Letter May Aid Covered Bonds’ Inclusion in Indices

A U.S. Securities and Exchange Commission no-action letter issued in response to a Royal Bank of Canada request among other things opens the door for U.S. dollar-denominated covered bonds’ inclusion in indices investors use to track returns, according to Fitch.
 
RBC's CB program to date has been an exception to existing Canadian CB programs, which have carried mortgage insurance provided by the government-supported Canada Mortgage and Housing Corp. But its type of program could gain momentum going forward under proposed Canadian covered bond legislation.
 
The proposed legislation “restricts the use of insured assets in cover pools, future regulated covered bond programs will look more like RBC’s existing uninsured mortgage program,” said Vanessa Purwin, a senior director at Fitch.
 
“Generally the market perception of the restriction on insured mortgages is that it is meant to increase the liquidity of uninsured mortgages in Canada, as well as appeal to investors who can only buy regulated covered bonds,” she said.
 
Canadian issuers would have a six-month grace period to continue issuing covered bonds under existing unregulated programs under the proposal, according to Fitch.
 
The ratings agency said U.S. dollar-denominated covered bond issuance from non-U.S. institutions has been rising and reached a high of roughly $50 billion in 2011.