Financial and Mortgage Portfolio Overview
Source: ECBC Factbook 2021
Legal framework
Issuance structure
Regulator and regulatory
supervision
Issuer type
Collateral type
LTV limits
Asset - liability requirements
Substitute assets
Minimum OC requirement
Insolvency of the issuer
Treatment of derivatives in the
cover pool
The Icelandic covered bond framework
Regular oversight performed by the FME
Governed by the Icelandic Covered Bond Act (ICBA), which came into force on March 2008, complemented by the Rules of the Financial Supervisory Authority no. 528/2008
("ICBR")
Direct on-balance sheet structure: the cover pool is held by the issuer and the assets shall remain at all times on the issuer's balance sheet. The issuer is obliged to maintain a
register of the cover pool
Issuers are regulated by the FME which in January 2020 merged with the Icelandic Central Bank
Icelandic commercial banks, savings banks and credit undertakings that hold a license to issue covered bonds granted by the FME upon satisfaction of certain criteria
Mortgage loan receivables, public sector assets and substitute assets recorded in the cover register
Market value LTV limits depend on the mortgage type: 80% (residential), 70% (agricultural), 60% (office/commercial/industrial)
The aggregate nominal value of the cover assets must at all times exceed the aggregate nominal value of claims arising from the outstanding covered bonds. On an NPV basis, cover
assets, including derivatives, must always exceed the corresponding value of interest and principal of outstanding covered bonds, taking into account the effects of stress-test scenarios
set by the FME on interest and currency risk. The issuer shall ensure that inflows arising from cover assets and derivative agreements are such that payment obligations towards
holders of covered bonds and counterparties in derivative agreements can always be met
Up to 20% of the total value of the cover pool can consist of substitute collateral, although the FME may authorise an increase in the proportion, up to 30%. Eligible substitute
assets include: demand deposits with a regulated financial undertaking and exposures to Member States/central banks/other legal entities deemed safe by the FME. The FME
may approve additional substitute collateral if appropriate: receivables against municipalities in member states/other regulated financial firms/non-Icelandic development
banks/other legal entities
No mandatory level - however, the FME assigns a maximum OC level to each programme
The ICBA states that in case of issuer insolvency the cover assets and the respective covered bonds are segregated from the general insolvency estate of the issuer. Covered
bondholders and registered derivative counterparties have a priority claim on the cover pool and the cash that derives from the pool, ensuring timely repayment at the originally
agreed terms, as long as the pool complies with the ICBA criteria. An issuer default does not trigger the premature termination of registered derivative contracts. The ICBA does
not provide for the appointment of a special cover pool administrator in case of issuer insolvency
Derivatives are eligible assets only if the purpose of the derivative is to hedge against interest and currency risks related to cover assets or covered bonds. The ICBA requires
derivatives to be structured such that premature termination of the derivative contract is not triggered by an issuer default or a demand by the counterparty. For this reason,
derivative counterparties must have a minimum long-term rating of A3/A-/A- (Moody's/S&P/Fitch) or short-term rating of P2/A2/F2. Lastly, all derivative contracts must be
recorded in the cover register
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