Statutory Securitisation

Mortgage Backed Securities

The Asset Covered Securities Act 2001 to 2007 allows the issue by designated institutions of mortgage-backed securities. The legislation avoids the need for the creation of such securities by use of somewhat artificial elaborate structures in the manner set out in a separate chapter.

The legislation does not cover all issuers.  It applies to designated mortgage credit institutions and designated public credit institutions. Issuers must be registered in one of the above categories under the legislation.

Eligible credit institutions for registration include licensed banks, buildings societies and credit institutions under the Banking Directive.  There are similar provisions in respect of designated mortgage credit institutions and designated public credit institutions.

Designagted Institutions

A designated commercial mortgage credit institution must enter a covered assets hedge contract before it may issue mortgage credit securities.  The covered assets monitor must take reasonable steps to ensure compliance with the provisions of the legislation in respect of the required contents of the assets pool.

A designated mortgage credit institution may carry out permitted business activities only. Permitted activities include providing mortgage credit, dealing in and holding mortgage credit assets, dealing in and holding substituted assets and refinancing.  This may include taking deposits and issuing asset-covered securities.

Mortgage covered securities may be issued by a designated mortgage credit institution which is secured on a pool of assets in a covered asset pool.  The assets may include mortgages, commercial mortgages, other credit receivables and commercial mortgages.  It may include covered assets, hedge contracts and substitution contracts.

Substitution contracts are those held with a financial institution or other assets designated by the ECB as Tier 1 assets, and they may be included, subject to conditions.  There are equivalent provisions in respect of designated public credit institutions.

The assets within the pool are registered on a register.  There are separate registers under the legislation for mortgage credit institutions and public credit institutions.

Hedging & Asset Pool

Institutions may hedge liabilities in the asset pool to reduce and minimize the risk of loss arising from changes in interest rates, exchange rates, credit risks and certain other risk factors. A hedge contract may be included if it relates to the assets included in the pool and it has been agreed between the institution and the other party to the contract that they may be included.

The hedge contract must relate only to mortgage-covered securities issued by the institution or substitution assets.  The contract must provide that they are covered asset hedge contracts entered in accordance with the legislation.  Regulation set out the formulae to be followed in respect of interest rate sensitivity.

Mortgage credit institutions may only issue mortgage-covered securities if they maintain a related asset pool compliant with the legislation.  The institution must ensure

• that the pool has a duration of not less than that of the securities issued against this
• that the prudent market value of the pool is greater than the total principal amounts of the mortgage-covered security assets
• that the total amount of interest payable in any calendar period in respect of the pool is not less than the interest payable on the securities issued and
• that the currency for each asset in the pool is the same as the currency of the securities issued.

In the latter cases, with respect to value interest and currency, account may be taken of a cover asset hedge contract.

The prudent market value of the pool is defined by legislation and regulations made under it by the Central Bank.  Duration refers to the weighted average value of the maturity of the assets, taking into account the relevant cover assets hedge contracts.

Requirements of Pool

There is a minimum level of regulatory over-collateralization required of the pool.  This is prudent value of mortgage assets and substitution assets in the pool and must be 103 percent at least, of the nominal or principal amount of the mortgage securities after taking account of hedge contracts.

Security may be provided by another counterparty under a cover asset hedge contract.  The pool hedge collateral is the assets or property provided by the other contracting party to the contract where the terms of the contracts provide for the absolute transfer of the asset or property to the institution by way of collateral and not by way of security or provide for the transfer of the asset or property by way of security and give the institution the right to deal with the asset or property as if the institution were the absolute owner. A security includes a mortgage, assignment charge or pledge.

The content of the pool is entered and evidenced in a register.  The institution must maintain a register of the mortgage credit securities it issues and associated contracts and substitution contracts.  The consent of the cover assets monitor, or Central Bank is required for making changing or amending entries in the register.

The entry in the register may be removed if the contract has been discharged or with the consent of the counterparty once the registered obligations relating to the contract concerned no longer apply.

Entry in the register is critical as without it, certain protections of the legislation are not available.  It ensures the counterparty is a preferred creditor for insolvency purposes, allowing its assets could be satisfied from the relevant pool.

Monitor

A designated credit institution must appoint a cover assets monitor.  This appointment is to be verified by the Central Bank.  The monitor must monitor compliance with certain key conditions, including the following

• stipulations in relation to the content of the pool
• over-collateralization provisions
• content of the pool,
• approval of replacement assets,
• conditions of substituted assets,
• use of proceeds of assets,
•  matters to be included in the register,
• amendments to the register, including of securitized assets,
• approval of covered assets,
• hedge contracts.

Where there is a contravention or non-compliance,  the cover assets manager must report it to the Central Bank.  Where a counterparty fails to perform or where the institution has to take proceedings under the contract, the monitor must be informed. The fees and expenses of cover assets are monitored, and its manager is a super preferred creditor who has paid ahead of preferred creditors in the pool.

Manager / Insolvency

There is a provision for appointing a manager to a designated credit institution by the Central Bank.  A manager may be appointed if the institution has become insolvent or where the Central Bank believes that the manager should be appointed to safeguard the interest of security holders, counterparties and other creditors.  The appointment may be restricted to some of the institutions’ covered assets or all of them.

The manager takes over management of the assets, or assets covered securities business of the institution specified in the appointment.  It may assume control of the assets.  The manager may run the pool in the interest of the holders of the pool, securities and contract counterparties.

The manager is a super-preferred creditor.  The provisions in relation to the manager take precedence over the normal insolvency rules. The insolvency of the credit institution does not affect the rights of the counterparty to the cover assets contracts.

Preferred holders include holders of securities issued by the institution and some other parties.  Preferred creditors rank equally among themselves.  Super preferred creditors rank ahead, being the monitor and the manager.

Asset pool contracts are not available in the institution’s insolvency until the claims of preferred creditors have been satisfied.  They are excluded from enforcement by judgment attachment, sequestration and set off.