburse the claims of investors in regulated covered bonds under the priority set out in Regulation 27 of the RCB Regulations (priority in a winding-up of an owner);

   12. (l)

       whether the contractual arrangements provide for the appointment of a person who will enable the views and interests of investors in the regulated covered bond to be taken account of in an appropriate and timely way as explained in RCB 2.3.15 G;

   13. (m)

       whether the contractual arrangements provide for the identification and rectification of breaches of Regulation 17 of the RCB Regulations (general requirements on issuer relating to the asset pool) and Regulations 23 and 24 of the RCB Regulations (requirements relating to the asset pool) and the orderly winding-up of the asset pool in the event that the breaches cannot be rectified; and

   14. (n)

       the enforceability of the contractual arrangements.

2. (2)

   Where assets are situated outside England and Wales, the FSA expects the issuer to obtain advice on whether the law of those jurisdictions impacts on the enforceability of security and the availability of those assets. Relevant issues to consider may include true sale, perfection of security, priority and recognition of insolvency proceedings, and foreclosure rights.

1. (1)

   The FSA expects the report from the accountants to address at least the following matters:

   1. (a)

      that the level of over collateralisation meets the limits set out in the covered bond arrangements which are designed to ensure compliance with the requirement that the asset pool is capable of covering claims attaching to the bond in Regulation 17 (requirements on issuer in relation to the asset pool) of the RCB Regulations; and

   2. (b)

      that appropriate due diligence procedures (which should include an analysis of a representative statistical sample at a 99% confidence level of the assets in the asset pool)1 have been carried out to check whether:

      1. (i)

         the attributes of the asset pool correspond accurately to supporting information obtained from other sources (for example, in the case of mortgage pools, that information such as the mortgage amount, value, term, type and location correspond to land registry records, valuation reports and loan agreements);

      2. (ii)

         the attributes of the asset pool are appropriately reflected on the records which are maintained in order to comply with the requirements of Regulations 17(2)(a) and 24(1)(a)(i) of the RCB Regulations (requirement to keep a record of each asset in the asset pool) and on the issuer's systems; and

      3. (iii)

         the issuer's analysis of the assets provided to the FSA is accurate.

The FSA's use of its power under Regulation 12 of the RCB Regulations (requirement of further information to determine application) may include requiring the issuer to provide copies of the advice or reports referred to in RCB 2.3.16 D to the FSA.

1Assets which would be eligible for inclusion in a liquidity buffer under BIPRU 12.7 can be liquid assets for the purposes of limb (a) of the definition of liquid assets in Regulation 1(2) of the RCB Regulations. The FSA will also expect that liquid assets which consist of deposits should be held in the same currency or currencies as the regulated covered bonds issued by the issuer.