ECB Reveals Details of €60 Billion Covered Bond Program

It is hard to picture any major way in which the European Central Bank's (ECB's) new program to purchase €60 billion (nearly USD $85 billion) in covered bonds will affect the financial lives of people in North America.  The major impact of the program's announcement last month was to spark a resurgence in the European covered bond market.  

Even so, given the worldwide publicity, you may want to know some of the details—or "technical modalities," to use the ECB's term—revealed today (June 4).  The following are bullet points quoted verbatim from a written announcement released by the ECB in connection with today's meeting:

• The purchases, for an amount of €60 billion, will be distributed across the euro area and will be carried out by means of direct purchases.

• The purchases will be conducted in both the primary and the secondary markets.

• In order to be eligible for purchase under the program, covered bonds must:

be eligible for use as collateral for Eurosystem credit operations;

comply with the criteria set out in Article 22(4) of the Directive on undertakings for collective investment in transferable securities (UCITS) or similar safeguards for non-UCITS-compliant covered bonds;

have, as a rule, an issue volume of about €500 million or more and, in any case, not lower than €100 million;

have, as a rule, been given a minimum rating of AA or equivalent by at least one of the major rating agencies (Fitch, Moody's, S&P or DBRS) and, in any case, not lower than BBB-/Baa3; and

have underlying assets that include exposure to private and/or public entities.

• The counterparties eligible to the purchase program are those eligible for the Eurosystem's credit operations, as well as euro area-based counterparties used by the Eurosystem for the investment of its euro denominated portfolios.

• The purchases will start in July 2009 and are expected to be fully implemented by the end of June 2010 at the latest.

For a good Reuters article supplying more background on the ECB plan together with reaction from the financial community, read "ECB to buy covered bonds on primary, secondary markets."