Circular NBB_2022_16 to Portfolio Supervisors of Belgian Credit Institutions Issuing Belgian Covered Bonds

NBB_2022_16 – 14 June 2022 Circular – Page 1/8 14 Berlaimont Boulevard – BE-1000 Brussels tel. +32 2 221 54 65 company number: 0203.201.340 RPM Brussels www.bnb.be

Circular
Brussels, 14 June 2022
Reference: NBB_2022_16 your contact:
Lisanne Vanderstappen tel. +32 2 221 41 97 lisanne.vanderstappen@nbb.be

Circular to Portfolio Supervisors of Belgian Credit Institutions Issuing Belgian Covered Bonds

Scope
The portfolio supervisor designated in accordance with Article 16 of Annex III of the Act of 25 April 2014 on the status and supervision of credit institutions and securities firms (the Banking Act).

Summary/Objectives
The Banking Act provides that Belgian credit institutions issuing Belgian covered bonds must designate a portfolio supervisor responsible for reporting to the National Bank of Belgium on the issuing credit institution's compliance with the legal and regulatory requirements relating to said Belgian covered bonds. This circular presents the Bank's instructions concerning the mission of the portfolio supervisor, both before and after issuance, and will enter into force on 8 July 2022.

Structure

1. Legal Basis
2. Instructions of the Bank concerning the mission of the portfolio supervisor before the issuance of Belgian covered bonds
3. Instructions of the Bank concerning the mission of the portfolio supervisor after the issuance of Belgian covered bonds – verifications to be carried out at least annually
4. Instructions of the Bank concerning the mission of the portfolio supervisor after the issuance of Belgian covered bonds – verifications to be carried out at least monthly
5. Annual report of the portfolio supervisor to the Bank
6. Evaluation of the report addressed to the Bank by the issuing institution
7. Specific missions

“‘ BanqueNationaleBank DE BEGIQUE VAN BELGIE Eurosystem

Circular – Page 2/8 NBB_2022_16 – 14 June 2022

Dear Auditor,

This circular includes the Bank's instructions concerning the mission of the portfolio supervisor of Belgian credit institutions issuing Belgian covered bonds.
The portfolio supervisor is designated by the issuing credit institution, subject to the prior agreement of the Bank. The supervisor is an auditor or an audit firm approved by the Bank in application of the provisions of Article 222 of the Act of 25 April 2014 (hereinafter "the Banking Act"). The supervisor cannot be the statutory auditor of the issuing credit institution. The supervisor may act in the context of several issuances or issuance programs of the credit institution. The Banking Act provides that the portfolio supervisor reports to the Bank on the issuing credit institution's compliance with the legal and regulatory requirements relating to Belgian covered bonds. This circular comprises seven chapters. The first explains the legal basis. The second presents the Bank's instructions concerning the mission of the portfolio supervisor before the issuance of Belgian covered bonds. The third details the Bank's instructions concerning the mission of the portfolio supervisor after the issuance of covered bonds – verifications to be carried out at least annually. The fourth contains instructions concerning verifications to be carried out at least monthly after the issuance of covered bonds. The fifth reviews the annual report of the portfolio supervisor to the Bank. The sixth addresses the evaluation of the report made by the reporting institution to the Bank. Finally, the last chapter deals with specific missions that the Bank may entrust to the portfolio supervisor.

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Chapter 1: Legal Basis
Article 16, paragraph 1, of Annex III of the Act of 25 April 2014 on the status and supervision of credit institutions and securities firms, as amended by the Act of 26 November 2021 aiming to ensure the transposition of Directive 2019/2162 concerning the issuance of covered bonds and public supervision of covered bonds (hereinafter "the Banking Act") provides that the portfolio supervisor is responsible for reporting to the Bank on the issuing institution's compliance with the legal and regulatory requirements relating to Belgian covered bonds.
Article 16, paragraphs 2 to 4, of Annex III of the Banking Act, as well as Article 11, paragraphs 4 to 7, of the Royal Decree of 11 October 2012 on the issuance of Belgian covered bonds by Belgian credit institutions, as amended by the Royal Decree of 27 January 20221 (hereinafter the "RD" or the "Royal Decree") specify the procedures for the tasks and reporting obligations of the portfolio supervisor.
The portfolio supervisor intervenes both before and after the issuance of Belgian covered bonds.
1 The Royal Decree of 27 January 2022 amending the Royal Decree of 11 October 2012 on the issuance of Belgian covered bonds by Belgian credit institutions, the Royal Decree of 11 October 2012 on the portfolio manager in the context of the issuance of Belgian covered bonds by a Belgian credit institution, the Royal Decree of 12 November 2012 on collective investment undertakings meeting the conditions of Directive 2009/65/EC, and the Royal Decree of 25 February 2017 on certain public alternative investment funds and their management companies, and containing various provisions.

NBB_2022_16 – 14 June 2022 Circular – Page 3/8

Chapter 2: Instructions of the Bank concerning the mission of the portfolio supervisor before the issuance of Belgian covered bonds
In accordance with Article 11, paragraph 4, of the Royal Decree, the portfolio supervisor is required, before the Belgian credit institution issues a Belgian covered bond, to take the necessary measures to verify that the issuing institution is able to meet the requirements concerning:

• collateral assets:
  o qualitative requirements for collateral assets; o compliance with collateral asset limits; o requirements regarding the coverage level; o requirements regarding the level of available liquidity and the composition of the liquidity cushion; o requirements regarding the purchase of assets to cover a covered bond issuance;
• the register and correct recording and segregation of assets;
• extendable maturity structures;
• information to be provided to investors.
  The qualitative requirements for collateral assets, including derivative contracts, are described in Articles 3 and 4 of the Royal Decree and in Article 1/2 and 1/3 of Annex III of the Banking Act. The collateral asset limits, the composition of the special estate, and the requirements regarding the coverage level (hereinafter "the coverage test") are described in Article 5 of the Royal Decree and in Article 2/1 of Annex III of the Banking Act. In the context of the coverage test, the valuation of collateral assets is important, and the valuation rules are set out in Article 6 of the Royal Decree. The requirements regarding the level of available liquidity and the composition of the liquidity cushion are described in Article 7 of the Royal Decree and in Article 13 of Annex III of the Banking Act. The requirements regarding the purchase of assets to cover a covered bond issuance are described in Article 4 of Annex III of the Banking Act, and the requirements regarding extendable maturity structures are detailed in Article 13/1 of Annex III of the Banking Act. The requirements regarding information to be provided to investors are defined in Article 15/1 of Annex III of the Banking Act, as well as in Article 12 of the Royal Decree. Finally, the requirements concerning the segregation of assets and the register and correct recording are detailed in Article 9 of the Royal Decree and in Articles 5 and 15 of Annex III of the Banking Act. These provisions are commented on in Circular NBB_2022_15 regarding the practical implementation modalities of the Act of 25 April 2014 on the status and supervision of credit institutions and securities firms, as amended by the Act of 26 November 2021 aiming to ensure the transposition of Directive 2019/2162 concerning the issuance of covered bonds and public supervision of covered bonds. It is for the portfolio supervisor to determine what necessary measures should be taken. The procedures applied by the portfolio supervisor must appropriately address the risks, assessed by itself, of significant misstatements regarding the requirements imposed by the Banking Act and the Royal Decree. The activities of the portfolio supervisor must enable the establishment, with reasonable assurance, that the planned issuance of covered bonds meets the requirements imposed by the Banking Act and the Royal Decree concerning:
• qualitative requirements for collateral assets, including their valuation and eligibility criteria, compliance with collateral asset limits, requirements regarding the coverage level and the level of available liquidity, excess collateral assets, requirements regarding the purchase of assets to cover a covered bond issuance, and requirements regarding derivative contracts;

Circular – Page 4/8 NBB_2022_16 – 14 June 2022

• the register and correct recording, segregation of assets, information to be provided to investors, and extendable maturity structures.
  The notion of "reasonable assurance" is that used under auditing standards.
  It is recalled that a credit institution must obtain authorization from the Bank and/or the ECB before it can issue Belgian covered bonds. This prior authorization covers, on the one hand, the organizational capacity of the credit institution to issue Belgian covered bonds and monitor them (general authorization), and on the other hand, the extent to which a given issuance or issuance program satisfies the provisions of the Banking Act and the Royal Decree (specific authorization). To this end, the credit institution must submit a file to the Bank and/or the ECB, the content of which is described in Article 80 of the Banking Act regarding the organizational capacity to issue Belgian covered bonds, as well as in Article 81 of the Banking Act regarding a given issuance or issuance program. These provisions are explained in Circular NBB_2022_15 regarding the practical implementation modalities of the aforementioned Act. Furthermore, before granting its general authorization, the Bank or the ECB requests the approved statutory auditor of the institution to submit a report concerning the organizational capacity of the credit institution with regard to its obligations arising from the Banking Act and the Royal Decree. The Bank considers that the portfolio supervisor must, as part of its activities, take note of the aforementioned files compiled by the issuing credit institution and, respecting the ethical framework of auditors, of the report addressed by the statutory auditor to the Bank. Given that the aim is to obtain reasonable assurance, the Bank considers that the portfolio supervisor must take note of the internal control environment regarding compliance with the requirements it is required to monitor. In the exercise of its activities, the portfolio supervisor may rely on International Standard on Assurance Engagements 3000 (ISAE 3000) (revised), Assurance Engagements Other Than Audits or Reviews of Historical Financial Information, concerning more particularly the requirements for critical thinking, knowledge of legal requirements, appropriate planning of work, application of the concept of materiality (as described in auditing standards) in the context of planning and executing control missions, and obtaining sufficient and appropriate evidence. The portfolio supervisor submits a report to the Bank on the results of its activities in which it confirms that the planned issuance of covered bonds is able to satisfy, in all materially significant respects, the requirements imposed by the Banking Act and the Royal Decree, namely:
• qualitative requirements for collateral assets, including their valuation and eligibility criteria, compliance with collateral asset limits, requirements regarding the coverage level and available liquidity level, excess collateral assets, requirements regarding the purchase of assets to cover a covered bond issuance, and requirements regarding derivative contracts;
• the register and the requirement for correct recording, segregation of assets, information to be provided to investors, and extendable maturity structures.
  The portfolio supervisor transmits the aforementioned report to the Bank within 45 calendar days from the date on which the Bank has marked its agreement on the designation of the portfolio supervisor.
  The issuing institution informs the portfolio supervisor no later than the day of receipt of the Bank's agreement regarding the designation of the portfolio supervisor. The portfolio supervisor's report is subject to professional secrecy as regulated by Articles 35 and 36/13 to 36/15 of the Act of

NBB_2022_16 – 14 June 2022 Circular – Page 5/8 22 February 1998 establishing the organic statute of the Bank. The portfolio supervisor brings to the attention of the management of the credit institution the report it has transmitted to the Bank.

Chapter 3: Instructions of the Bank concerning the mission of the portfolio supervisor after the issuance of Belgian covered bonds – verifications to be carried out at least annually
In accordance with Article 11, paragraph 5, first paragraph, of the Royal Decree, the portfolio supervisor is required, at least annually, to undertake reasonable steps to verify that the issuing institution meets the requirements concerning:

• collateral assets:
  o qualitative requirements for collateral assets; o compliance with collateral asset limits; o requirements regarding the coverage level; o requirements regarding the level of available liquidity and the composition of the liquidity cushion; o requirements regarding the purchase of assets to cover a covered bond issuance;
• the register and correct recording, as well as the segregation of assets;
• extendable maturity structures;
• information to be provided to investors.
  Since the mission is identical to that described above in Chapter 2, the same instructions apply.
  The following instructions also apply.
  Regarding the reasonable steps that the portfolio supervisor must undertake, the Bank expects the latter to test the internal control to gather sufficient and appropriate evidence regarding the effectiveness of the functioning of the relevant internal control related to the covered bond activity. The Bank also expects that, independently of the assessed risks of significant misstatements, the portfolio supervisor designs and implements substantive tests for transaction flows and payment obligations (such as amounts repaid for amortization, interest, or recovery, adjustments made to the amount of collateral assets to account for payment delays or defaults within the meaning of Article 178 of Regulation (EU) No 575/2013, etc.). To determine the frequency of this mission, the portfolio supervisor must appropriately address the risks, assessed by itself, of significant misstatements regarding the requirements imposed by the Banking Act and the Royal Decree that it must monitor. In this regard, it takes into account not only the circumstances specific to the issuing institution (such as the availability of additional collateral assets, etc.) and the covered bond issuance or issuance program (such as the results of the coverage test, liquidity tests, and stress tests, the magnitude of collateral asset provisions, etc.), but also market conditions (such as the evolution of the value of collateral assets, etc.). The Bank expects the portfolio supervisor to notably also take into account the results of its previous controls and the controls carried out at least monthly (cf. Chapter 4 below). In accordance with the circular on the management report concerning the evaluation of internal control, the management report concerning the evaluation of internal control in matters of investment services and activities, and the management declaration concerning periodic prudential reporting (Circular NBB_2011_09 of 20 December 2011), the management establishes annually a report on the evaluation it carries out of internal control, including the covered bond issuance activity. The management makes the part of its report relating to the issuance of covered bonds available to the portfolio supervisor.

Circular – Page 6/8 NBB_2022_16 – 14 June 2022 Under the Banking Act, the approved statutory auditor of the credit institution is required to evaluate the internal control measures adopted by the institution and transmit its findings to the Bank. The Bank considers that the portfolio supervisor must, as part of its activities and respecting the ethical framework of auditors, take note of the statutory auditor's findings relating to the issuance of covered bonds, as communicated to the Bank. If it finds that the issuing credit institution no longer meets the requirements imposed on it by the Banking Act and/or the Royal Decree, the portfolio supervisor immediately informs the issuing credit institution and the Bank.

Chapter 4: Instructions of the Bank concerning the mission of the portfolio supervisor after the issuance of Belgian covered bonds – verifications to be carried out at least monthly
In accordance with Article 11, paragraph 5, second paragraph, of the Royal Decree, the portfolio supervisor is required, at least monthly, to monitor compliance with the requirements concerning:

• coverage tests;
• liquidity test;
• register of collateral assets.
  These requirements are described in detail in Articles 5, 7, and 9 respectively, of the Royal Decree. These provisions are commented on in Circular NBB_2022_15.
  The work of the portfolio supervisor must be sufficient to assert with limited assurance that the covered bonds meet the requirements imposed by the Banking Act and the Royal Decree concerning:
• qualitative requirements for collateral assets, including their valuation, requirements regarding the coverage level and the level of available liquidity;
• the register and the requirement for correct recording.
  The notion of "limited assurance" is that used in auditing standards. In this context, the Bank expects the portfolio supervisor to focus its work primarily – but not necessarily exclusively – on inquiries and analytical procedures, which are sufficient to obtain, according to the professional judgment of the portfolio supervisor, limited assurance.
  To determine the frequency of this mission, the portfolio supervisor must appropriately address the risks, assessed by itself, of significant misstatements regarding the requirements imposed by the Banking Act and the Royal Decree that it must monitor. This point is commented on in more detail in Chapter 3 above.
  In the exercise of its activities, the portfolio supervisor may rely on International Standard on Assurance Engagements 3000 (revised), on assurance engagements other than audits or reviews of historical financial information, concerning more particularly the requirements for critical thinking, knowledge of legal requirements, appropriate planning of work, application of the concept of materiality (as described in auditing standards) in the context of planning and executing control missions, and obtaining sufficient and appropriate evidence. If it finds that the issuing credit institution does not meet the requirements imposed on it by the Banking Act and/or the Royal Decree, the portfolio supervisor immediately informs the issuing credit institution and the Bank. This is an exception report and not a periodic report. It is therefore paramount that the portfolio supervisor retains the necessary audit documentation. It must at least be able to demonstrate to which period the work was carried out (start and end dates), what work was performed, what evidence was obtained (findings), and what communications were, if any, addressed to the issuing institution and the Bank.

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Chapter 5: Annual report of the portfolio supervisor to the Bank
As provided for in Article 11, paragraph 7, of the Royal Decree, the portfolio supervisor transmits to the Bank, at the end of the fiscal year of the issuing institution, a report on the results of its work in which it confirms that the issuance of covered bonds meets, in all materially significant respects, the requirements imposed by the Banking Act and the Royal Decree concerning:

• qualitative requirements for collateral assets, including their valuation and eligibility criteria, compliance with collateral asset limits, requirements regarding the coverage level and the level of available liquidity, excess collateral assets, requirements regarding the purchase of assets to cover a covered bond issuance, and requirements regarding derivative contracts;
• the register and the requirement for correct recording, segregation of assets, information to be provided to investors, and extendable maturity structures.
  The portfolio supervisor transmits the aforementioned report to the Bank within 60 days following the closing of the fiscal year. This communication is subject to professional secrecy as regulated by Articles 35 and 36/13 to 36/15 of the Act of 22 February 1998 establishing the organic statute of the Bank. The portfolio supervisor brings to the attention of the management of the credit institution the report it has transmitted to the Bank. The said report may inc