BANKING AMENDMENT (COVERED BONDS) BILL 2011

i Banking Amendment (Covered Bonds) Bill 2011 No. , 2011

Contents

1 Short

title

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2 Commencement

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3 Schedule(s)

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Schedule 1--Amendments

Banking Act 1959

Banking Amendment (Covered Bonds) Bill 2011 No. , 2011 1

A Bill for an Act to amend the Banking Act 1959,

and for related purposes

The Parliament of Australia enacts:

1 Short title

This Act may be cited as the Banking Amendment (Covered Bonds)

Act 2011.

2 Commencement

This Act commences on the day this Act receives the Royal

Assent.

3 Schedule(s)

Each Act that is specified in a Schedule to this Act is amended or

repealed as set out in the applicable items in the Schedule

Amendments Schedule 1

Banking Amendment (Covered Bonds) Bill 2011 No. , 2011 3

Schedule 1--Amendments

Banking Act 1959

1 Subsection 5(1)

Insert:

covered bond has the meaning given by subsection 26(1).

2 Subsection 5(1)

Insert:

covered bond liabilities has the meaning given by subsections

26(4) and (5).

3 Subsection 5(1)

Insert:

covered bond special purpose vehicle has the meaning given by

subsection 26(1).

4 Subsection 5(1)

Insert:

cover pool has the meaning given by subsection 26(3).

5 Subsection 5(1)

Insert:

issuing ADI has the meaning given by subsection 26(6).

6 Subparagraph 9A(2)(a)(ii)

After "1BA", insert "or section 29".

7 Paragraph 11CA(2)(n)

After "amount", insert "or asset".

8 Subsection 11CA(2)

Before "does not apply", insert "or asset".

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4 Banking Amendment (Covered Bonds) Bill 2011 No. , 2011

9 After subsection 11CA(2)

Insert:

(2AA) However, APRA must not direct, or give a direction that would

cause or require, a covered bond special purpose vehicle to:

(a) deal, or not deal, with an asset to the extent that the asset

secures covered bond liabilities of an ADI; or

(b) make a payment, or not make a payment, in relation to a

covered bond liability of an ADI.

Note:

Covered bond special purpose vehicles hold assets that secure

liabilities in relation to covered bonds: see Division 3A of Part II.

10 Subsection 11CD(1A)

After "Subdivision A or B", insert "or section 29".

11 Subsection 11CD(2)

Before "the other party", insert "or because of a direction under

section 29,".

12 Subsection 11CD(3)

After "Subdivision A" (wherever occurring), insert "or section 29".

13 Subsections 11CE(1) and (2)

After "Subdivision A or B", insert "or section 29".

14 Paragraphs 11CE(3)(a) and (b)

After "Subdivision A or B", insert "or section 29".

15 Subsection 11CE(4)

After "Subdivision A or B", insert "or section 29".

16 Paragraphs 11CG(1)(b) and (2)(a)

Omit "or 23", substitute ", 23 or 29".

17 Subsection 11CG(2A)

Omit "or 23", substitute ", 23 or 29".

18 After subsection 13A(3)

Insert:

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Banking Amendment (Covered Bonds) Bill 2011 No. , 2011 5

(3A) The assets of an ADI are taken for the purposes of subsection (3)

not to include any interest in an asset (or a part of an asset) in a

cover pool for which the ADI is the issuing ADI.

19 After subsection 13A(4)

Insert:

(4A) For the purposes of subsection (4):

(a) the ADI's deposit liabilities are taken not to include an

amount equal to the total of the face values of all of the

covered bonds issued by the ADI; and

(b) the assets of the ADI are taken not to include:

(i) any interest in an asset (or a part of an asset) in a cover

pool for which the ADI is the issuing ADI; or

(ii) any loan to a covered bond special purpose vehicle that

relates to an asset (or a part of an asset) in a cover pool

for which the ADI is the issuing ADI.

20 Paragraph 14B(1)(a)

After "1BA", insert "or section 29".

21 Subparagraph 16BA(6)(a)(iii)

After "Part II", insert "or section 29".

22 After Division 3 of Part II

Insert:

Division 3A--Covered bonds

24 Guide to this Division

This Division provides for the issue of covered bonds by ADIs.

An ADI issuing covered bonds must provide assets to secure the

covered bonds and related liabilities. These assets are held by a

covered bond special purpose vehicle. Some of the assets held by

the covered bond special purpose vehicle form the cover pool for

the covered bonds.

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6 Banking Amendment (Covered Bonds) Bill 2011 No. , 2011

The ADI must not issue covered bonds if the combined value of

assets in cover pools securing covered bonds issued by the ADI

would exceed 8%, or such other percentage as is prescribed by the

regulations, of the value of the ADI's assets in Australia.

25 Application of Division

This Division does not apply in relation to:

(a) a foreign ADI; or

(b) a bond, note or other debenture, liabilities in relation to

which are secured wholly by assets that are not in Australia.

26 Covered bonds

(1)

Covered bonds are bonds, notes or other debentures issued by an

ADI, liabilities to the holders of which, or their representatives,

are:

(a) recoverable from the ADI; and

(b) secured by assets beneficially owned by a covered bond

special purpose vehicle.

Purposes of covered bond special purpose vehicle

(2) The purposes of the covered bond special purpose vehicle must

relate only to the covered bonds.

Cover pool

(3)

The

cover pool for the covered bonds consists of the assets

beneficially owned by the covered bond special purpose vehicle to

the extent that they secure the liabilities to the holders or

representatives equally or in priority to any other liabilities.

Note 1:

The value of the cover pool will usually exceed the value of the

liabilities to the holders or representatives.

Note 2:

Assets in cover pools may change from time to time.

Covered bond liabilities

(4) The liabilities to the holders or representatives, and any other

liabilities secured by assets beneficially owned by the covered

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Banking Amendment (Covered Bonds) Bill 2011 No. , 2011 7

bond special purpose vehicle, are covered bond liabilities of the

ADI.

Note:

This means that liabilities incurred by the covered bond special

purpose vehicle can be covered bond liabilities of the ADI.

(5) However, a liability to the ADI, other than a liability in relation to

a derivative or the provision of services, secured in priority to any

liability to the holders or representatives is not a covered bond

liability of the ADI.

Issuing ADI

(6) The ADI is the issuing ADI for:

(a) the cover pool; and

(b) the covered bond special purpose vehicle.

27 Arrangements involving several ADIs

Aggregated issuing of covered bonds

(1) Two or more ADIs may enter into an arrangement with another

entity (the aggregating entity) under which the aggregating entity

issues bonds, notes or other debentures secured by covered bonds

issued by each of the ADIs to the aggregating entity.

Other arrangements

(2) The regulations may prescribe other arrangements that may be

entered into by 2 or more ADIs for the purposes of issuing or

dealing with covered bonds.

28 Restrictions on issuing covered bonds--8% rule

An ADI must not issue a covered bond if the combined value of

assets in cover pools securing covered bonds issued by the ADI

would exceed 8%, or such other percentage as is prescribed by the

regulations, of the value of the ADI's assets in Australia.

29 Restrictions on issuing covered bonds--APRA directions

(1) APRA may direct an ADI not to issue a covered bond.

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8 Banking Amendment (Covered Bonds) Bill 2011 No. , 2011

(2) APRA may, by written notice given to the ADI, give the ADI such

a direction if:

(a) APRA has reason to believe that the ADI has contravened:

(i) this Division; or

(ii) another provision of this Act, a prudential requirement

regulation or a prudential standard relating to covered

bonds; or

(b) APRA has given the ADI a direction under section 11CA.

(3) A notice under subsection (2) is not a legislative instrument.

(4) The direction may deal with the time by which, or period during

which, it is to be complied with.

(5) The ADI has power to comply with the direction despite anything

in its constitution or any contract or arrangement to which it is a

party.

(6) APRA may, by notice in writing to the ADI, vary the direction if,

at the time of the variation, it considers that the variation is

necessary and appropriate.

(7) The direction has effect until APRA revokes it by notice in writing

to the ADI. APRA may revoke the direction if, at the time of

revocation, it considers that the direction is no longer necessary or

appropriate.

(8) Part VI applies to a decision to give a direction under

subsection (1).

(9) Information relating to directions and revocations of directions

under this section is subject to the secrecy requirements in Part 6 of

the Australian Prudential Regulation Authority Act 1998, unless

the information has been published in the Gazette under

section 11CE of this Act.

(10) This section does not limit any other powers of APRA to give

directions.

30 Cover pool monitors

(1) Each cover pool must have a cover pool monitor.

(2) The cover pool monitor must:

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Banking Amendment (Covered Bonds) Bill 2011 No. , 2011 9

(a) be registered as an auditor under Part 9.2 of the Corporations

Act 2001; or

(b) hold an Australian financial services licence under that Act

that covers the provision of financial services as the cover

pool monitor; or

financial services licence for the provision of financial

services as the cover pool monitor.

(3) However, the cover pool monitor must not be:

(a) the issuing ADI for the cover pool; or

(b) an associated entity (within the meaning of the Corporations

Act 2001) of the issuing ADI.

(4) The functions of the cover pool monitor are as follows:

(a) to assess the keeping, by the issuing ADI or covered bond

special purpose vehicle concerned, of an accurate register of

the assets in the cover pool;

(b) to assess compliance by the issuing ADI with sections 31 and

31A;

(b) available to the issuing ADI (or any substituted entity) for

distribution to the holders of covered bonds or their

representatives;

(d) to provide reports relating to the cover pool to APRA on

written request by APRA;

(e) such functions (if any) as are prescribed by the regulations.

(5) Copies of reports provided under paragraph (4)(d) must be

provided to the issuing ADI (or any substituted entity) and the

covered bond special purpose vehicle concerned.

(6) The functions covered by paragraphs (4)(a) to (c) must be

performed at least every 6 months.

(7) The functions covered by paragraphs (4)(a) and (b) may be

performed by sampling in accordance with auditing standards

made under the Corporations Act 2001.

31 Assets that may be in cover pools

(1) An asset in a cover pool must be one of the following:

Schedule 1 Amendments

10 Banking Amendment (Covered Bonds) Bill 2011 No. , 2011

(a) an at call deposit held with an ADI and convertible into cash

within 2 business days;

(b) a bank accepted bill or certificate of deposit that:

(i) matures within 100 days; and

(ii) is eligible for repurchase transactions with the Reserve

Bank; and

(iii) was not issued by the ADI that issued the covered bonds

secured by the assets in the cover pool;

guaranteed by the Commonwealth, a State or a Territory;

(d) a loan secured by a mortgage, charge or other security

interest over residential property in Australia;

(e) a loan secured by a mortgage, charge or other security

interest over commercial property in Australia;

(f) a mortgage insurance policy or other asset related to a loan

covered by paragraph (e) or (f);

(g) a contractual right relating to the holding or management of

another asset in the cover pool;

(h) a derivative held for one or more of the following purposes:

(i) to protect the value of another asset in the cover pool;

(ii) to hedge risks in relation to another asset in the cover

pool;

(iii) to hedge risks in relation to liabilities secured by the

assets in the cover pool;

(i) an asset of a kind prescribed by the regulations for the

purposes of this paragraph.

(2) Paragraph (1)(i) is not limited by paragraphs (1)(a) to (h).

(3) Despite subsection (1), a cover pool must not contain an asset of a

kind prescribed by the regulations for the purposes of this

subsection.

31A Maintenance of cover pools

(1) The value of assets in a cover pool must be at least 103%, or such

other percentage as is prescribed by the regulations, of the face

value of the covered bonds secured by the assets.

Note:

An exception to this rule is set out in subsection (5).

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Banking Amendment (Covered Bonds) Bill 2011 No. , 2011 11

(2) The value of assets covered by paragraph 31(1)(b) (bank accepted

bills or certificates of deposit) in a cover pool must not exceed 15%

of the face value of the covered bonds secured by the assets.

Note:

An exception to this rule is set out in subsection (6).

(3) For the purposes of subsection (1), if the sum of:

(a) the outstanding principal amount of a loan secured by a

residential property; and

(b) the outstanding principal amounts of any prior or equal

ranking loans secured by the property;

exceeds 80%, or such other percentage as is prescribed by the

regulations, of the value of the property (as determined by the most

recent valuation of the property), then the value of the loan is

reduced by the amount of the excess.

(4) For the purposes of subsection (1), if the sum of:

(a) the outstanding principal amount of a loan secured by a

commercial property; and

(b) the outstanding principal amounts of any prior or equal

ranking loans secured by the property;

exceeds 60%, or such other percentage as is prescribed by the

regulations, of the value of the property (as determined by the most

recent valuation of the property), then the value of the loan is

reduced by the amount of the excess.

Exceptions

(5) Subsection (1) does not apply to the extent that compliance would

be inconsistent with a direction given by APRA.

(6) Subsection (2) does not apply to the extent that compliance would

be inconsistent with the need to deal with an asset to satisfy a call

on security in relation to a covered bond.

31B Protection of certain contractual rights

Directions by APRA

(1) Subsection 11CD(1A) (direction not grounds for denial of

obligations) does not prevent the exercise of a contractual right in

relation to an asset that secures liabilities to holders of covered

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12 Banking Amendment (Covered Bonds) Bill 2011 No. , 2011

bonds, or their representatives, if payments under the covered

bonds to the holders or representatives are not made.

ADI statutory manager in control

(2) Section 15C (ADI statutory manager being in control not grounds

for denial of obligations) does not prevent the exercise of a

contractual right in relation to an asset that secures liabilities to

holders of covered bonds, or their representatives, if payments

under the covered bonds to the holders or representatives are not

made.

31C Powers and obligations of ADI statutory manager or external

administrator

To the extent that an asset secures covered bond liabilities of an

ADI, an ADI statutory manager or an external administrator has:

(a) no powers in relation to the asset apart from the contractual

powers of the ADI; and

(b) the contractual obligations of the ADI in relation to the asset.

31D Prudential standards--treatment of assets and liabilities

(1) This section applies for the purposes of applying:

(a) prudential standards in relation to assets in cover pools

securing covered bonds issued by an ADI; and

(b) any other prudential standard in relation to the ADI.

(2) Treat those assets as assets of the ADI to the extent that the total

value of those assets at the time does not exceed 8%, or such other

percentage as is prescribed by regulations made for the purposes of

section 28, of the ADI's assets in Australia.

(3) Disregard any liability of the ADI to a covered bond special

purpose vehicle that relates to an asset, or a part of an asset, that is

to be treated as an asset of the ADI under subsection (2).

(4) Disregard any liability of a covered bond special purpose vehicle to

the ADI that relates to an asset, or a part of an asset, that is to be

treated as an asset of the ADI under subsection (2).

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Banking Amendment (Covered Bonds) Bill 2011 No. , 2011 13

31E Prudential standards for covered bonds

(1) A prudential standard may provide for any matter relating to

covered bonds, including the following:

(a) the issuing of covered bonds;

(b) assets in cover pools;

Note:

Prudential standards are made under section 11AF.

(2) A prudential standard relating to covered bonds may:

(a) require that the following together satisfy particular

requirements in relation to prudential matters:

(i)

ADI;

(ii) one or more covered bond special purpose vehicles that

beneficially own assets securing covered bond liabilities

of the ADI; and

(b) impose, in relation to assets, or parts of assets, in cover pools

that are not treated as assets of an ADI under section 31D,

requirements that are different from requirements imposed in

relation to assets, or parts of assets, in cover pools that are

treated as assets of the ADI under that section; and

special purpose vehicle that is not covered by subsection

31D(3), requirements that are different from requirements

imposed in relation to liabilities that are covered by that

subsection; and

(d) impose, in relation to a liability of a covered bond special

purpose vehicle to an ADI that is not covered by subsection

31D(4), requirements that are different from requirements

imposed in relation to liabilities that are covered by that

subsection.

(3) This section does not limit the prudential matters in relation to

which APRA may determine standards under section 11AF.

31F APRA may direct covered bond special purpose vehicles to

return certain assets

(1) APRA may, by written notice given to a covered bond special

purpose vehicle, direct the covered bond special purpose vehicle to

return to its issuing ADI an asset to the extent that, at the time the

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14 Banking Amendment (Covered Bonds) Bill 2011 No. , 2011

direction is given, the asset does not secure covered bond liabilities

of the issuing ADI.

(2) Subsection (1) applies only if APRA may give the issuing ADI a

direction under section 11CA.

(3) A notice under subsection (1) is not a legislative instrument.

(4) The direction may deal with the time by which, or period during

which, it is to be complied with.

(5) The covered bond special purpose vehicle has power to comply

with the direction despite anything in its constitution or any

contract or arrangement to which it is a party.

(6) APRA may, by notice in writing to the covered bond special

purpose vehicle, vary the direction if, at the time of the variation, it

considers that the variation is necessary and appropriate.

(7) The direction has effect until APRA revokes it by notice in writing

to the covered bond special purpose vehicle. APRA may revoke

the direction if, at the time of revocation, it considers that the

direction is no longer necessary or appropriate.

(8) Part VI applies to a decision to give a direction under

subsection (1).

(9) Information relating to directions and revocations of directions

under this section is subject to the secrecy requirements in Part 6 of

the Australian Prudential Regulation Authority Act 1998, unless

the information has been published in the Gazette under

section 11CE of this Act.

(10) This section does not limit any other powers of APRA to give

directions.

(11) If a direction is given under subsection (1), this Act applies in

relation to the direction as if:

(a) the covered bond special purpose vehicle were an ADI; and

(b) the direction were given under section 29.

23 Subparagraph 62A(1B)(a)(ii)

After "Part II", insert "or section 29,".

Commonwealth of Australia Bills

BANKING AMENDMENT (COVERED BONDS) BILL 2011