The Minister for Finance, Mr Charlie McCreevy TD announced today the imminent publication of the Asset Covered Securities Bill, 2001. The Bill enables the introduction of new financial instruments in the Irish market - mortgage and public credit covered securities similar in nature to the long standing German Pfandbriefe securities. In recent years other European countries including France, Spain and Luxembourg have introduced enabling legislation to facilitate the issuance of similar securities.
The Minister said "the introduction of the euro has led to the development of an integrated and competitive money market in the euro area. This Bill will enable Irish lenders to finance their activities as efficiently as their European counterparts and demonstrates the Government's commitment to the further development of Irish capital markets and the IFSC"
The Bill provides that the new financial products - mortgage and public credit covered securities - will be statutorily secured on a pool of underlying assets (to be known as cover assets) held by the institution issuing the securities. These "cover assets" are primarily mortgages or public sector loans. Unlike conventional securitisation, the assets remain the property of the institution issuing the securities and remain on that institution's balance sheet. In addition, the cover asset pools will be "dynamic" i.e. assets which disimprove in quality may be replaced by new and better assets.
The key feature of the new product is the enhanced security offered to the holders of the securities. In the event of the insolvency of the issuing institution, the cover assets must be used first to meet the claims of the holders of the securities. Ordinary creditors of the institution may not make a claim against these assets until the full obligation due to the investors in the securities has been discharged.
The enhanced security afforded by the preferential creditor status, the specification of strict matching of assets and liabilities and the regulatory environment for the product have resulted in the German Pfandbriefe attaining a AAA credit rating and becoming an extremely popular investment. They are the largest single bond type in Europe.
The product provided for in this legislation builds on the existing Pfandbriefe type product in existence across Europe, but also contains some innovative features. These include:
specific interest rate risk management requirements;
express powers to enter into hedging contracts to manage risk;
tiered regulatory protection for investors; and
clear provisions on what must happen in the event of an institution getting into financial difficulties.
The Minister said that mortgage and public credit covered securities are now becoming a standard feature of European markets. They are a recognised asset class in their own right and are attractive to long-term institutional investors. They offer financial institutions the prospect of raising funds in a cost-effective manner and, as a consequence, they can have a substantial and beneficial impact on competitiveness.
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