Exchange of government securities for covered bonds

The Storting (Norwegian parliament) has today authorised the Ministry of Finance to exchange government securities with collateral in or in return for Norwegian covered bonds in amounts up to a total of NOK 350 billion.

The following guidelines will apply:

• Banks eligible to sign up for Norges Bank’s fixed-rate lending facility (F-loans) are eligible to participate in the swap arrangement with the government. These include Norwegian commercial and savings banks and branches of foreign banks. Participation in the arrangement is subject to bilateral agreements between banks and the government. Norges Bank will administer the arrangement on behalf of the Ministry of Finance.
• The government will initially accept Norwegian residential mortgage-backed securities (RMBSs) under the swap arrangement. The Ministry of Finance is considering whether to accept securities backed by the other types of assets listed in Section 2-28 of the Financial Institutions Act.
• The banks can procure Norwegian covered bonds (OMF) either in the market or directly from a mortgage company authorised to issue Norwegian covered bonds (OMF).
• The price of the swap agreement applying to the banks will be set by auction. The arrangement provides for auctions to be held twice a month.
• Banks may conclude swap agreements for up to three years. Agreements shall mature on an IMM date, i.e. on the third Wednesday in March, June, September and December. Banks may select the IMM maturity date.
• Covered bonds accepted as collateral by the government will be temporarily exchanged for Norwegian Treasury bills. When new agreements are entered into, banks will be offered a Treasury bill with a maturity date three to six months ahead. Bills that mature within the term of the agreement will be replaced by new bills with a six-month maturity.
• A general limit will be set for the difference between the yield on the covered bonds (OMF) accepted by the government and Treasury bills. This limit will apply through the life of the arrangement and shall compensate the government for risk and provide an incentive to discontinue the arrangement when market conditions become more normal.
• Banks must swap securities on market terms. A minimum price will be set at each auction based on NIBOR. The banks will bid by indicating a NIBOR margin that is higher than the minimum price. The margin will remain fixed through the contractual period. The banks’ borrowing cost will be variable in that it will be adjusted every six months in pace with NIBOR.
• The value of the covered bonds (OMF) will be set by Norges Bank when the agreement is concluded, according to the same principles that apply to securities pledged as collateral in Norges Bank’s lending facilities.
• All payments and transfers of securities under the arrangement will be settled in the Norwegian securities settlement system in Norges Bank and the Norwegian Central Securities Depository (VPS).
• Fixed coupon government bonds will not be included in the swap arrangement for the time being. This will be considered should demand for auctions of government bonds arise at a later time.
• At the beginning of November, further details concerning the arrangement will be set out in a circular. It is expected that Norges Bank and market participants will require some time to prepare for the first auction. The Ministry of Finance and Norges Bank aim to conduct the first auction in mid-November.
• Moreover, the Ministry of Finance, as presented in Proposition No. 5 (2008-2009) to the Storting, will consult the Financial Supervisory Authority of Norway on how best to prevent the arrangement from having unintended effects on banks’ capital adequacy and pricing, and ensure that the transfer and acquisition of mortgages between companies in the same group is conducted on a commercial basis.