The first draft was roundly slated, seeming to favour potential issuers’ ordinary creditors over creating a healthy, liquid market. Limits on issuance, and on the assignment of assets to the cover pool, were seen as far too stringent. Consequently, the banking industry sat back and waited for the second draft, which arrived in mid-September 2006. Unfortunately, the problems with the first draft had not been adequately addressed and the Italian market failed again to get off the ground.
The latest draft has now arrived, and, according to many market participants, Italy finally has workable covered bond legislation. "The purpose of the law is to create a trade-off between holder protection and the success of the market, as well as the protection of the ordinary creditors of the banks," says Federico Del Monte, a partner with law firm Simmons and Simmons.
It is this triple concern that resulted in the myriad delays and false starts in the Italian covered bond market. The legislation is in two parts. The decree of the economy and finance ministry covers the logistical side. The Bank of Italy’s supervisory regulations protect the issuer’s other creditors, although a little too forcefully in previous drafts.