Decision on Aligning Coverage in Cover Assets with Liabilities from Mortgage or Municipal Bonds

Evidentiary Data Collection: Other General and Individual Acts Decision on Aligning Coverage in Cover Assets with Liabilities from Mortgage or Municipal Bonds Official Gazette of the Republic of Slovenia, No. 11/22 ID: SKLE12692 SOP: 2022-01-0166 Adopted: 24 January 2022 Published: 27 January 2022 Effective from: 7 July 2022 Type of Act: Decision Lead Agency: Bank of Slovenia Adopting Body: Bank of Slovenia Forms The electronic edition of the Official Gazette is the official edition from 1 January 2006. Prior to this date, official editions were published in paper form. Text

Pursuant to the thirteenth paragraph of Article 28 of the Mortgage and Municipal Bond Act (Official Gazette of the RS, No. 123/21) and the first paragraph of Article 31 of the Bank of Slovenia Act (Official Gazette of the RS, No. 72/06 – officially consolidated text and 59/11), the Council of the Bank of Slovenia, having obtained the opinion of the Securities Market Agency dated 8 December 2021, issues

DECISION

on aligning coverage in cover assets with liabilities from mortgage or municipal bonds

1. GENERAL PROVISIONS

Article 1

(content of the decision)

This Decision specifies in detail:

1. instructions for aligning coverage in cover assets with liabilities arising from individual programs of issued mortgage or municipal bonds;

2. rules for valuing claims and liabilities under contracts for financial derivative instruments from Article 24 of the Mortgage and Municipal Bond Act (Official Gazette of the RS, No. 123/21; hereinafter: ZHKO-2), concluded for the purpose of hedging risks.

Article 2

(definition of terms)

The terms used in this Decision have the same meaning as in the provisions of ZHKO-2.

2. ALIGNMENT OF COVERAGE IN COVER ASSETS WITH LIABILITIES FROM A PROGRAM OF MORTGAGE OR MUNICIPAL BONDS

Article 3

(requirement regarding the coverage of the principal amount of liabilities by the principal amount of cover assets – nominal principle)

(1) The issuer shall, at least once a month, compare the total principal amount of cover assets of all maturities from the fourth paragraph of Article 28 of ZHKO-2 with the total principal amount of unpaid liabilities of all maturities from the third paragraph of Article 28 of ZHKO-2, arising from an individual program of issued mortgage or municipal bonds.

(2) In the event that the repurchase price of a mortgage or municipal bond is higher than its nominal value, its nominal value shall be taken into account. In the event that at a given moment a cover asset can only be sold at a value lower than the principal, the lower repurchase value of the cover asset shall be taken as the nominal value.

(3) The nominal value of items in foreign currency shall be recalculated into euros each time using the current reference exchange rate of the European Central Bank (hereinafter: ECB).

Article 4

(requirement regarding the coverage of the present value amount of liabilities by the present value amount of cover assets – present value principle)

(1) The issuer shall, at least once a month, compare the total present value of cover assets of all maturities from the fourth paragraph of Article 28 of ZHKO-2 and the total present value of liabilities of all maturities from the third paragraph of Article 28 of ZHKO-2, arising from an individual program of issued mortgage or municipal bonds.

(2) When discounting future cash flows to the current day, the current, currency-specific price of an overnight reference rate interest rate swap with a maturity corresponding to the weighted average maturity of the primary cover assets shall be taken into account, where the weight represents the volume of the individual primary cover asset. In cases where the price of an overnight reference rate interest rate swap does not exist for a given currency, the price of an interest rate swap on the reference rate representing the largest share of contractual interest rates in primary cover assets denominated in that currency shall be taken into account for discounting. Notwithstanding the previous sentence, for items denominated in currencies included in the Exchange Rate Mechanism II (ERM II), the price of the current interest rate swap on €STR may be used for discounting.

(3) The present value of items in foreign currency shall be recalculated into euros each time using the current reference exchange rate of the ECB.

Article 5

(testing the impact of changes in interest rates and exchange rates on the coverage of liabilities by cover assets)

(1) The issuer, for the purpose of aligning interest rate and currency exposure between cover assets and liabilities from a program of mortgage or municipal bonds and contracts for financial derivative instruments concluded in connection with cover assets, in accordance with the tenth paragraph of Article 28 of ZHKO-2, shall test the impact of changes in interest rates and exchange rates on the value of cover assets and liabilities from a program of mortgage or municipal bonds and contracts for financial derivative instruments concluded in connection with cover assets, at least once a month.

(2) The issuer shall consistently apply the selected approach for conducting the testing of the impact of changes in interest rates and exchange rates on the coverage of liabilities by cover assets from the previous paragraph, and shall appropriately document it. The documentation shall be kept for at least until the maturity and settlement of the last liability under the program of mortgage or municipal bonds.

3. RULES FOR VALUATION OF CONTRACTS FOR FINANCIAL DERIVATIVE INSTRUMENTS

Article 6

(valuation of contracts for financial derivative instruments)

(1) Contracts for financial derivative instruments for which an active market exists shall be valued at the current market price, determined by the issuer or another entity that is not involved in the management of cover assets and does not trade in issued mortgage or municipal bonds and has access to information on current market prices. In the event that market prices are not available, contracts for financial derivative instruments shall be valued at fair value, estimated using another valuation technique.

(2) The issuer shall document the sources of market prices for contracts for financial derivative instruments and the prices thereof or the method of valuing contracts for financial derivative instruments at fair value, as well as any changes in sources or methods of valuation. The documentation shall be kept for at least until the maturity and settlement of the last liability under the program of mortgage or municipal bonds.

4. FINAL PROVISIONS

Article 7

(beginning of validity)

This Decision shall enter into force on 8 July 2022.

Ljubljana, 25 January 2022

Boštjan Vasle

President of the Council of the Bank of Slovenia