Covered Bond Legal Framework

Covered Bond Legislation

1.1. Chapter 2, subchapter IV: Covered Bonds
1.1.1. Section 2-25 Scope of application

This subchapter governs mortgage credit institutions’ right to raise loans by issuing covered bonds. The term “covered bonds” denotes standardised bearer bonds conferring a preferential claim over a mortgage credit institution’s cover pool.

1.1.2. Section 2-26 Protected term

The term “covered bonds” may only be applied to bonds coming under the rules of this subchapter.

1.1.3. Section 2-27 Business restrictions and obligation to notify upon start-up

A mortgage credit institution may raise loans by issuing covered bonds where the mortgage credit institution’s mission as laid down in its articles of association is:

a) to grant or acquire residential mortgages, commercial mortgages, loans secured on other registered assets or public sector loans, and

b) to finance its lending business primarily by issuing covered bonds.The mortgage credit institution shall notify Kredittilsynet not later than 30 days prior to the first time it issues covered bonds.

Where consideration for a mortgage credit institution’s financial strength so indicates, SFA may instruct the mortgage credit institution not to issue covered bonds.

SFA may consent to mortgage credit institutions engaging – in a transitional period and in parallel with other activity – in activity that consists in raising loans through the issuance of covered bonds. The said activities shall in such case be kept separate from one another. SFA may impose conditions to ensure such separation. SFA’s consent may be given for a period of up to one year with the possibility of extension for one further year.

1.1.4. Section 2-28 Requirements on the composition of the cover pool

The cover pool may only consist of the following assets:

a) loans secured on residential property, on a document of proprietary lease of a housing unit or on a certificate showing that the lessee owns a share in the housing cooperative that owns the housing structure of which the unit forms part (residential mortgages),

b) loans secured on other real estate (commercial mortgages),

c) loans secured on other registered assets,

d) loans to municipalities and loans guaranteed by the State, a municipality or corresponding public body in other states (public sector loans),

e) assets in the form of derivative contracts which meet further requirements set in regulations,

f) assets which constitute substitute assets under the provisions of the fourth paragraph.

Upon incorporation in the cover pool, loans as mentioned in the first paragraph a) to c) shall not exceed a specified percentage of the value of the mortgaged property (loan-to-value ratio). The King may issue regulations on loan-to-value ratios for different types of assets.

Loans as mentioned in the first paragraph a) to c) must be secured on a capital asset located within the EEA or the OECD area. Public sector loans must have been granted to or guaranteed by a public body as mentioned in the first paragraph d) within the EEA or the OECD area.

Only particularly liquid and secure assets may be employed as substitute assets. Substitute assets may constitute up to 20 per cent of the cover pool at any and all times. Where special conditions are present, SFA may authorise this proportion to constitute up to 30 per cent for a limited period. The King may in regulations lay down supplementary provisions regarding requirements on assets eligible for inclusion in the cover pool, including restrictions on the composition of the cover pool.

1.1.5. Section 2-29 Calculation of the value of underlying assets

Upon inclusion of loans as mentioned in section 2-28 first paragraph a) to c) in the cover pool, a prudent value shall be established for the asset furnished as security for each loan. Prudent market value may not exceed the market value resulting from a cautious assessment.

Prudent value shall be fixed by individual assessment of the registered asset concerned. Valuations shall be conducted by a competent and independent person in accordance with recognised principles. A valuation shall be documented and shall indicate who has conducted it, when it was conducted and the assumptions on which it was based. Valuation of residential properties may never the less be based on general price levels provided this is deemed prudent based on market conditions.The mortgage credit institution shall establish systems for subsequent monitoring of asset values.

The mortgage credit institution shall also monitor market trends and factors bearing on the value of the individual registered assets. Should market conditions or factors pertaining to the individual asset indicate that a significant value impairment has taken place, the mortgage credit institution shall ensure that a new prudent value is established in accordance with the first and second paragraph.

The King may in regulations establish further rules on valuation and on requirements with regard to the mortgage credit institution’s systems. The King may in regulations also establish rules governing changes to loan-to-value ratios resulting from a subsequent fall in the value of assets as mentioned in section 2-28 first paragraph a) to c).

1.1.6. Section 2-30 Pledging and execution

Assets included in the cover pool may not be pledged or be subject to execution, attachment or other enforcement proceedings in favour of particular creditors of the mortgage credit institution. Nor may a right of set-off, right of retention or the like be declared in an asset included in the cover pool. The King may in regulations issue special rules and make exceptions from the rule of this paragraph in the case of assets as mentioned in section 2-28 first paragraph e).

1.1.7. Section 2-31 Asset coverage requirement

The value of the cover pool shall at all times exceed the value of covered bonds with a preferential claim over the pool. Account shall be taken of the mortgage credit institution’s derivative contracts as mentioned in section 2-28 first paragraph e) when values are calculated. The King may in regulations lay down further requirements in regard to how such values shall be calculated. The King may in regulations lay down rules in regard to mortgage credit institutions which fail to meet the asset coverage requirement set out in the first sentence.

In an assessment of whether the requirement of the first paragraph is met, loans to the same borrower and loans secured on the same collateral cannot be included in the cover assets at more than 5 per cent of the total cover pool. The King may issue regulations providing for the inclusion of loans over and above the limit of 5 per cent where additional collateral exists, and rules governing such additional collateral.

1.1.8. Section 2-32 Liquidity requirements

The mortgage credit institution shall ensure that the payment flows from the cover pool enable the mortgage credit institution to honour its payment obligations towards holders of covered bonds and counterparties to derivative contracts as mentioned in section 2-28 first paragraph e) at any and all times. The mortgage credit institution may enter into interest rate and foreign exchange contracts in order to meet this requirement.

The mortgage credit institution shall establish a liquidity reserve to be included in the cover pool as substitute assets. The King may in regulations lay down further rules on liquidity reserves, including rules on permitted divergence between future receipts and payments and permitted divergence between the redemption conditions for covered bonds and for assets included in the cover pool assigned to such bonds. The King may in regulations lay down rules on permitted interest rate and foreign currency risk and on the right to enter into interest rate and foreign currency contracts.

1.1.9. Section 2-33 Register requirement

The mortgage credit institution shall keep a register of the covered bonds it issues, and of the cover assets assigned thereto, including derivative contracts as mentioned in section 2-28 first paragraph e). The register shall at all times contain information on the value of the bonds and the cover pool.

The King may issue regulations setting further requirements as to the register’s contents, design and accessibility, as well as rules on maintaining the register.

1.1.10. Section 2-34 Independent inspector

An independent inspector shall be appointed for a mortgage credit institution before it issues covered bonds. The inspector shall be appointed by SFA.
SFA may at any time withdraw the appointment and appoint a new inspector.

The inspector shall oversee that the register is correctly maintained and shall regularly review compliance with the requirements of sections 2-31 and 2-33. The inspector shall regularly inform SFA of his observations and assessments.

The mortgage credit institution shall be obliged to provide the inspector with all relevant information about its business. The inspector shall have full access to the credit mortgage institution’s register and may request further information from the institution. The inspector shall also be entitled to conduct investigations at the premises of the institution.

The inspector shall be entitled to reasonable remuneration from the mortgage credit institution for his or her work. The King may issue regulations setting further rules on the appointment and remuneration of inspectors, and on inspectors’ tasks, rights and duties.

1.1.11. Section 2-35 Preferential claim over the cover pool, joint debt recovery etc.

In the event of bankruptcy, negotiation of debt under the Bankruptcy Act, winding up of the mortgage credit institution or public administration, holders of covered bonds and counterparties to derivative contracts as mentioned in section 2-28 first paragraph e) shall have an exclusive, equal and proportional preferential claim over the cover pool assigned to them. Such preferential claim over the cover pool shall rank ahead of priority as mentioned in the Act relating to Creditors’ Rights to Satisfaction of Claims (Satisfaction of Claims Act, No. 59 of 8 June 1984) sections 9-2 to 9-4. In regard to bankruptcy, the provisions of the Mortgages and Pledges Act section 6-4 on a statutory security interest for the bankruptcy estate shall apply correspondingly to the estate’s claim over the cover pool. The estate’s statutory security interest in each individual cover pool shall in such cases comprise a maximum of 700 times the court fee.

The preferential claim shall also apply to funds which are subsequently remitted in accordance with terms of contract applying to assets included in the cover pool. Such funds shall be registered on a continual basis under the rules of section 2-33.

In the event of bankruptcy, negotiation of debt under the Bankruptcy Act, winding up of the mortgage credit institution or public administration, holders of covered bonds and counterparties to derivative contracts as mentioned in section 2-28 first paragraph e) shall be entitled to timely payment from assets encompassed by their preferential claim for the duration of the bankruptcy or administration proceedings, provided the cover pool is essentially in compliance with the statutory requirements. Should it not be possible to make contractual payments using funds from the cover pool, and an imminent change in the liquidity situation is unlikely, the bankruptcy estate shall set a date on which payments shall be halted. The bankruptcy estate shall inform holders of preferential claims of the halt to payments at the earliest opportunity.

Should the cover pool deliver more than is needed to meet the claims of the bondholders or derivative counterparties, the surplus shall be added to the gross estate.

The King may in regulations lay down further rules on the implementation of bankruptcy proceedings, public administration, negotiation of debt or winding up of mortgage credit institutions coming under this chapter, including rules to restrict the opportunity of the bankruptcy estate, debt restructure committee, administration board or liquidation board
to dispose over loans and other assets included in the cover pool when this can be done without impairing other creditors’ ability to enforce a claim. Such regulations may depart from the rules of legislation governing bankruptcy, public administration of financial institutions, negotiation of debt and execution.

Regulations of Mortgage Credit Institutions

Regulation on mortgage credit institutions which issue bonds conferring a preferential claim over a cover pool consisting of public sector loans and loans secured on residential property or other real property (covered bonds)

Adopted by the Ministry of Finance on 25 May 2007 pursuant to the Act on Financing activity and Financial Institutions (Financial Institutions Act, No. 40 of 10 June 1988) sections 2-28, 2-29, 2-30, 2-31, 2-32, 2-33, 2-34 and 2-35, and Royal Decree of 25 May 2007.

2.1. Chapter 1 Activity of mortgage credit institutions
2.1.1. Section 1 Scope of application

These regulations apply to mortgage credit institutions which issue covered bonds, cf. the Financial Institutions Act chapter 2 subchapter IV, when such bonds confer a preferential claim over assets as mentioned in section 28-2 first paragraph a), b) and d) of the Financial Institutions Act. A mortgage credit institution’s articles of association shall state which of the types of loan mentioned in section 2-27, first paragraph a) of the Financial Institutions Act shall be granted or acquired by the institution.

2.1.2. Section 2 Holders of covered bonds

“Holders of covered bonds” means holders of covered bonds and parties to derivative contracts as mentioned in the Financial Institutions Act section 2-28, first paragraph e), cf. Financial Institutions Act section 2-35, first paragraph.

2.1.3. Section 3 Capital requirements regulations

"Capital Requirements Regulations" means Regulations on Capital Requirements for Commercial Banks, Savings Banks, other Credit Institutions , Holding Companies in Financial Groups, Investment Firms and Management Companies (Capital Requirements Regulations, No. 1506 of 14 of December 2006).

"Credit quality steps” as referred to in these regulations means credit quality steps as mentioned in the Capital Requirements Regulations part II on the calculation of credit risk using the standardised approach.

2.1.4. Section 4 Requirement for rating of the home country of a loan and collateral, and requirement on systems

Where loans are granted or acquired, the central authorities in the country where the collateral is present, or where the borrower or guarantor in the case of a public sector loan is domiciled, shall qualify for credit quality step 2 or better.

A mortgage credit institution shall have systems that document fulfilment of the Financial Institutions Act section 2-31 (asset coverage requirement) and section 2-28 (cover pool composition requirement).

2.1.5. Section 5 Interest rate risk

A mortgage credit institution shall not assume greater risk than is prudent at any and all times. A mortgage credit institution is obliged to establish a limit on the interest rate risk which shall be fixed in relation to the institution's own funds and potential losses resulting from a parallel shift of 1 percentage point in all interest rate curves and resulting from distortion of the interest rate curves. The interest rate curves shall be divided into time intervals, and value changes for each time interval shall be limited to a prudent portion of the overall limit on interest rate risk that is set for the institution.

The limit on interest rate risk shall apply to each cover pool and to the institution as a whole. Where an institution has two or more cover pools, its own funds shall for the purposes of this calculation be allocated on a pro rata basis to the overall value of each cover pool. The limit on interest rate risk within each cover pool shall not exceed the level of interest rate risk applying to the institution as a whole under the first paragraph.

2.1.6. Section 6 Liquidity risk

A mortgage credit institution shall not assume greater liquidity risk on each cover pool than is prudent at any and all times.

A mortgage credit institution shall establish limits on divergence between future receipts and future payments.

A mortgage credit institution shall carry out periodic stress tests to document a satisfactory liquidity reserve and that the requirement of the Financial Institutions Act section 2-31 is met.

In calculating liquidity risk, account may be taken of committed drawing rights if the counterparties qualify for credit quality step 2 or better.

2.1.7. Section 7 Foreign exchange risk

A mortgage credit institution shall not assume greater foreign exchange risk than is prudent at any and all times. A mortgage credit institution is obliged to establish limits on foreign exchange risk.

2.1.8. Section 8 Derivative contracts

This section applies to derivative contracts entered into by an institution as mentioned in the Financial Institutions Act section 2-28 first paragraph e). The purpose of such derivative contracts shall be to ensure compliance with the asset coverage requirement of the Financial Institutions Act section 2-31 and to enable the institution to honour its payment obligations.

Derivative contracts may be entered into with the following types of counterparty:

Clearing houses established in the EEA or the OECD area
States and central banks in the EEA or OECD area
Credit institutions established in the EEA or OECD area

Such counterparties shall have a risk classification conforming to the provisions of section 9 second and third paragraphs.

The Financial Institutions Act section 2-30 shall not prevent agreed set-offs of cash flows in the same currency and with the same due date from being completed between the counterparties to derivative contracts included in the same cover pool. An institution may also agree with a derivative counterparty to replace one or more ongoing derivative contracts with one or more new contracts, provided the asset coverage requirement under the Financial Institutions Act section 2-31 and the liquidity requirement under the Financial Institutions Act section 2-32 are met.

Any claim against a mortgage credit institution arising from a derivative contract may only be used for set-off against other contracts in the same cover pool provided the mortgage credit institution’s estate halts payments under section 17 in accordance with the rules concerning set-off in the Satisfaction of Claims Act chapter 8. The Securities Trading Act chapter 10 applies correspondingly following a halt to payments under section 17.

If, in the course of the contract period, a party to a derivative contract no longer meets the requirement as to risk classification in section 9 third paragraph, that party shall furnish adequate security in the form of a cash deposit, guarantee or charge over assets that meets the requirements of section 9 third and fourth paragraphs.

2.1.9. Section 9 Cover pool

Assets as mentioned in the Financial Institutions Act section 2-28 first paragraph a) and b) may not have a loan-to-value ratio higher than the following upon inclusion in the cover pool:

75 per cent of prudent market value in the case of residential mortgages.
60 per cent of prudent market value in the case of commercial mortgages.

Assets in the form of public sector loans as mentioned in the Financial Institutions Act section 2-28 first paragraph d) must be granted to or guaranteed by central authorities (states), central banks, regional and local authorities and state-owned enterprises within the EEA or OECD area. Public sector loans to counterparties within the OECD area, but outside the EEA, shall be granted to or guaranteed by counterparties as mentioned in the first sentence, multilateral development banks or international organisations which qualify for credit quality step 1 or better. Similarly, assets which qualify for credit quality step 2 may constitute at most 20 per cent of the nominal value of outstanding covered bonds. The Capital Requirements Regulations sections 5-1 to 5-5 concerning risk weighting of on-balance sheet items apply insofar as appropriate.

The requirement as to risk classification of public sector bodies mentioned in the second paragraph similarly applies where the latter are party to derivative contracts or to contracts involving assets used as substitute assets as mentioned in the Financial Institutions Act section 2-28 first paragraph e) and f). Claims (exposures) on institutions etc as mentioned in the Capital Requirements Regulations section 5-6 which qualify for credit quality step 1, shall in aggregate not exceed 15 per cent of the nominal value of outstanding covered bonds. Amounts due to operation and management of the cover pool, including settlement of loans, and transfers of payments to preferential creditors shall not be included for the purpose of the 15 per cent limit. The same applies to covered bonds issued by other institutions, cf. fourth paragraph. Claims on institutions within the EEA with a maturity of up to 100 days shall qualify for credit quality step 2 or better.

Substitute assets in the form of securities issued by credit institutions with a preferential claim over a cover pool under the Financial Institutions Act chapter 2 subchapter IV, or equivalent statute in another EEA country, and securities issued under the Financial Institutions Act chapter 2 subchapter V with a basis in securitised residential mortgages or commercial mortgages, or equivalent statute in another EEA country, which qualify for credit quality step 1, may in aggregate constitute no more than 20 per cent of the nominal value of outstanding covered bonds.

Within the constraints of the Financial Institutions Act section 2-28, the cover pool may otherwise contain such assets as are established by the authorities in the state concerned in accordance with the requirements of Directive 2006/48/EC, Annex VI, part 1, no. 12 points 68-71.

Assets which do not conform to the above-mentioned risk classification, quantitative limits, loan to value ratios or other requirements under this section, may nonetheless be included in the cover pool, but shall not be included for the purpose of verifying the institution’s compliance with asset coverage requirement under the Financial Institutions Act section 2-31. Assets which exceed the above-mentioned quantitative requirements or loan to value ratios, may be included in respect of that portion which meets the requirements. The value of residential mortgages and commercial mortgages may be included up to the limits stated in the first paragraph even if a subsequent value change indicates that the limits have been exceeded, cf section 10 second paragraph.

Interest rate and foreign exchange contracts and substitute assets shall be assigned to the cover pool and the associated bond issue to which the contracts and the substitute assets relate. Where a mortgage credit institution has issued two or more bonds not conferring a preferential claim over the same cover pool, interest rate and foreign exchange contracts and substitute assets shall be held in separate bank or CSD accounts for each cover pool.

Interest income on the cover pool shall at all times exceed the sum of the costs of the bond issue. In calculating the costs, account shall also be taken of the cash flows accruing from interest rate and foreign exchange contracts entered into.

Loans which a mortgage credit institution has recorded as non-performing shall not be taken into account in calculating the cover pool under the Financial Institutions Act section 2-31.

2.1.10. Section 10 Valuation

In assessing whether the value of the cover pool exceeds the value of preferential claims under the Financial Institutions Act section 2-31, loans, interest rate contracts and foreign exchange contracts and substitute assets shall be valued at prudent market value. Bank deposits redeemable at notice up to 30 days and floating rate loans may be valued at nominal value. Bond issues shall be valued at the sum of the discounted value of nominal and discounted coupon payments. SFA may lay down further rules on the discount rate as mentioned.

Property furnished as collateral for residential mortgages and commercial mortgages shall be valued in accordance with the Financial Institutions Act section 2-29 first paragraph. The Capital Requirements Regulations section 17-1 concerning general requirements as to security provision, section 17-6 first paragraph c) and d) concerning valuation of real estate and section 18-4 first paragraph a) concerning prudent market value apply correspondingly.

2.1.11. Section 11 Requirements as to register and independent inspector

A mortgage credit institution shall for each cover pool establish a register of loans, interest rate contracts and foreign exchange contracts, substitute assets and covered bonds. Such registers shall at minimum contain:

An overview of loans containing the following information:

a) Borrower’s name
b) Borrower's personal identification number or organisation number
c) Borrower’s address
d) Original and outstanding loan amount
e) Loan's maturity structure and cash flow
f) Titleholder, address and register designation of the collateral
g) Value of the collateral established in accordance with section 10
h) If applicable, the guarantor's name, organisation number and address, amount and type of guarantee
i) Any other claims that the mortgage credit institution has against the borrower or the titleholder of the collateral
j) Statistical data, appraisals and other material concerning current valuation of the collateral included in the cover pool

An overview of assets and liabilities in the form of derivative contracts containing the following information:

a) Counterparty's name or firm and any identity number, as well as the latest applicable rating
b) Counterparty's address
c) Original and outstanding contract amount
d) Contract's maturity structure and cash flow
e) Titleholder, address and register designation of any collateral
f) Any other claims that the mortgage credit institution has on the counterparty or the titleholder of the collateral

An overview of substitute assets containing the following information:

a) Borrower's name or firm and any identity number, as well as the latest applicable rating
b) Borrower's address
c) Original and outstanding loan amount
d) Loan's maturity structure and cash flow
e) Titleholder, address and register designation of any collateral
f) Name or firm and address of any guarantor
g) Any other claims that the mortgage credit institution has on the borrower or the titleholder of the collateral

An overview of covered bonds containing the following information:

a) Nominal value
b) Interest terms
c) Maturity date

The institution shall put forward an independent inspector who shall be appointed by SFA in accordance with the Financial Institutions Act section 2-34 first paragraph, unless SFA deems this individual to be unfit for purpose. The institution's elected auditor may be appointed under the first sentence.

The inspector shall at least every third month check that the requirements of the Financial Institutions Act sections 2-31 and 2-33 are met. The inspector shall each year inform SFA of the observations and assessments arising from the inspections. If the inspector has cause to believe that the requirements are not met, he shall inform SFA accordingly. The Financial Supervision Act section 3a) last paragraph applies correspondingly.

2.2. Chapter 2 Joint recovery of debt etc.
2.2.1. Section 12 Relationship to bankruptcy legislation etc.

Except as otherwise stated in the Financial Institutions Act chapter 2 subchapter IV or these regulations, the ordinary rules on proceedings in bankruptcy and negotiation of debt, winding up or public administration shall apply. Where the regulations make exceptions from these rules, the exceptions shall apply both to covered bonds and to derivative contracts as mentioned in the Financial Institutions Act section 2-28 first paragraph e).

The Bankruptcy Act section 64 shall not prevent bankruptcy proceedings from being started against a mortgage credit institution upon petition by holders of covered bonds.

The provisions of the Act on Guarantee Schemes for Banks and Public Administration etc., of Financial Institutions section 4-6 first paragraph d) concerning SFA's approval of payments and section 4-9 second paragraph concerning reduction of claims, shall not apply to holders of covered bonds.

The rules of chapters 2, 3 and 4 of these regulations concerning bankruptcy proceedings apply correspondingly to debt negotiation, public administration and winding up insofar as they are appropriate.

2.2.2. Section 13 Payment of expenses

Payment of expenses on operation, management, recovery and realisation of the cover pool may be demanded before the holders of covered bonds receive payment from the cover pool.

2.3. Chapter 3 Administration of an estate where timely payment can be made from the cover pool
2.3.1. Section 14 Timely payment etc.

The bankruptcy administrator shall ensure proper management of the cover pool to secure the assets in the cover pool. The bankruptcy administrator shall also ensure that the provisions concerning the composition of the cover pool and the provisions concerning liquidity, currency and interest rate risk are complied with on a continuous basis.

The bankruptcy administrator and creditors’ committee shall ensure that holders of covered bonds receive agreed and timely payment from assets encompassed by their preferential claim as provided in the Financial Institutions Act section 2-35 third paragraph.

Bankruptcy or negotiation of debt or public administration of a mortgage credit institution shall not in itself be sufficient cause for termination or similar remedy by holders of covered bonds. Neither may actions as mentioned in the Financial Institutions Act section 2-30 be undertaken or carried out. In the case of forced recovery this also applies after the expiry of the period stated in Bankruptcy Act section 117 third paragraph, cf. section 17 second paragraph. This does not prevent derivative contracts as mentioned in the Financial Institutions Act section 2-28 first paragraph e), which meet the requirements of section 8 of these regulations, from continuing to run in accordance with their terms so that agreed set-off of cash flows in the same currency and with the same maturity date can be undertaken between the parties in the same cover pool. Neither, in relation to derivative contracts as mentioned in section 8, does this prevent the bankruptcy administrator and creditors’ committee from agreeing with a derivative counterparty to replace one or more ongoing derivative contracts with one or more new such contracts, so long as the asset coverage requirement under the Financial Institutions Act section 2-31 and the liquidity requirement under section 2-32 are met.

The bankruptcy administrator and creditors’ committee may take any action considered necessary to redeem preferential claims over the cover pool, including selling assets and issuing new bonds and derivative contracts conferring a preferential claim. The bankruptcy administrator and creditors’ committee shall as soon as possible inform holders of covered bonds of decisions assumed to be of material significance to them.

2.3.2. Section 15 Estate’s disposal over the cover pool

The bankruptcy administrator and creditors’ committee may dispose over assets included in the cover pool solely for the purpose of meeting the requirement of timely payment.

If deemed necessary in the interests of the other creditors’ ability to enforce a claim, the bankruptcy administrator and creditors’ committee may none the less sell the entire cover pool provided the proceeds obtained provide at minimum full satisfaction to holders of covered bonds.

Full satisfaction means settlement of interest rate contracts and foreign exchange contracts at market value based on pricing of comparable interest rate contracts and foreign exchange contracts. Full satisfaction in respect of bond issues entails settlement of all accrued interest and charges as well as agreed future cash flow (principal and interest) up to the ordinary maturity date, discounted at the market rate for comparable bonds in the relevant currency.

2.3.3. Section 16 Estate’s assumption of the debtor’s position in derivative contracts

The bankruptcy estate shall without specific decision assume the debtor’s position in the debtor’s derivative contracts as mentioned in the Financial Institutions Act section 2-28 first paragraph e). The other party shall not be entitled to invoke insolvency as a ground for termination based on the nature of the contract.

2.4. Chapter 4 Administration of the estate when timely payment cannot be made from the cover pool
2.4.1. Section 17 Halt to payments

Should it not be possible to make contractual payments using assets from the cover pool as and when the claims falls fall due up to the agreed redemption date, and an imminent change that will ensure such contractual payments is unlikely, the bankruptcy administrator and creditors’ committee shall introduce a halt to payments. A halt to payments shall be introduced even if the cover pool assures correct ongoing payments in the purely short term.

The bankruptcy administrator and creditors’ committee shall as soon as possible inform holders of covered bonds of the halt to payments and the date on which such halt to payments is to be introduced.

2.4.1. Section 18 Effect of halt to payments

Where a halt to payments is introduced under section 17, further administration of the estate shall proceed under the general rules of the bankruptcy legislation. The bankruptcy administrator and creditors’ committee shall inform the holders of covered bonds of the further treatment of the cover pool. The bankruptcy administrator and creditors’ committee shall, when making material decisions about the cover pool, consult the holders of covered bonds in accordance with the Financial Institutions Act section 2-35 first paragraph.

2.4.3. Section 19 Calculation of claims

The size of all preferential claims over the cover pool shall be calculated on the date that the bankruptcy administrator and creditors’ committee introduced the halt to payments. Claims shall be calculated by discounting them to present value in accordance with the provisions of section 15 third paragraph.

2.5. Chapter 5 Entry into force
2.5.1. Section 20 Entry into force

These regulations enter into force on 1st June 2007.