Singapore’s coveted covered bond market to open by mid-2015

Thanks to amendments proposed by the MAS.

Singapore’s covered bond market is expected to open as early as mid-2015, a report by Fitch revealed today.

According to Fitch, amendments proposed by the Monetary Authority of Singapore (MAS) to rules governing the issuance of covered bonds put Singapore one step closer to an active covered bond market.

The changes, as detailed in an MAS consultation paper, will provide greater flexibility to covered bond structures.

It further clarifies regulations including how assets can be segregated, the limit on liquid assets, and the calculation of the loan-to-value (LTV) ratio for mortgage assets.

Updated rules on the segregation of assets will allow the covered bond issuing banks to hold assets on balance sheet under a declaration of trust. This addresses a technical issue of payment ranking rights for mortgage recoveries, and will ensure covered bond holders have first ranking security over defaulting loan recoveries.

The MAS requirement remains for an issuer to provide legal confirmation of the ringfencing of assets, whether via an SPV or through declaration of trust.

This would also be the case where there is a time lag for when mortgage assets can be substituted into the cover pool.

This is especially true for the issuance of hard-bullet covered bonds, where there is no grace period to liquidate assets as part of the terms of the bonds. In some cases, a pre-maturity test is used to trigger the collateralisation of bonds maturing in the coming 12 months.

The proposed rules will give programmes that issue hard-bullet bonds the ability to hold cash assets in excess of the 15% limit to fund such maturing covered bonds.