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Keywords: FSA, covered bonds, debt securities, asset pool, UCITs Directive, Capital Requirements Directive, Sourcebook
Originally published March 2008
As mentioned before, the Sourcebook sets out the guidance, directions and rules made by the FSA under the Regulations, which in particular relate to:
- The registration formalities and requirements;
- The notification requirements towards the FSA;
- The FSA's enforcement process and
procedures.
This part 3 contains a brief description of the guidance, directions and rules set out in the Sourcebook.
3.1 Registration
In order to issue Regulated Covered Bonds, the issuer and the covered bonds (programme) must be registered in the relevant Register of the FSA. This section 3.1 sets out some practical aspects of the registration procedure of the FSA.
Submission Of Application Form And Payment Of Registration Fees
In order to become admitted to both Registers, the issuer must submit an application for registration form, which:
- will cover the registration of both the issuer and the
covered bond, because the FSA will not consider applications
for issuer registration in isolation from the application for
registration of the covered bond; and
- must be submitted for each proposed issuance of covered
bonds (even if it is already registered in the Register of
Issuers), unless the regulated covered bonds will be issued
under a programme (as the UK structured covered bonds issued
to date have been). In the latter case, the issuer merely has
to notify the FSA of each issuance by submitting a
"series issuance notification form"; and
- will not be considered by the FSA until it has received a
registration fee of £25,000 (by way of bankers draft,
cheque or credit transfer). This fee is non-refundable (even
in case the application is not successful); and
- must be verified by a senior manager of the issuer, who
also has to make a number of required confirmations in the
form (such as the confirmation that the arrangements relating
to the covered bond or the covered bond programme (as the
case may be) comply with the Regulations and the Sourcebook)
and consent to the FSA displaying their confirmation of
compliance with the Regulations and the Sourcebook on the
FSA's website.
Evidence Of Compliance To Be Provided
According to the Sourcebook, the application form must provide the relevant details of the covered bond or the covered bond programme (as the case may be) and demonstrate how each of the requirements of the Regulations and the Sourcebook will be complied with.
In order to enable the issuer to demonstrate this compliance, the Sourcebooks sets out a number of expectations of the FSA in relation to the requirements set out in the Regulations, such as:
- In order to satisfy the requirement of having an asset
pool with sufficient quality (see section 2.4 of part 2
above), the FSA expects the issuer to demonstrate that (i) it
has in place appropriate systems, controls, procedures and
policies in place and (ii) the cashflows generated by the
assets are sufficient to meet payments in a timely
manner.
- In considering the sufficient quality of the asset pool,
the FSA will also take account of any over collateralisation
to mitigate the asset credit risk, concentration risk, market
risk and counterparty risk and consider the loss in the event
of a default.
-
The issuer must demonstrate that the covered bond or the
covered bond programme (as the case may be) contains
provisions that adequately deal with (amongst
others):
- identification and rectification of any breach of the
asset pool requirements set out in the Regulations;
- the appointment of replacement servicers, cash
managers or paying agents; and
- the winding up of the asset pool in case any breach
of the asset pool requirements are not rectified in a
timely manner.
- identification and rectification of any breach of the
asset pool requirements set out in the Regulations;
-
The issuer must obtain written advice and reports regarding
the compliance of the issuer and the covered bond or the
covered bond programme (as the case may be) with the
Regulations and the Sourcebook from suitable independent
third party advisers (such as lawyers and accountants)
before making an application.
The Sourcebook also clarifies that the FSA requires legal advice and an auditor's report, each covering a number of listed items. In particular, the FSA expects legal advice to deal with a minimum set of matters required by the Regulations for Regulated Covered Bonds. The following are examples of such matters:
- bankruptcy remoteness of the transfer of the assets
to the owner and that there is no risk of the transfer
being recharacterised as a security interest;
- whether the contractual arrangement for the covered
bond transaction limits the property in the pool to
"eligible property" as determined by Regulation
2(1) and located in the permitted locations determined by
Regulation 2(2);
- whether the owner is a company registered in the UK
and its "centre of main interest" likewise is
situated in the UK;
- whether the security granted over the asset pool by
the owner is enforceable;
- whether the contractual arrangements provide for a
priority of payments in the case of winding up of the
owner consistent with Regulation 27 (see part 2 of this
paper above).
- bankruptcy remoteness of the transfer of the assets
to the owner and that there is no risk of the transfer
being recharacterised as a security interest;
Where assets are situated in jurisdictions 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 in relation to matters such as true sale, perfection of security, priority and recognition of insolvency proceedings and foreclosure rights.
3.2 Annual Confirmations Of Compliance
In order to monitor the on-going compliance with the Regulations and the Sourcebook (and in particular, the asset coverage requirements described in section 2.4 of part 2 above), the issuer must send to the FSA an annual written confirmation of compliance.
This annual confirmation of compliance:
- will be published on the FSA's website;
- must be preceded by the issuer having obtained and
considered written advice or reports from suitable
independent third party advisers (such as accountants and
lawyers); and
- must be sent for the first time (covering the period from
the registration date up to the confirmation date) to the FSA
on the earlier of (i) the date selected by the issuer and
(ii) the date 12 months from the registration date. Any
subsequent confirmations (covering the period from the last
confirmation date to the date of the current confirmation)
must be made on the anniversary on the first confirmation
date.
If the issuer is in insolvency, the annual confirmation requirements will be imposed on the owner, with the owner having to make an additional confirmation of compliance within one month of the date of insolvency.
3.3. Asset Pool Notifications And Other Notifications
The issuer (or the owner, in case of insolvency of the issuer) must provide the FSA with on-going information about the asset pool. Such information must be provided by completing an asset notification form and delivering this to the FSA within one month of the end of each quarter following the registration date.
The Sourcebook also determines that, in case of a change of the owner or any proposed material changes to the regulated covered bond, the FSA will need to be notified thereof.
3.4 Annual Fees
In addition to the non-refundable registration fees (see 3.1 above), each registered issuer must pay to the FSA a fee of £20,000 for each financial year in which the issuer is on the Register of Issuers (as at 31 March of the previous financial year).
For the first year, the annual fee will be either £20,000, £15,000, £10,000 or £5,000 (depending on the registration date of the issuer).
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