Regulations on mortgage credit institutions

Regulation on mortgage credit institutions which issue bonds conferring a preferential claim over a cover pool consisting of public sector loans and loans secured on residential property or other real property (covered bonds)

Laid down by the Ministry of Finance on 25 May 2007 pursuant to the Act on Financing activity and Financial Institutions (Financial Institutions Act, No. 40 of 10 June 1988) sections 2-28, 2-29, 2-30, 2-31, 2-32, 2-33, 2-34 and 2-35, and Royal Decree of 25 May 2007.

  • 2.1. Chapter 1 Activity of mortgage credit institutions

    • 1.1.1. Section 1 Scope of application

      These regulations apply to mortgage credit institutions which issue covered bonds, cf. the Financial Institutions Act chapter 2 subchapter IV, when such bonds confer a preferential claim over assets as mentioned in section 28-2 first paragraph a), b) and d) of the Financial Institutions Act. A mortgage credit institution’s articles of association shall state which of the types of loan mentioned in section 2-27, first paragraph a) of the Financial Institutions Act shall be granted or acquired by the institution.

    • 1.1.2. Section 2 Holders of covered bonds

      “Holders of covered bonds” means holders of covered bonds and parties to derivative contracts as mentioned in the Financial Institutions Act section 2-28, first paragraph e), cf. Financial Institutions Act section 2-35, first paragraph.

    • 1.1.3. Section 3 Capital requirements regulations

       "Capital Requirements Regulations" means Regulations on Capital Requirements for Commercial Banks, Savings Banks, other Credit Institutions , Holding Companies in Financial Groups, Investment Firms and Management Companies (Capital Requirements Regulations, No. 1506 of 14 of December 2006).

      "Credit quality steps” as referred to in these regulations means credit quality steps as mentioned in the Capital Requirements Regulations part II on the calculation of credit risk using the standardised approach.

    • 1.1.4. Section 4 Requirement for rating of the home country of a loan and collateral, and requirement on systems

      Where loans are granted or acquired, the central authorities in the country where the collateral is present, or where the borrower or guarantor in the case of a public sector loan is domiciled, shall qualify for credit quality step 2 or better.

      A mortgage credit institution shall have systems that document fulfilment of the Financial Institutions Act section 2-31 (asset coverage requirement) and section 2-28 (cover pool composition requirement).

    • 1.1.5. Section 5 Interest rate risk

      A mortgage credit institution shall not assume greater risk than is prudent at any and all times. A mortgage credit institution is obliged to establish a limit on the interest rate risk which shall be fixed in relation to the institution's own funds and potential losses resulting from a parallel shift of 1 percentage point in all interest rate curves and resulting from distortion of the interest rate curves. The interest rate curves shall be divided into time intervals, and value changes for each time interval shall be limited to a prudent portion of the overall limit on interest rate risk that is set for the institution.

      The limit on interest rate risk shall apply to each cover pool and to the institution as a whole. Where an institution has two or more cover pools, its own funds shall for the purposes of this calculation be allocated on a pro rata basis to the overall value of each cover pool. The limit on interest rate risk within each cover pool shall not exceed the level of interest rate risk applying to the institution as a whole under the first paragraph.

    • 1.1.6. Section 6 Liquidity risk

      A mortgage credit institution shall not assume greater liquidity risk on each cover pool than is prudent at any and all times.

      A mortgage credit institution shall establish limits on divergence between future receipts and future payments.

      A mortgage credit institution shall carry out periodic stress tests to document a satisfactory liquidity reserve and that the requirement of the Financial Institutions Act section 2-31 is met.

      In calculating liquidity risk, account may be taken of committed drawing rights if the counterparties qualify for credit quality step 2 or better.

    • 1.1.7. Section 7 Foreign exchange risk

      A mortgage credit institution shall not assume greater foreign exchange risk than is prudent at any and all times. A mortgage credit institution is obliged to establish limits on foreign exchange risk.

    • 1.1.8. Section 8 Derivative contracts

      This section applies to derivative contracts entered into by an institution as mentioned in the Financial Institutions Act section 2-28 first paragraph e). The purpose of such derivative contracts shall be to ensure compliance with the asset coverage requirement of the Financial Institutions Act section 2-31 and to enable the institution to honour its payment obligations.

      Derivative contracts may be entered into with the following types of counterparty:

      1. Clearing houses established in the EEA or the OECD area
      2. States and central banks in the EEA or OECD area
      3. Credit institutions established in the EEA or OECD area

      Such counterparties shall have a risk classification conforming to the provisions of section 9 second and third paragraphs.

      The Financial Institutions Act section 2-30 shall not prevent agreed set-offs of cash flows in the same currency and with the same due date from being completed between the counterparties to derivative contracts included in the same cover pool. An institution may also agree with a derivative counterparty to replace one or more ongoing derivative contracts with one or more new contracts, provided the asset coverage requirement under the Financial Institutions Act section 2-31 and the liquidity requirement under the Financial Institutions Act section 2-32 are met.

      Any claim against a mortgage credit institution arising from a derivative contract may only be used for set-off against other contracts in the same cover pool provided the mortgage credit institution’s estate halts payments under section 17 in accordance with the rules concerning set-off in the Satisfaction of Claims Act chapter 8. The Securities Trading Act chapter 10 applies correspondingly following a halt to payments under section 17.

      If, in the course of the contract period, a party to a derivative contract no longer meets the requirement as to risk classification in section 9 third paragraph, that party shall furnish adequate security in the form of a cash deposit, guarantee or charge over assets that meets the requirements of section 9 third and fourth paragraphs.

    • 1.1.9. Section 9 Cover pool

      Assets as mentioned in the Financial Institutions Act section 2-28 first paragraph a) and b) may not have a loan-to-value ratio higher than the following upon inclusion in the cover pool:

      1. 75 per cent of prudent market value in the case of residential mortgages.
      2. 60 per cent of prudent market value in the case of commercial mortgages.

      Assets in the form of public sector loans as mentioned in the Financial Institutions Act section 2-28 first paragraph d) must be granted to or guaranteed by central authorities (states), central banks, regional and local authorities and state-owned enterprises within the EEA or OECD area. Public sector loans to counterparties within the OECD area, but outside the EEA, shall be granted to or guaranteed by counterparties as mentioned in the first sentence, multilateral development banks or international organisations which qualify for credit quality step 1 or better. Similarly, assets which qualify for credit quality step 2 may constitute at most 20 per cent of the nominal value of outstanding covered bonds. The Capital Requirements Regulations sections 5-1 to 5-5 concerning risk weighting of on-balance sheet items apply insofar as appropriate.

      The requirement as to risk classification of public sector bodies mentioned in the second paragraph similarly applies where the latter are party to derivative contracts or to contracts involving assets used as substitute assets as mentioned in the Financial Institutions Act section 2-28 first paragraph e) and f). Claims (exposures) on institutions etc as mentioned in the Capital Requirements Regulations section 5-6 which qualify for credit quality step 1, shall in aggregate not exceed 15 per cent of the nominal value of outstanding covered bonds. Amounts due to operation and management of the cover pool, including settlement of loans, and transfers of payments to preferential creditors shall not be included for the purpose of the 15 per cent limit. The same applies to covered bonds issued by other institutions, cf. fourth paragraph. Claims on institutions within the EEA with a maturity of up to 100 days shall qualify for credit quality step 2 or better.

      Substitute assets in the form of securities issued by credit institutions with a preferential claim over a cover pool under the Financial Institutions Act chapter 2 subchapter IV, or equivalent statute in another EEA country, and securities issued under the Financial Institutions Act chapter 2 subchapter V with a basis in securitised residential mortgages or commercial mortgages, or equivalent statute in another EEA country, which qualify for credit quality step 1, may in aggregate constitute no more than 20 per cent of the nominal value of outstanding covered bonds.

      Within the constraints of the Financial Institutions Act section 2-28, the cover pool may otherwise contain such assets as are established by the authorities in the state concerned in accordance with the requirements of Directive 2006/48/EC, Annex VI, part 1, no. 12 points 68-71.

      Assets which do not conform to the above-mentioned risk classification, quantitative limits, loan to value ratios or other requirements under this section, may nonetheless be included in the cover pool, but shall not be included for the purpose of verifying the institution’s compliance with asset coverage requirement under the Financial Institutions Act section 2-31. Assets which exceed the above-mentioned quantitative requirements or loan to value ratios, may be included in respect of that portion which meets the requirements. The value of residential mortgages and commercial mortgages may be included up to the limits stated in the first paragraph even if a subsequent value change indicates that the limits have been exceeded, cf section 10 second paragraph.

      Interest rate and foreign exchange contracts and substitute  assets shall be assigned to the cover pool and the associated bond issue to which the contracts and the substitute  assets relate. Where a mortgage credit institution has issued two or more bonds not conferring a preferential claim over the same cover pool, interest rate and foreign exchange contracts and substitute  assets shall be held in separate bank or CSD accounts for each cover pool.

      Interest income on the cover pool shall at all times exceed the sum of the costs of the bond issue. In calculating the costs, account shall also be taken of the cash flows accruing from interest rate and foreign exchange contracts entered into.

      Loans which a mortgage credit institution has recorded as non-performing shall not be taken into account in calculating the cover pool under the Financial Institutions Act section 2-31.

    • 1.1.10. Section 10 Valuation

      In assessing whether the value of the cover pool exceeds the value of preferential claims under the Financial Institutions Act section 2-31, loans, interest rate contracts and foreign exchange contracts and substitute  assets shall be valued at prudent market value. Bank deposits redeemable at notice up to 30 days and floating rate loans may be valued at nominal value. Bond issues shall be valued at the sum of the discounted value of nominal and discounted coupon payments. SFA may lay down further rules on the discount rate as mentioned.

      Property furnished as collateral for residential mortgages and commercial mortgages shall be valued in accordance with the Financial Institutions Act section 2-29 first paragraph. The Capital Requirements Regulations section 17-1 concerning general requirements as to security provision, section 17-6 first paragraph c) and d) concerning valuation of real estate and section 18-4 first paragraph a) concerning  prudent market value apply correspondingly.

    • 1.1.11. Section 11 Requirements as to register and independent inspector

      A mortgage credit institution shall for each cover pool establish a register of loans, interest rate contracts and foreign exchange contracts, substitute  assets and covered bonds. Such registers shall at minimum contain:

      1. An overview of loans containing the following information:

        a) Borrower’s name
        b) Borrower's personal identification number or organisation number
        c) Borrower’s address
        d) Original and outstanding loan amount
        e) Loan's maturity structure and cash flow
        f) Titleholder, address and register designation of the collateral
        g) Value of the collateral established in accordance with section 10
        h) If applicable, the guarantor's name, organisation number and address, amount and type of guarantee
        i) Any other claims that the mortgage credit institution has against the borrower or the titleholder of the collateral
        j) Statistical data, appraisals and other material concerning current valuation of the collateral included in the cover pool

      2. An overview of assets and liabilities in the form of derivative contracts containing the following information:

        a) Counterparty's name or firm and any identity number, as well as the latest applicable rating
        b) Counterparty's address
        c) Original and  outstanding contract amount
        d) Contract's maturity structure and cash flow
        e) Titleholder, address and register designation of any collateral
        f) Any other claims that the mortgage credit institution has on the counterparty or the titleholder of the collateral

      3. An overview of substitute assets containing the following information:

        a) Borrower's name or firm and any identity number, as well as the latest applicable rating
        b) Borrower's address
        c) Original and  outstanding loan amount
        d) Loan's maturity structure and cash flow
        e) Titleholder, address and register designation of any collateral
        f) Name or firm and address of any guarantor
        g) Any other claims that the mortgage credit institution has on the borrower or the titleholder of the collateral

      4. An overview of covered bonds containing the following information:

        a) Nominal value
        b) Interest terms
        c) Maturity date

      The institution shall put forward an independent inspector who shall be appointed by SFA in accordance with the Financial Institutions Act section 2-34 first paragraph, unless SFA deems this individual to be unfit for purpose. The institution's elected auditor may be appointed under the first sentence.

      The inspector shall at least every third month check that the requirements of the Financial Institutions Act sections 2-31 and 2-33 are met. The inspector shall each year inform SFA of the observations and assessments arising from the inspections. If the inspector has cause to believe that the requirements are not met, he shall inform SFA accordingly. The Financial Supervision Act section 3a) last paragraph applies correspondingly.

  • 2.2. Chapter 2 Joint recovery of debt etc

    • 2.2.1. Section 12 Relationship to bankruptcy legislation etc

      Except as otherwise stated in the Financial Institutions Act chapter 2 subchapter IV or these regulations, the ordinary rules on proceedings in bankruptcy and negotiation of debt, winding up or public administration shall apply. Where the regulations make exceptions from these rules, the exceptions shall apply both to covered bonds and to derivative contracts as mentioned in the Financial Institutions Act section 2-28 first paragraph e).

      The Bankruptcy Act section 64 shall not prevent bankruptcy proceedings from being started against a mortgage credit institution upon petition by holders of covered bonds.

      The provisions of the Act on Guarantee Schemes for Banks and Public Administration etc., of Financial Institutions section 4-6 first paragraph d) concerning SFA's approval of payments and section 4-9 second paragraph concerning reduction of claims, shall not apply to holders of covered bonds.

      The rules of chapters 2, 3 and 4 of these regulations concerning bankruptcy proceedings apply correspondingly to debt negotiation, public administration and winding up insofar as they are appropriate.

    • 2.2.2. Section 13 Payment of expenses

      Payment of expenses on operation, management, recovery and realisation of the cover pool may be demanded before the holders of covered bonds receive payment from the cover pool.

  • 2.3. Chapter 3 Administration of an estate where timely payment can be made from the cover pool

    • 3.3.1. Section 14 Timely payment etc

      The bankruptcy administrator shall ensure proper management of the cover pool to secure the assets in the cover pool. The bankruptcy administrator shall also ensure that the provisions concerning the composition of the cover pool and the provisions concerning liquidity, currency and interest rate risk are complied with on a continuous basis.

      The bankruptcy administrator and creditors’ committee shall ensure that holders of covered bonds receive agreed and timely payment from assets encompassed by their preferential claim as provided in the Financial Institutions Act section 2-35 third paragraph.

      Bankruptcy or negotiation of debt or public administration of a mortgage credit institution shall not in itself be sufficient cause for termination or similar remedy by holders of covered bonds. Neither may actions as mentioned in the Financial Institutions Act section 2-30 be undertaken or carried out. In the case of forced recovery this also applies after the expiry of the period stated in Bankruptcy Act section 117 third paragraph, cf. section 17 second paragraph. This does not prevent derivative contracts as mentioned in the Financial Institutions Act section 2-28 first paragraph e), which meet the requirements of section 8 of these regulations, from continuing to run in accordance with their terms so that agreed set-off of cash flows in the same currency and with the same maturity date can be undertaken between the parties in the same cover pool. Neither, in relation to derivative contracts as mentioned in section 8, does this prevent the bankruptcy administrator and creditors’ committee from agreeing with a derivative counterparty to replace one or more ongoing derivative contracts with one or more new such contracts, so long as the asset coverage requirement under the Financial Institutions Act section 2-31 and the liquidity requirement under section 2-32 are met.

      The bankruptcy administrator and creditors’ committee may take any action considered necessary to redeem preferential claims over the cover pool, including selling assets and issuing new bonds and derivative contracts conferring a preferential claim. The bankruptcy administrator and creditors’ committee shall as soon as possible inform holders of covered bonds of decisions assumed to be of material significance to them.

    • 3.3.2. Section 15 Estate’s disposal over the cover pool

      The bankruptcy administrator and creditors’ committee may dispose over assets included in the cover pool solely for the purpose of meeting the requirement of timely payment.

      If deemed necessary in the interests of the other creditors’ ability to enforce a claim, the bankruptcy administrator and creditors’ committee may none the less sell the entire cover pool provided the proceeds obtained provide at minimum full satisfaction to holders of covered bonds.

      Full satisfaction means settlement of interest rate contracts and foreign exchange contracts at market value based on pricing of comparable interest rate contracts and foreign exchange contracts. Full satisfaction in respect of bond issues entails settlement of all accrued interest and charges as well as agreed future cash flow (principal and interest) up to the ordinary maturity date, discounted at the market rate for comparable bonds in the relevant currency.

    • 3.3.3. Section 16 Estate’s assumption of the debtor’s position in derivative contracts

      The bankruptcy estate shall without specific decision assume the debtor’s position in the debtor’s derivative contracts as mentioned in the Financial Institutions Act section 2-28 first paragraph e). The other party shall not be entitled to invoke insolvency as a ground for termination based on the nature of the contract.

  • 2.4. Chapter 4 Administration of the estate when timely payment cannot be made from the cover pool

    • 4.4.1. Section 17 Halt to payments

      Should it not be possible to make contractual payments using assets from the cover pool as and when the claims falls fall due up to the agreed redemption date, and an imminent change that will ensure such contractual payments is unlikely, the bankruptcy administrator and creditors’ committee shall introduce a halt to payments. A halt to payments shall be introduced even if the cover pool assures correct ongoing payments in the purely short term.

      The bankruptcy administrator and creditors’ committee shall as soon as possible inform holders of covered bonds of the halt to payments and the date on which such halt to payments is to be introduced.

    • 4.4.1. Section 18 Effect of halt to payments

      Where a halt to payments is introduced under section 17, further administration of the estate shall proceed under the general rules of the bankruptcy legislation. The bankruptcy administrator and creditors’ committee shall inform the holders of covered bonds of the further treatment of the cover pool. The bankruptcy administrator and creditors’ committee shall, when making material decisions about the cover pool, consult the holders of covered bonds in accordance with the Financial Institutions Act section 2-35 first paragraph.

    • 4.4.3. Section 19 Calculation of claims

      The size of all preferential claims over the cover pool shall be calculated on the date that the bankruptcy administrator and creditors’ committee introduced the halt to payments. Claims shall be calculated by discounting them to present value in accordance with the provisions of section 15 third paragraph.

  • 2.5. Chapter 5 Entry into force

    • 5.5.1. Section 20 Entry into force

      These regulations enter into force on 1 June 2007.