New Legal Framework for Covered Bonds

Decree-Law No. 31/2022, of May 6, brings key changes to the covered bonds framework since it (i) approves the Legal Framework for Covered Bonds, transposing Directive (EU) 2019/2162, of November 27, on the issue of covered bonds and the public supervision of such bonds, with a view to harmonizing the requirements for the issue and supervision of covered bonds within the European Union, and (ii) also transposes Directive (EU) 2021/2261, of December 15, which ensures the equivalence of the use of the key information documents prepared in accordance with European Union legislation on packaged retail investment products and insurance-based investment products.

Decree-Law no. 31/2022 shall enter into force on July 1, 2022, with the exception of the provisions of article 156-A of the General Regime of Collective Investment Undertakings, as amended by this Decree-Law, which shall only enter into force on January 1, 2023, as well as the provisions of article 44 of the Legal Regime of Covered Bonds (“RJOC“), approved in annex to this Decree-Law, which shall enter into force on the day following its publication.

Therefore, the previous 2006 regime continues to apply to covered bonds and public sector bonds until they are paid in full, and CMVM is responsible for supervising the issues and programs made under this regime.

1. Object and Scope

This Decree-Law approves the new Legal Framework for Covered Bonds, applicable to all covered bonds issued by credit institutions established in Portugal, replacing the legislation that regulated mortgage and public sector bonds, simplifying the framework and opting for a single bond typology, regardless of the cover asset.

To this end, it amends the General Regime of Collective Investment Undertakings, the General Regime of Credit Institutions and Financial Companies and the Securities Code.

It also revokes the previous regime set forth in Decree-Law 59/2006, of March 20.

2. New Legal Framework for Covered Bonds

2.1. General Provisions

In accordance with RJOC, covered bonds represent a debt obligation issued by credit institutions which is collateralized by a limited set of assets to which bondholders have direct recourse as preferred creditors.

In this way, bondholders simultaneously continue to have a claim on the issuer as ordinary creditors.

This dual claim on the covering portfolio and the issuer is called the “dual recourse” mechanism.

The covered bonds programme is subject to prior authorization from the CMVM.

2.2. Liquidation or Resolution Protection and Eligible Assets

In the event of resolution or liquidation of the issuing credit institution, the holders of the covered bonds are also protected, by ensuring that the associated payment obligations are not automatically accelerated.

For this purpose, an adjustment was made to the eligible assets catalog of the covered bonds:

1. assets that meet the requirements set out in European Union legislation on the prudential requirements for credit institutions for exposures in the form of covered bonds;
2. high quality cover assets that are secured by a first class guarantee over assets located or registered in the European Economic Area not covered by the previous point; or
3. claims on or guaranteed by public corporations not covered by point (a).

2.3. Intragroup Pooled Covered Bond Structures

Provision is made for covered bonds issued by a credit institution belonging to a group to be used as underlying assets in a covered bonds issue by another credit institution, provided that the latter belongs to the same group.

Alternatively, it is possible to opt for joint financing structures, in which a credit institution acquires and uses credits originated by another credit institution as collateral for the issue of covered bonds.

2.4. Coverage and Liquidity

In accordance with the new RJOC, the liabilities arising from the covered bonds are fully secured by the cover assets.

For this purpose, and in order to mitigate liquidity risks, the global guarantees have a permanent liquidity reserve made up of liquid assets available to cover net outflows from the covered bonds programme.

It should be noted, however, that unsecured claims resulting from exposures considered to be in default under European Union legislation on the prudential requirements for credit institutions with respect to credit risk do not contribute to the liquidity reserve of the global guarantee.

2.5. CMVM’s Regulatory and Supervisory Powers

The covered bonds programme is subject to the prior authorization of the CMVM.

Furthermore, the CMVM may request information from issuing credit institutions about covered bonds programmes and issues, including, namely, the following elements:

1. the eligibility of assets and requirements applicable to the global guarantee;
2. the segregation of the cover assets;
3. the performance of duties by the entity monitoring the global guarantee;
4. the coverage requirements;
5. the liquidity reserve of the pool guarantee;
6. the conditions applicable to covered bonds with automatic extension of maturity.

In this regard, the CMVM is also responsible for the supervision and oversight of credit institutions, regardless of whether the covered bonds are subject to an offer of securities to the public under EU prospectus rules.

2.6. The “European Covered Bond” mark

Covered bonds complying with the requirements of RJOC may use the mark “European Covered Bond”. In addition, covered bonds which comply with the above rules may use the mark “European Covered Bond (Premium)”.

3. Amendments to the national legislation in force

3.1. Addition and Amendments to the General Regime of Collective Investment Undertakings

The present diploma adds article 156-A and revises articles 110-D, 114-C, 176, 201-A, 233, 233-A and 240 of the General Regime of Collective Investment Undertakings (“RGOIC”), approved in annex to Law no. 16/2015, of 24 February, as amended.

To this end, article 156-A was added to the RGOIC, integrated in the subsection “Key information for investors“.

According to this article, “the entity in charge of the management that prepares, provides, updates and translates a key information document in accordance with the provisions of the European Union legislation on packaged retail investment products and insurance-based investment products, for the collective investment undertakings it manages, may use that document for the purposes of complying with the provisions of the General Regime and the respective national and European regulations regarding the key investor information document.”

In the above situation, the CMVM is not allowed to require the additional preparation of the said document containing fundamental information for investors in accordance with the requirements laid down in the RGOIC and other national and European regulations.

Oaragraph 6 of article 176 of the RGOIC was also amended, in order to limit to 25% and 80% the investments by UCITS in transferable securities and money market instruments issued by the same entity, if they consist in covered bonds issued by credit institutions having their registered office in a Member State under the terms of the applicable legislation, including covered bonds issued until July 8, 2022 under the terms of the legislation applicable to these bonds.

Regarding the revision of the remaining articles above mentioned, it mainly concerns the determination of CMVM or the authorities of other Member States’ powers to change the elements or cease trading in several cases:

1. Establishment of a branch and freedom to provide services in another Member State relating to Alternative Investment Undertakings;
2. Establishment of a branch and freedom to provide services in Portugal relating to the management of Alternative Investment Undertakings;
3. Marketing in Portugal of Undertakings for Collective Investment in EU Securities;
4. Marketing by Management Entities from the European Union or from third countries authorized in another Member State;
5. Marketing of European Union AIFs in another Member State.

3.2. Amendment to the Legal Framework of Credit Institutions and Financial Companies

In turn, article 2-A of the General Regime of Credit Institutions and Financial Companies (“RGICSF”), approved by Decree-Law no. 298/92, of December 31, was amended to include the definition of “covered bond”.

3.3. Amendment to the Securities Code

The Securities Code (“CVM”), approved by Decree-Law 486/99, of November 13, as amended, is essentially amended in two aspects:

i) Amendment to paragraph 7 of article 257-G, regarding reporting: the daily reporting of the positions held by financial intermediaries that execute OTC operations in commodity derivative financial instruments or emission allowances and respective derivatives, or by clients and their beneficial owners in those instruments, shall be carried out in accordance with the terms defined in the European Union legislation and regulations;

ii) Amendment to paragraph 2 of article 375, regarding cooperation: it clarifies that cooperation agreements with other national institutions must be published on CMVM’s website, instead of the CMVM’s bulletin, as previously foreseen.

3.4. Revocation of Decree-Law 59/2006, of March 20

Since mortgage bonds are now included in the definition of covered bonds, the new RJOC will also extend its application to this category of bonds.

Consequently, this decree-law revokes Decree-Law 59/2006, subsequently amended by Decree-Law 17/95, of 27 January and Decree-Law 52/2006, of 15 March, which regulated mortgage-backed bonds, without prejudice to the provisions of this Decree-Law and of article 240(3)(c) of the General Regime of Collective Investment Undertakings, approved in annex to Law 16/2015, of 24 February, as amended.

CONCLUSIONS

RJOC establishes new rules for the prudential treatment of exposures in the form of covered bonds, simplifying the regime, through a single type of bond, regardless of the cover asset, and harmonizing the requirements for the issue and supervision of covered bonds.

This harmonization of the structural elements that covered bonds issued in the European Union must fulfill will certainly contribute to the dynamization of this instrument which is an important source of funding for credit institutions.