Directive (EU) 2019/2162 on Covered Bonds | Amendments to UCITS Directive

On 18 December 2019, Directive (EU) 2019/2162 of the European Parliament and of the Council of 27 November 2019 on the issue of covered bonds and covered bond public supervision and amending Directives 2009/65/EC and 2014/59/EU (the “Directive”) was published in the Official Journal of the European Union. The Directive aims to establish rules to protect investors in their transactions involving covered bonds. The Directive amends Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (the “UCITS Directive”).

Article 52(4) of the UCITS Directive already allowed an exemption to the minimum percentage of assets that a UCITS is authorized to invest in transferable securities issued by the same issuer. In the case of covered bonds, Member States could raise the general 5% limit to allow a UCITS to invest up to 25% of its assets in covered bonds issued by the same issuer. The Directive amends article 52 (4) to provide that the 25% limit applies in the following circumstances:

1. Where bonds were issued before 8 July 2022 and met the requirements applicable to covered bonds on the date of their issue, or
2. Where bonds fall under the definition of covered bonds in the Directive which means a debt obligation that is issued by a credit institution in accordance with the provisions of national law transposing the mandatory requirements of the Directive and that is secured by cover assets to which covered bond investors have direct recourse as preferred creditors.

In addition, the Directive reduces supervisory requirements by exempting Member States from reporting the list of covered bond categories and authorised issuers to ESMA and the EU Commission.

Those measures shall be applied at the latest from 8 July 2022. Transitional measures foresee that covered bonds issued before 8 July 2022 that comply with the UCITS Directive as applicable on the date of their issue, are not subject to the requirements set out in the Directive (i.e. requirements on bankruptcy remoteness of covered bonds, eligible assets, coverage and liquidity requirements and permission for covered bond programmes requirement), and continue to be referred to as covered bonds in accordance with the Directive until their maturity.