Canadian Covered Bonds - Canada

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1 Who is the issuer? Universal credit institution

See National Housing Act 21.52 and Canadian Registered Covered Bond Guide section 2.2
2 Does the bondholder have recourse to the issuer (in case of special issuer: recourse to the sponsor bank)? Direct
3 Who owns the cover assets? SPE which guarantees the bonds
4 Is the issuer the originator of the cover assets? Yes, partly (external origination possible)

Where the cover asset (mortgage loan) is not originated by issuer, the mortgage loan must comply with registered issuer's approved underwriting policies

1 What type of assets may be included in the cover pool?
 
  Primary assets Substitution assets
Public sector assets Mortgage assets Other 1* Other 2* Other 3*  
Residential mortgage loans x
Derivatives x
"Government of Canada securities Repos of Government of Canada securities" x x x


Derivates are exclusively for hedging purposes.
2 What is the geographical scope of assets?
 
  Primary assets Substitution assets
Public sector assets Mortgage assets Other 1* Other 2* Other 3*  
Domestic x
Canada x
3 Is there a maximum level for substitute assets in the statutory national framework? Yes, please specifiy

10% of all covered bond collateral
4 Are there any reporting requirements for covered bond issuers to investors? Yes, by law and in line with art. 14 of EU Covered Bond Directive

Reporting is required as per Canadian Registered Covered Bond Guide and believed to be in line with article 14 of the EU Covered Bond Directive
5 What is the frequency of reporting to investors? Monthly

1 What is the basis for property valuation Market value

Combination of mortgage lending value and market value under the Asset Coverage Test, as per Annex D of the Canadian Registered Covered Bond Guide
2 Is a regular update of the property value required? Yes, automated / indexed valuation sufficient

Quarterly by a disclosed recognized indexed. A registered Issuer must provide notice to CMHC of any change in an Index used.
3 What are the LTV limits (single asset based)? Please specify in %/n.a. Residential

Residential LTV limit 80%
4 Are loans in excess of LTV limits eligible for inclusion in the cover pool? Hard limit upon inclusion but soft limit accepted following inclusion

The portion of the loan which exceeds the 80% LTV would not be counted in coverage ratios, but can remain in the pool after inclusion in the cover pool, so covered bond holders would get benefit of that portion exceeding 80% LTV.

IV.1 Derivative contracts in the cover pool

1 Are derivative contracts eligible for the inclusion in the cover pool? Yes, exclusively for hedging purposes (by law)
2 Are there requirements for derivative contracts (e.g. eligibility criteria for hedging counterparties)? Yes, specified in law
3 Will derivative contracts remain in case of insolvency of the issuer? Yes

Programs are required to include Ratings Triggers for collateralization and/or guarantee of hedges by suitably rated counterparty.
4 If derivatives are permitted in the cover pool, what is their ranking? Pari passu to covered bond holders

Canadian Registered CB Guide section 4.5.6 (b) states that the terms of each hedge must preclude the Counterparty from ranking in priority to the covered bondholders' entitlement to receive interest payments and for so long as an issuer event of default has occurred and is continuing.

IV.2 Exposure to market risk

1 What is the primary method for the mitigation of market risk? Use of derivative hedging instruments

A Valuation Calculaton measuring present value of the covered bond collateral relative to the CAD dollar equivalent of the market value of the outstanding covered bonds guaranteed by it (without regard for such derivatives) is also conducted and disclosed to investors.
2 Are there mitigating provisions for interest rate risk? Yes, by legislation/regulation

Canadian Registered CB Guide section 4.5.
3 Are there mitigating provisions for foreign exchange risk?
4 Are there mitigating provisions for maturity mismatch risk? Yes, by legislation/regulation

Pre-maturity tests are designed to ensure the CB collateral includes sufficient cash to satisfy in full the Canadian dollar equivalent of all principal payments due under series of hard-bullet CB. It is common for Canadian Issuers to issue soft-bullet CB with extendable maturities of 12 months.
5 What type of coverage test is applied? Nominal cover
Present value cover

Nominal coverage in Asset Coverage Test and minimum OC Calculation. Present value coverage in the Valuation Calculation.
6 Are there stress scenarios applied? Yes, by law

Unless the interest rate risk is mitigated, a negative carry factor must be applied to the asset value, for the Asset-Coverage-Test. Programs are required to prescribe a cash reserve requirement for all obligations in a prescribed period below a Ratings Trigger (as specified in the Program)

IV.3 Liquidity risk

1 Is exposure to liquidity risk mitigated? Yes, by law

and contractual obligations. See above regarding Pre-maturity liquidity tests and Cash Reserve requirements.
2 What liquidity risk mitigation requirements are in place (principal)? Maturity extension provisions
Contractual pre-maturity test
Other, please specify

Similar to "180 days liquidity provisions" Cash reserve requirements are required to be prescribed and triggered at a Ratings Trigger for a period specified in the program. Hard bullets require pre-maturity tests and are required by the Guide and contractual obligations. Soft bullets dominate.
3 What liquidity risk mitigation requirements are in place (interest)? Maturity extension provisions
Reserve fund requirements

Cash reserve requirements are required to be prescibed and trigger at a Ratings Trigger for a period specified in the program. Soft bullets apply unless there is a Pre-Maturity Liquidity Test.
4 What is the consequence of not fixing a breach of liquidity risk mitigants? No new covered bond issuance
Event of default
Other, please specify

Canadian Registered CB Guide 3.5.2 (c) & (d) specifies reserve fund and pre-maturity test requirements. If registered Issuer fails to remedy material breach, CMHC can suspend issuance. Terms of Programs would provide that failure to comply with the requirements constitutes an Event of Default.
5 If 180 days liquidity provisions are in place, what types of liquid assets are eligible Other, please specify

Although not 180 liquidity provision, cash reserve requirements (discussed above which apply for a period prescribed by the Program), provide that they will be funded in cash.
6 If 180 days liquidity provisions are in place, the calculation of principal is based on: The expected maturity date

Although not 180 liquidity provision, the cash reserve must satisfy in full the Canadian dollar equivalent of all interest payments due under all series or tranches of CB outstanding together with all payment obligations of the guarantor ranking prior to such interest payments.

IV.4. Maturity extension

1 Is maturity extension allowed by national law? Yes, but optional and subject to conditions

Pre-maturity liquidity test required for hard-bullet covered bonds. Soft bullets dominate.
2 Is it possible to issue… Hard bullet
Soft bullet
3 Which trigger plays a role for maturity extension according to law - independent or alone or in combination? Issuer bankruptcy/resolution
Lack of liquidity; breach of liquidity rules
Issuer failure to pay

Per contractual market practice, Issuer default (which could be bankruptcy, breach or failure to pay) so Guarantor LP/SPV is required to pay on the bonds and has insufficient money available in accordance with Guarantee Priority of Payments to pay in full the guaranteed amounts of the relevent CB.
4 Does any competent authority need to give its okay (or non-opposition)? No

IV.5 Overcollateralisation

1 Is mandatory overcollateralisation required in the law ?

Residential mortgages - 103% - Nominal

V.1 Cover pool monitor (CPM)

1 Is there a cover pool monitor in addition to national competent authorities in the statutory law? Yes, by law and in line with Article 13 of EU Covered Bond Directive
2 Is the CPM separate from the issuing credit institution? No, internal CPM allowed in line with the provisions of Article 13(3)

The CPM can be the auditor of the issuer. The auditor would be separate from the credit decision process of the registered issuer.
3 Is the appointment, dismissal, eligibility criteria and the role of the CPM regulated by the national statutory law? Yes

V.2 Banking supervision

1 Which are the national competent authorities designated to carry out covered bonds public supervision in the law?

Canada Mortgage and Housing Corporation (CMHC) - Website

Office of Superintendent of Financial Institutions (OSFI) - Website

Quebec Autorité des Marchés Financiers (AMF) - Website


CMHC administers the Canadian covered bond legal framework. OSFI is prudential supervisor of federally incorporated financial institutions. AMF is prudential supervisor for Quebec regulated financial institutions. OSFI & AMF establishes covered bond encumbrance limits for regulated entities
2 Is a special permission required for a covered bond programme according to national law? Yes, licence for institution + competent autority
3 Is there a covered bond issuance limit in law or regulation? If yes, please specify Yes

Under OSFI and AMF regulatory requirements, total assets pledged for covered bonds must not represent more than 5.5% of a deposit-taking institution’s total on-balance sheet assets.
4 Does the national statutory law provide for the appointment of a dedicated cover pool administrator in case of insolvency/resolution (transfer included acc. to BRRD [Bank Recovery and Resolution Directive])? Yes

While the Canadian legal framework does not specifically provide for a dedicated special cover pool administrator, the registered issuer must designate a Bond Trustee. Independence requirements also apply to the guarantor entity following a default by the issuer.
5 Which is the typical frequency in the national statutory law of reporting from the covered bond issuers to the designated competent authorities? Monthly

A monthly investor report including detailed information on the covered bond program must be prepared and published each month.

1 Does the national statutory law meet the requirements laid down in the EU Covered Bond Directive? No

Canada is not an EU member state.
2 Does the statutory law meet the requirements of Article 129 of CRR [Capital Requirement Regulation]? In this case, please specify the collateral types meeting the Art. 129 CRR. Yes
3 Does the statutory law allow covered bonds out of the scope of Art 129 of CRR? In this case, please specify the collateral Yes

Canada is not an EU member state.
4 Are listed covered bonds eligible in repo transactions with the national central bank? Yes

Registered covered bonds are listed as eligible collateral under the Bank of Canada's Standing Liquidity Facilities.

Fact Book

Any further comments/information?