The CBC in cooperation with the Ministry of Finance and the Cooperative Societies Supervision and Development Authority has prepared, after consultation with the banking industry and the positive opinion of the ECB, the legal framework for the issue of covered bonds by credit institutions incorporated in the Republic. The Covered Bond Law of 2010 came into force on December 23, 2010 (130 (I)/2010). On the same day the CBC Directive (Administrative Decision 463/2006) came into force, which was issued under the provisions of the above Law and constitutes the regulatory framework for the issue of covered bonds.
The Law provides that only the banks registered in the Register of approved institutions maintained by the CBC are eligible to issue covered bonds. Similarly, issues of covered bonds need to be registered in the Covered Bonds Register maintained by the CBC.
Covered bonds are collateralised by high quality assets of the issuing credit institution, mainly mortgage loans or public claims, which are capable of covering, at any time, the claims arising from covered bonds. Unlike securitization transactions, cover assets, as well as their inherent credit risk, are not transferred to a special purpose entity, but remain on the balance sheet of the credit institution that issues the covered bonds. In case where the issuing credit institution is subject to dissolution proceedings, a qualified person assumes the management of the cover assets in order to continue the servicing of the covered bonds. In such a case, if the claims arising from the covered bonds are not satisfied in full from the realisation proceeds of cover assets, the covered bond holders are, with respect to the unsatisfied part of their claims, unsecured creditors of the credit institution that is subject to dissolution proceedings.
The issue of covered bonds is expected to provide an alternative source of funding for the credit institutions of Cyprus with favourable terms mainly as a result of broader institutional investor base, potentially higher credit ratings, and the possibility of using the coved bonds as collateral in Eurosystem liquidity operations.
In November 2019, EU Directive 2019/2162 on the issue of covered bonds and covered bond public supervision and amending Directives 2009/65/EC and 2014/59/EU was published. This Directive lays down investor protection rules concerning: 1) requirements for issuing covered bonds; 2) the structural features of covered bonds; 3) covered bond public supervision; and 4) publication requirements in relation to covered bonds.
For the purposes of harmonisation with the EU Directive, the Law on the Issue of Covered Bonds and Covered Bond Public Supervision and Related Matters of 2021 (166(Ι)/2021) and the CBC Directive on the Issue and Supervision of Covered Bonds of 2021 (RAA 456/2021) were issued. The Law and the Directive apply from July 8, 2022, at which time the 2010 Law and Directive will be repealed.