The FSC approved a draft regulation on Supervision of Covered Bond Issuance, completing a legal framework for covered bond issuance. The Regulation on Supervision of Covered Bond Issuance is enacted to stipulate further details mandated by the Covered Bond Act and its Enforcement Decree.

1. Specify qualifications of underlying assets

Home mortgage loans in underlying assets need to be composed of at least 20% of loans with a debt-to-income (DTI) ratio 70% or lower in a bid to contribute to improving structural soundness of household debt. Out of home mortgage loans in underlying assets, fixed-rate loans must account for more than 30%, by which banks would be pushed toward extending more fixed-rate loans.

2. Establish standards for evaluation of underlying assets

In principle, underlying assets in a cover pool are to be evaluated by market prices. In the absence of such prices, the assents can be evaluated by book value computed by international accounting standards. These are to guarantee objective valuations of collateral assets, which will enhance investors’ confidence.

3. Require market-making roles of underwriters

Issuers are required to register their underwriters’ market-making roles when they file their issuance plan. The requirement is to encourage underwriters to play market-making roles such as offering quotations upon investors’ requests for a certain period of time after the issuance of covered bonds.

The Regulation on Supervision of Covered Bond Issuance will take effect on April 23, 2014.

*Please refer to the attached PDF for details.