Background

The origin of covered bonds can be traced back to the late 18th century and has become an important funding instrument for both the mortgage and public finance industries. The ECBC (European Covered Bond Council) has played an integral role in being the platform that unites market participants, becoming a point of reference regarding the covered bond industry.

As a member of the of the ECBC, TAO Solutions has been actively involved in working with both new and established covered bond Issuers to provide a software-as-a-service solution to address the needs of the global community. We are now extending our innovative approach to emerging markets to assist with the development of sustainable financing frameworks.

The central theme to our methodology is to provide a technological solution that “ticks all the boxes”: achieving the required administration, reporting, regulatory compliance, risk management, governance, and monitoring of the Covered Bond Programme needed by relevant stakeholders (such as Central Banks, Regulators, Investment Banks, Rating Agencies, Investors, and Issuers) in a simple, quick, and cost-effective manner. Using this approach removes the burden on the Issuer of building and maintaining an internal solution.

TAO Solutions credentials are proven. Our technology is systemically important to the Canadian market (where we are the dominant provider of covered bond SaaS solutions) and our expertise has enabled us to expand and support Issuers globally.

This article explores the challenges faced, lessons learnt and how we can provide an integral tool to enable industry participants and stakeholders a path of least resistance to achieve Covered Bond administration and related regulatory and risk management best practices.

While Covered Bonds provide significant benefits, the establishment of a Covered Bond Programme to Issuers (efficient cost of funding and access to long-term funding) and Investors (dual recourse to the issuing institution and the cover pool makes covered bonds a safe investment), their administration can be a is a complex task for operations teams to manage (particularly for new Issuers and/or Issuers operating under emerging regulatory frameworks).

Fortunately, the ECBC’s efforts in harmonizing covered bond frameworks across jurisdictions facilitates the dissemination of information in a more transparent and comparable manner. For example, the creation of the Harmonized Transparency Template (HTT), a standardized Covered Bond Investor report, facilitates greater transparency and comparability of Covered Bond Programmes. The following are examples of potential challenges faced by Issuers:

Data Requirements:

• Accuracy: Ensuring the accuracy and integrity of data related to the cover pool.
• Integration: Integrating data from multiple sources (both internal and external) and systems to provide a comprehensive view of the Covered Bond Programme.
• Extracts: creating the required data extracts needed internally as well as by third parties (examples include rating agencies, regulatory authorities, data repositories and investors).

Asset Pooling Requirements:

• Frequency: Having the ability to select assets as and when required to remain compliant with the transaction documentation.
• Eligibility: Only selecting assets that meet eligibility criteria.
• Monitoring: Continue to monitor the portfolio and removing assets that do not meet eligibility criteria.

Transaction Modelling Requirements:

• Traceability: Ability to trace aggregate results to the underlying data.
• Flexibility: Ability to model the various scenarios required as outlined in the transaction documentation.
• Controls: Models provided need to be robust, transparent, and auditable. This includes mechanisms to enable only approved users the ability to amend models as necessary with a record of the change provided.

Reporting Requirements:

• Complexity: Ensuring consistent and accurate reporting to stakeholder.
• Traceability: Ensuring that the data and calculations for all reporting periods are persisted.
• Flexibility: Enabling ad-hoc reporting to be available for end-users without IT support.
• On-Going Rating Agency, Central Bank, and Regulatory Surveillance: Generate specific reporting templates required by the rating agencies, central banks and regulators.

Accounting Requirements:

• Transactions: Accurate recording of sales, discharges and repurchases (and related accrued amounts) from the covered pool
• Journal Entries: Record of all accounting events from a cash and accrual basis for the Covered Bond Programme

Audit and Compliance Requirements:

• Internal: Conducting regular internal audits to ensure compliance with policies and procedures.
• External: Coordinating with external auditors to validate the integrity and performance of the Covered Bond Programme.

Compliance with Legal and Regulatory Requirements:

• Policy Updates: Keeping up to date with changes in laws and regulations that affect covered bonds and updating the Covered Bond Programme accordingly. An example includes adopting the new risk-free rate methodologies.

Over the past several years, TAO Solutions has been actively investing in its technology to address the needs of the global covered bond community. This has resulted in a unique product offering that helps mitigate the key challenges identified above:

Data

• Dynamic data interfaces which allow users to define and maintain their interfaces directly within the application.
• Data validation processes and reporting to ensure that the ingested data meets high standards.
• Time series logging of data ingested which allows for rapid and efficient point-in-time reporting on the Cover Pool.

Asset Pooling

• Asset Selection templates that are specific to the programme, meeting eligibility criteria and can be utilized to select the required pool at a specific date.
• Data analysis tools that allow for reporting on why loans are rejected from selection, which allows users to both assess data quality issues and have transparency on their loan portfolio.
• Recording of sales for both loans sold into and sold out of a Covered Bond Programme

Transaction Modelling

• Unique transaction modelling tool that provides the required transparency, flexibility and controls needed to maintain a Covered Bond Programme.

Reporting

• Out of the box Covered Bond reports: using configurable template reporting and an analytics module. Key reports to Investors (such as the Harmonized Transparency Template), to the Regulators (BOE/ESMA Annexes), and to assist administrators (e.g. Cover Pool monitoring and testing reports).
• Built-in traceability on data and calculations: All reporting data and calculated results are persisted for ease of audit.

Accounting

• The ability to record both cash and accrual accounting entries.
• Reconciliation of values created to the cash received.

Audit and Compliance

• Detailed user roles and responsibilities and the segregation of duties.
• Audit logs for data changes can be accessed directly from the application.

The following best practices will allow for a seamless implementation of a Covered Bond Reporting solution:

• Design from the end, then build from the beginning: As with all large, complex data projects, it is critical to understand exactly what information is required for the correct production of the required reporting and asset selection criteria. As such, when performing any analysis on a Covered Bond Programme, start with identifying and validating each of the data elements in downstream processes. This will allow for a much better understanding of what the data requirements will be and will minimize the rework to extracts from your loan management system. Once the process has been mapped correctly,
• Multiple processes, one source of truth: To avoid inconsistencies in reporting, ensure that all data calculations and transformations are persisted as a single source of information. This information can then be disseminated to downstream reports as required. SecureHub, for example, creates “staging tables” that will feed into the Investor reporting, regulatory reports, Rating Agency Data tapes, eligibility criteria, etc.
• Document, document, document: creating a document mapping all the calculation processes will allow you to catch outstanding data/calculation issues much earlier in the process. In addition, this documentation can come in quite handy when performing internal or external audits.
• Utilise the skills of knowledgeable professionals: With extensive experience in implementing Covered Bond administration solutions, TAO Solutions can provide you and your team with the knowledge and expertise to make this transition a seamless process.

Understanding administrative requirements and providing meaningful solutions are crucial for a successful Covered Bond Programme. TAO Solutions offers deep industry knowledge and frequent updates at no additional cost, ensuring ongoing compliance and performance.

Through our continued investment into our SaaS technologies, TAO Solutions has achieved an effective and scalable turn-key option for Covered Bond Issuers. This approach as well as providing superior whole of life economic benefits, enables the industry to address the needs of the industry, from the established to the emerging market participants.

Information on TAO Solutions can be found at https://www.taosolutions.ca/

For more information in respect of this article and our covered bond solution, please reach out to the authors Jim Metaxas and Nicolas Warlop (details provided below). 

Mr Jim Metaxas

Managing Director – Head of Global Business Development

Direct: +61 2 8870 1498

Email: jim.metaxas@taosolutions.ca

LinkedIn: https://www.linkedin.com/in/jimmetaxas/

Mr Nicolas Warlop

Director of Sales and Solutions Engineering

Direct: +1 (416) 309-7473

Email: nicolas.warlop@taosolutions.ca

LinkedIn: https://www.linkedin.com/in/nicolaswarlop/