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Saturday, 16 December 2017

Pfandbriefe/Covered Bonds 2005

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Seemingly impervious to wider credit market woes, the Covered Bond sector goes from strength to strength – offering borrowers reliable access to cheap funding and providing investors with a high-grade substitute for government or agency debt.

Though many a sales desk may trumpet the sector's legally or contractually assigned virtue – that imposes a more credible degree of fiscal discipline than governments adhere to under their self-serving Stability & Growth Pact – it is naturally not as liquid as government bonds.

To date, liquidity is ensured by obliging arrangers to make a market, and in the absence of a more viable alternative, the arrangement seems to work. Whether the head-to-head system can continue ad infinitum is not so assured, however. Borrowers appear reluctant to tap existing issues, investors are not rewarding borrowers for issuing in liquid size, and arrangers may have under-estimated the cost of making a market.

Ultimately, the market-making obligation enforces liquidity – where otherwise there might be limited – but at a deeper level the obligation is a necessity born out of the heterogeneous structure of the market it serves. As the global nature of funding evolves, those issuers capable of identifying, adapting to and taking advantage of the mechanisms that drive efficiency should pull away from those that don not – and this might inject structural homogeneity from which liquidity naturally springs forth.

Though the forces of globalisation impact all elements of the value chain at the macro level, at the micro level it is the case that borrowers continue to ensure their longevity by trying to meet investor demands. With a view to ever-prescient cover pool transparency, the role of asset cover pool monitor might prove an attractive element in the composite arsenal of selling points that jostle for investors' attention. This impetus to reach out and harness the institutional buyer is not new; it probably began a decade ago.

The ''jumbo" covered bond was conceived out of an assiduous desire to sustain and develop an investor-driven product that, as history shows, has never stood still. To this day, the covered bond sector is being defined and re-defined in an ever-enriching, dynamic landscape.

For change is surely the only constant: whether that is over the ramifications of falling over-collateralisation on today's fastest growing sector, Spain, or the absence of a legal framework in a potentially more dominant market, the UK.

The clash of ideas that manifests itself today echoes back to the sounds of real conflict 200 years ago. The battle of Trafalgar ensured the future of contract law in the UK but it has exposed ongoing fundamental differences with the rest of Europe.

But with competing new jurisdictions now planning their own laws, the need for defined regulation looks increasingly unassailable. Italy, Portugal, Sweden, Norway and Finland are set to join the legally coded ranks, but with the Netherlands about to introduce a contractually defined market, the debate may yet run a little longer.

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