Act on Covered Bonds, No. 11/2008
This is an English translation.
The original Icelandic text, as published in the Law Gazette (Stjórnartíðindi), is the authoritative text. Should there be discrepancy between this translation and the authoritative text, the latter prevails.
Act on Covered Bonds, No. 11/2008
CHAPTER I
General Provisions
Article 1
Scope
This Act shall apply to issuing of covered bonds.
Article 2
Definitions
For the purposes of this Act the following meanings shall apply:
1. Issuer: a commercial bank, savings bank or credit undertaking, which has received an operating license as provided for in the Act on Financial Undertakings and which has been licensed to issue covered bonds.
2. Covered bond: a bond or other unilateral, unconditional, written debt obligation, which enjoys a right of priority on the issuer's cover pool upon bankruptcy and is issued in compliance with this Act.
3. Bond: a written debt instrument whereby an issuer recognises unilaterally and unconditionally its obligation to make a specific monetary payment.
4. Cover pool: a collection of bonds, substitute collateral and other assets listed in a register, as provided for inChapter VI, in which the covered bond holders and issuing institution's counterparties have rights of priority pursuant to the provisions of this Act.
5. Substitute collateral: assets as provided for in Article 6 which may be included in the cover pool and are intended to ensure that the interests of covered bond holder are not prejudiced despite changes which may occur to assets in the cover pool.
6. Member state: a state which is a party to the Agreement on the European Economic Area or the European Free Trade Association Treaty, or the Faroe Islands.
7. Derivative agreement: an agreement concluded for the purpose of achieving a balance between financial terms and conditions governing assets in the cover pool and corresponding terms and conditions governing the covered bonds, entered into between an issuer and the Icelandic state, a member state, municipality in a member state, central bank in a member state or other party deemed sufficiently solid to fulfil the obligations involved in the agreement.
8. Loan class: the type of debt instrument in an asset pool, as provided for in Points 1-4 of the first paragraph of Article 5.
9. Covered bond class: covered bonds issued by an issuer based on one and the same license from the Financial Supervisory Authority (FME).
Article 3
License requirements
FME shall grant licenses for the issuance of covered bonds pursuant to this Act. Licenses to issue covered bonds will only be granted to commercial banks, savings banks and credit undertakings.
The conditions for granting a license to issue covered bonds are as follows:
1. that the issuance complies with this Act, and
2. that the issuer's budget, as attested to by a certified public accountant, demonstrates that its financial situation is sufficiently sound so that the issuance of covered bonds will not jeopardise the interests of other creditors.
FME may authorise the conversion of previously issued bonds and other debt obligations, which were issued to finance bonds of the same type which may be included in the cover pool, to covered bonds as provided for in this Act.
FME may make the granting of a license subject to further conditions, for instance, concerning loan classes in the cover pool for the issue in question, classes of covered bonds, time limits of issues, maturities and repayment terms of the proposed covered bond. Such conditions shall be specified in the license.
Article 4
Processing of license applications
Once a license application has been submitted, FME must process the application within six months of receiving a complete application. If the granting of a license is delayed beyond this period, FME must notify the applicant in writing of the reasons for the delay.
CHAPTER II
Cover pool assets, etc.
Article 5
Bonds in the cover pool
The cover pool may consist of bonds of the following classes:
1. Bonds which have been issued against mortgages in residential housing in member states.
2. Bonds which have been issued against mortgages in industrial, office or commercial property in member states.
3. Bonds which have been issued against mortgages in farms and other real estate used for agricultural purposes in member states.
4. Bonds issued by the Icelandic state or other member state, municipality in Iceland or in another member state, or guaranteed by such member state. Real estate referred to in Points 1-3 of the first paragraph must be listed in the Land Registry Database (Icel. Landskrá fasteigna). If bonds as referred to in Points 1-3 of the first paragraph are secured by real estate mortgages in a member state other than Iceland, they must be listed in public land databases.
Article 6
Substitute collateral in the cover pool
The cover pool may include the following substitute collateral:
1. demand deposits with a financial undertaking;
2. deposits with or claims against a member state or central bank in a member state;
3. claims against other legal entities which, in FME's estimation, do not involve greater risk than those referred to in Points 1-2 of this paragraph.
FME may approve as substitute collateral the following claims:
1. claims against municipalities in member states;
2. claims against financial undertakings other than those referred to in Point 1 of the first paragraph, provided the final maturity is within one year of their issuance;
3. claims against foreign development banks listed in rules adopted by FME, cf. Article 25;
4. claims against other legal entities which do not involve greater risk than the substitute collateral referred to in Points 1-3 of this paragraph.
Substitute collateral may not comprise more than 20% of the value of the cover pool. FME may authorise an increase in the proportion of substitute collateral in the cover pool to as much as 30% of its value.
CHAPTER III
Bonds secured by real estate mortgages
Article 7
Loan-to-value (LTV) ratio and cover pool composition
Bonds covered by Points 1-3 of the first paragraph of Art. 5, listed in a cover pool register, must on the date of registration fulfil the following conditions:
1. The LTV ratio of residential property must not exceed 80%.
2. The LTV of industrial, office or commercial property must not exceed 60%.
3. The LTV of farms or real property intended for agricultural purposes must not exceed 70%. Production quotas, allocated to registered farms, may not be included in calculations of market value.
Bonds as referred to in Points 1-3 of the first paragraph of Art. 5 may not be listed in a cover pool if payment is in arrears of 90 days or more. Should an issuer intend to include more than one class of bonds in its cover pool, mention must be made thereof in the license application.
Article 8
Valuation of mortgaged properties
In assessing the market value of real estate as referred to in Art. 7, appraisal shall be based on the selling price in recent transactions with comparable properties.
If the market value of real estate as referred to in the first paragraph is not available it shall be determined by a specific valuation. The valuation shall be based on generally accepted principles for market valuation of real estate. Data on real estate price developments from the Land Registry of Iceland of Iceland, for instance, may be used as a basis, together with other systematic collection of real estate price data.
If an issuer assesses the market value of real estate as referred to in the first or second paragraph, the independent inspector provided for in Chapter VIII must verify that the appraisal is based on accepted methodology. The inspector may re-assess the market price of one or more properties if he/she regards the valuation as incorrect.
An appraisal of the market value of real estate as referred to in the first and second paragraphs must be in writing and must specify what methodology is used, who has carried out the appraisal and when it was made.
Article 9
Regular assessment of the market value of cover pool assets
An issuer must regularly monitor and have appraised the market value of real estate underlying the mortgages of the cover pool.
If the market value of collateral in the cover pool decreases substantially, the amount of the mortgage included in the cover pool shall be decreased to ensure that the LTV lies within the limits specified in Points 1-3 of the first paragraph ofArticle 7.
CHAPTER IV
Specific rules for municipalities
Article 10
Bonds and guarantees
Bonds issued by a municipality, or guaranteed by a municipality as provided for in Point 4 of the first paragraph of Art. 5, must on the date of registration in a cover pool, fulfil the following conditions:
1. The municipality must have a positive equity balance.
2. Loans may not be in arrears.
3. In the case of guarantees by a municipality, the guarantee must be within the limits of its authorisation under the Act on Local Authorities to issue guarantees.
CHAPTER V
Matching rules
Article 11
Amount of cover pool and covered bonds issued
The aggregate present value of bonds [including accrued interest and indexation] and other assets in the cover pool which is to serve as collateral for a specific class of covered bonds must always exceed the aggregate current value of this same covered bond class.
Article 12
Valuation of cover pool, administration, etc.
Bonds, substitute collateral and other assets placed by an issuer in a cover pool shall be valued having regard to exchange rates, interest rates, maturities and other factors of significance, in order to maintain a suitable balance between the cover pool and the corresponding class of covered bonds. An issuer may conclude derivative agreements for the purpose of achieving this balance.
An issuer must ensure that instalments and other payment flows accruing on assets in the cover pool, and from derivative agreements, match payments on the covered bonds so that all commitments towards the covered bond holders and counterparties to derivative agreements can be met. To this end the issuer shall keep instalments and other payments accruing on assets in the cover pool segregated from the issuer's other assets, including other cover pools, as well as their accrued instalments and other payments.
An issuer must preserve assets as referred to in the second paragraph in a separate account and keep them segregated from its other assets.
An issuer may not mortgage debt instruments or other assets in the cover pool.
Bonds and other cover pool assets shall not be subject to claims by the issuer's creditors.
CHAPTER VI
Register
Article 13
Obligation to maintain a register and endorse bonds
An issuer must maintain a special register in respect of covered bonds and the cover pool, together with any derivative agreements. The register must include the following information:
1. the nominal value, interest terms and final maturity of covered bonds in each bond class;
2. the classes of bonds in a cover pool, as provided for in Points 1-4 of the first paragraph of Article 5;
3. the number of each bond in the cover pool, name of borrower, his/her Id. No., nominal value of the loan, date of issue, maturity, terms of instalments and interest;
4. name of guarantor of debts of the state or municipalities, or their institutions, as appropriate;
5. appraisal of the value of collateral in the cover pool, when appraisal was carried out and the premises used;
6. in the case of substitute collateral, the details must be specified, together with the assets covered, the nominal value, maturities and interest terms of the substitute collateral;
7. funds and other assets received in payment towards bonds and other assets in the cover pool which have not been paid to the covered bond holders, and how they are preserved;
8. in respect of any derivative agreements, the type of agreement and individual number, counterparty, nominal value, currency, interest terms, value of the net claim or net debt, as well as the start and expiry date of the agreement.
Bonds in a cover pool must be endorsed showing they are part of a cover pool and have been entered in a register as provided for in this Chapter. The endorsement shall also indicate that the debt instrument is to secure priority rights of a specific class of covered bonds.
CHAPTER VII
Bankruptcy of the issuer
Article 14
Legal effect of a ruling on bankruptcy proceedings
If an issuer's estate is subject to bankruptcy proceedings, covered bonds it has issued shall not be foreclosed unless a specific agreement to this effect has been concluded. The estate shall maintain rights and obligations subject to derivative agreements concluded in accordance with the provisions of this Act. Claims due to such derivative agreements shall enjoy priority as provided for in Point 3 of Art. 110 of the Act on Bankruptcy etc., cf. paragraph 3 of Art. 111 of the same Act.
Article 15
Priority of claims
If an issuer's estate is subject to bankruptcy proceedings, covered bonds it has issued shall have rights of priority to bonds and other assets in the cover pool and payments received on the above-mentioned assets, provided they have been entered into a register, cf. Chapter VI of this Act. The nature of claims and rights of priority of covered bonds to the assets shall be as provided for in the rules of Art. 111 of the Act on Bankruptcy etc.
If an issuer seeks composition with creditors, covered bonds as provided for in this Act shall have the status provided for in the rules of Point 4 of the first paragraph of Article 28 of the Act on Bankruptcy etc.
Article 16
Administration of assets
The administrator of the bankrupt estate must keep bonds and other assets in a cover pool as provided for in this Act segregated from other assets in the issuer's estate. The same shall apply to funds and other assets substituted for the bonds and other assets in a cover pool, or paid towards such assets. Such separation shall be maintained until claims arising from covered bonds have been paid in full.
The bankruptcy administrator shall also keep derivative agreements, and funds returned by such assets or which must be paid from the cover pool to counterparties in derivative agreements, separate from other assets of the estate.
Article 17
Contractual payments
A bankruptcy administrator, or co-ordinator of attempts to reach composition with creditors, shall fulfil the issuer's commitments under the covered bonds and derivative agreements using bonds and other assets in the cover pool and payments received on such assets, provided these assets are listed in the register provided for in Chapter VI.
If an issuer is granted a debt moratorium, the assisting administrator for the debt moratorium shall, notwithstanding the provisions of Chapter IV of the Act on Bankruptcy etc., ensure that obligations arising from covered bonds and derivative agreements are fulfilled using the assets of the cover pool, substitute collateral and payments made on these assets.
Article 18
Payments received
Payments received by the issuer after the deadline (Icel. frestdagur) [for composition with creditors, the granting of a debt moratorium or the commencement of bankruptcy proceedings], in accordance with the terms and conditions governing debt instruments or other assets in the cover pool intended for payment of claims, including fulfilment of derivative agreements, shall be entered in the register provided for in Chapter VI.
Article 19
Annulment of actions
Actions taken by an issuer, whether they involve delivery of funds to a cover pool, delivery of substitute collateral to the cover pool, payments on assets in the cover pool or disposal of funds from the cover pool to fulfil obligations under a bond covered by it or a derivative agreement concluded in accordance with this Act and in connection with the cover pool, shall not be subject to annulment, cf. Chapter XX of the Act on Bankruptcy etc. The same shall apply to payments to an issuer under a derivative agreement concluded in accordance with the provisions of this Act.
Article 20
Bankruptcy administration fees
Cost of bankruptcy administration, cf. Article 110 of the Act on Bankruptcy etc., to such extent as this is incurred due to efforts of the bankruptcy administrator concerning covered bonds, bonds and other assets in the cover pool, payments with respect to these assets or derivative agreements connected with the cover pool, shall be paid from the assets of the cover pool or funds which are substituted for them. Other cost of bankruptcy administration shall not be paid from the assets of the cover pool, until settlement has been made of claims arising from covered bonds and fulfilment of derivative agreements connected with the pool, if such exist.
Chapter VIII
Supervision by an independent inspector
Article 21
Independent inspector
An issuer must appoint an independent inspector to supervise the issuance of covered bonds licensed by FME. FME must approve his/her appointment. The inspector must fulfil the eligibility criteria prescribed in FME rules as provided for in Point 8 of Art. 25. If FME is of the opinion that the inspector does not fulfil these requirements it may revoke its approval.
In seeking FME's approval for an inspector's appointment, an issuer must disclose any possible ties between the inspector and the issuer and the issuer's principal leaders.
Article 22
Principal tasks of the inspector
The inspector must ensure that a register is maintained, cf. Chapter VI of this Act. He/She shall verify that valuation of collateral for bonds in the cover pool is based on proper methodology.
The inspector shall provide FME with information which he/she obtains in the course of work as frequently and in such format as FME decides, or above and beyond this if exceptional circumstances so warrant.
Article 23
Disclosure obligations. Confidentiality
The issuer must provide the inspector with all information the inspector requests and which concerns the issuance of covered bonds and the cover pool. The inspector shall be authorised to carry out any examination of data on the issuer's premises which the inspector considers necessary to fulfil his/her duties.
The inspector shall be bound by obligations of confidentiality towards all parties other than FME on all matters of which he/she may become aware in the course of his/her work and which shall remain confidential. The inspector may seek assistance if his/her tasks are very extensive. Any person assisting the inspector shall also be bound by obligations of confidentiality.
CHAPTER IX
FME supervision and intervention
Article 24
Role of FME
FME shall monitor compliance with this Act, including compliance by issuers with the provisions of this Act and other rules applicable to their operations. The supervision shall be as provided for in the Act on Public Supervision of Financial Activities.
Article 25
FME rules
FME may issue rules providing for:
1. the contents of the budget referred to in Point 2 of the second paragraph of Art. 3;
2. real estate as referred to in Points 1-3 of the first paragraph of Article 5;
3. methods for appraisal of collateral of bonds;
4. substitute collateral and eligible debtors for instruments used as substitute collateral;
5. how an issuer is to update valuations of collateral;
6. terms and conditions for derivative agreements, as well as conditions for calculation of risk and interest payments;
7. the register provided for in Chapter VI;
8. eligibility criteria for the independent inspector, cf. Chapter VIII, his/her duties and the contents and format of reports the inspector submits to FME;
9. determination of cost as provided for in Art. 30.
Article 26
Cancellation of licenses to issue covered bonds
FME shall revoke a license to issue covered bonds if the issuer:
1. has not issued the covered bonds to which the license applies within one year from its date of issue;
2. has declared that it does not intend to avail itself of the authorisation to issue covered bonds.
In lieu of revocation, cf. Point 1 of the first paragraph, FME may grant an issuer a specified time limit for issuance. Once the time limit has expired the license may be revoked if the bonds have not been issued.
FME may revoke a license to issue covered bonds if:
1. the premises for issuance of covered bonds change, with the result that in FME's estimation the requirements of Point 2 of the second paragraph of Art. 3 are no longer fulfilled;
2. the issuer violates provisions of this Act or rules adopted by virtue of it.
Before any revocation may be enacted pursuant to the third paragraph, the issuer must be allowed a suitable period to rectify the situation, if rectification is possible in the estimation of FME.
Article 27
Consequences of revocation
If a license to issue covered bonds is revoked, FME shall decide how to terminate the activities of an issuer covered by this Act. FME may, for instance, appoint a new custodian for the issuer's cover pool or pools and take such measures as it considers necessary to ensure the rights of holders of covered bonds issued by the party whose license has been revoked.
Article 28
Unauthorised issuance
If bonds having the same characteristics as covered bonds provided for in this Act are issued without the issuer having obtained a license from FME, the latter shall instruct the issuer to cease such activity immediately. FME may decide how to put a stop to such activities.
Such issuance shall not have the legal effect prescribed in Chapter VII.
Article 29
Specific obligation to give notice and prohibition of issuance
If a party authorised to issue covered bonds intends to issue bonds granting claimants priority rights to specific assets of the issuer, in a manner comparable to issuance of covered bonds, the issuer must, two months in advance, send FME a report on the issue in question providing similar information as required under this Act for an application for a license to issue covered bonds.
FME may prohibit such issuance if it considers that it could jeopardize the interests of other creditors.
Article 30
Cost
An issuer or, as the case may be, an applicant must pay costs incurred by FME in processing applications and issuing licenses as provided for in this Act in accordance with a tariff adopted by FME's Board of Directors and published in the Official Journal of Iceland (Stjórnartíðindi).
CHAPTER X
Penalties, etc.
Article 31
Administrative fines
FME may levy administrative fines on any party violating:
1. the second paragraph of Art. 7, by including a bond in arrears in a register;
2. Art. 9, concerning regular appraisal of the market value of collateral in a cover pool;
3. the second to fourth paragraphs of Art. 12, on administration of the cover pool;
4. Art. 13, on the obligation to maintain a register and endorse bonds;
5. the first paragraph of Art. 23 on disclosure obligations;
6. a settlement reached between FME and a party, cf. Article 32.
The amount of the fine levied on an issuer may vary from ISK 50,000 to ISK 50 million. In determining the amount of the fine regard shall be had, for instance, to the seriousness of the violation, how long it has prevailed, the readiness of the offending party to co-operate and whether this is a repeat violation. Decisions on administrative fines shall be taken by the Board of Directors of FME and are enforceable by execution. Fines shall accrue to the National Treasury after deducting collection costs. If administrative fines are not paid within one month of FME's decision, penalty interest must be paid on the amount of the fine. A decision on and calculation of penalty interest shall be made in accordance with the Act on Interest and Price Indexation.
Administrative fines shall be levied regardless of whether a violation was committed intentionally or through negligence.
Article 32
Settlement
If an issuer has violated the provisions of this Act or decisions by FME based upon it, FME may conclude the case by reaching a settlement with the party concerned. Such a settlement is binding upon the party concerned once it has approved and accepted its contents by affixing its signature thereto. FME shall adopt detailed rules on the implementation of this provision.
Article 33
Time limits for levying administrative fines
Authorisation to FME to levy administrative fines, as provided for in this Act, shall expire once seven years have passed since the conduct in question concluded.
The time limit referred to in the first paragraph shall be interrupted by notification from FME to the party or parties of a suspected violation. Interruption of the time limit shall have legal effect on all parties involved in the violation.
Article 34
Entry into force
This Act shall enter into force at once.
Adopted by Althingi, the Icelandic Parliament, on 4 March 2008