Swedish FSA finalises updated regs, stays close to summer proposals

The Swedish financial supervisory authority published updated covered bond regulations and guidelines last week, with some amendments made to proposals included in a consultation last year, although most changes were adopted as originally put forward, according to an official at the FSA.

Covered bond issuance in Sweden is governed by dedicated legislation and a regulatory framework, “Regulations and General Guidelines Governing Covered Bonds”, managed by Finansinspektionen, the financial supervisory authority (FSA).

In July the FSA released proposed amendments to its framework, which were intended to update it to take into account changes made to Sweden’s covered bond legislation since the guidelines and the legislation came into effect in 2004. Simplifying the language and reflecting changes to market environment and supervisory practice are also understood to have been behind the move to revisit the guidelines.

A consultation was held on the proposed amendments, which lasted until 3 September, and the final publication came on Wednesday of last week (16 January).

According to the FSA, its new regulatory framework includes changes relating to issuer’s re-evaluation of collateral for loans included in the cover pool, the introduction of a sensitivity analysis of price changes in property used as collateral for mortgage loans in the cover pool, requirements for derivative counterparties, and an extension of the independent inspector’s duties.

Martin Liljeblad, banking analyst at the FSA, said that in general most of the proposed changes have been carried through to the final version of the updated framework, although the language may differ slightly from the consultative document.

“In general we received quite good feedback from the financial institutions and the Association of Swedish Covered Bond Issuers, and some in-depth comments from the Riksbank and the group of independent inspectors,” he told The Covered Bond Report.

The main departure from the proposed amendments has to do with the calculation of net present value, according to Liljeblad.

“We had proposed that the issuing institutions use a discount rate including all types of risk, including credit risk,” he said, “but after referring back to the covered bond legislation and reviewing the feedback we received we decided to stick more or less with the existing approach.

“That means a discount rate using only the swap rate, since we wish to create some kind of continuity of the approaches used by the issuers so that it is easier to compare.”

This was a welcome outcome for issuers, he added, as it will avoid them having to carry out any major IT updates, for example.

A new feature that the FSA is introducing under its covered bond regulatory framework is stress testing for falls in property prices as part of the risk management of cover pools. Liljeblad said that the final version of this differs from what was proposed by specifying that price falls in 5% increments ranging from 0%-30% should be tested against rather than only two set levels, as was the case in the proposal.

The stress testing will lead to a sensitivity analysis that will be part of a review carried out by the independent inspector, added Liljeblad, who will provide an annual report to the FSA.