CMHC announces covered bond framework

Canada Mortgage and Housing Corporation has announced the details of the legal framework for Canadian covered bonds.

The framework will support financial stability by helping lenders further diversify their sources of funding, and by also attracting more international investors to the market for Canadian covered bonds.

“[It] establishes a high standard of disclosure for covered bonds for lending institutions across the country,” says Karen Kinsley, president and CEO of CMHC. “The framework strikes a balance between issuer and investor needs, and takes into account evolving international best practices.”

Read: RBC debuts SEC-approved covered bonds

Amendments were made to the National Housing Act as part of the 2012 Federal Budget, which put CMHC in charge of administering a legal framework for covered bonds.

The group has consulted with a variety of stakeholders and industry participants while developing the framework. It will operate on a cost-recovery basis.

Assets that may be held as covered bond collateral include loans secured by one-to-four unit residential properties located in Canada. Insured mortgages can’t be used as covered bond collateral, and CMHC or the Government of Canada doesn’t guarantee the bond issues.

Read: Feds act to legitimize covered bonds (2011)

Issuers of registered the bonds will be able to reach a broader investor base, as some international investors are restricted from purchasing bonds issued under a non-legislative framework. They’ll also benefit from gaining access to an alternative source of funding.

In addition to the high standard of disclosure, investors will benefit from having recourse to both the covered bond issuer and to the assets in the cover pool. In the event of issuer default, the bondholder continues to be paid from the cash flow of the cover pool assets.

“We are pleased the government created legislation for a covered bond framework in Canada,” says Terry Campbell, president of the Canadian Bankers Association. “A robust market for Canadian bonds is important to enable the Canadian financial sector to have access to global sources of financing and compete with other financial institutions in these markets.”

Read: Canada gets the go-ahead to issue covered bonds (2007), for more on the background of covered bonds

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.