Issuer ratings out, Art 129(7) added in new LCR draft leak

Issuer ratings look set to have been scrapped as LCR eligibility criteria for covered bonds and a transparency requirement introduced, according to a leaked EC document on the delegated act that the Commission is likely to finalise in September.

Minimum issuer ratings had only recently been added as a precondition for covered bonds to count toward Liquidity Coverage Ratio (LCR) requirements, appearing in a leaked EC paper seen by The CBR in June. The move could have resulted in certain covered bonds losing LCR status despite meeting minimum rating requirements for the bonds themselves.

However, the Commission held a further meeting on the LCR regulation on Friday and a document linked to this does not include the minimum issuer rating requirement.

“The dreaded and much discussed issuer rating is not contained anymore in the document,” said Florian Eichert, senior covered bond analyst at Crédit Agricole CIB. “This is good news for a lot of weaker banks in the periphery as well as core countries.”

A new LCR eligibility criterion, however, has been added, for Level 1 and Level 2A assets, and sets transparency standards stemming from a requirement in the Capital Requirements Regulation thus: “the credit institution investing in the covered bonds must meet the transparency requirement laid down in Article 129(7) of Regulation (EU) No. 575/2013”.

Luca Bertalot, secretary general of the European Covered Bond Council, welcomed the prospect of the transparency standards being included in the LCR delegated act, seeing it as a nod to the ECBC Label initiative.

“We are pleased that the delegated act looks set to include an implicit recognition of the pivotal and hard work undertaken in the last years by the covered bond Label community in enhancing transparency in the covered bond market,” he said.