Issuing and trading of Swedish Covered Bonds in the domestic covered bonds market
In order to issue covered bonds mortgage companies and banks need an authorisation by the Swedish Financial Supervisory Authority (SFSA). Normally the bonds are registered at the Nordic Exchange Stockholm (NASDAQ OMX Group), although no actual bond trading takes place there. Offering circulars with the detailed issue conditions are following a standard based on the Prospectus Directive with acceptance from the SFSA, OMX and the market participants. The normally used technique for issues is "on tap".
The Swedish bond market investors appreciate liquidity. Because of these “requirements” the large issuers issue their bonds as benchmarks which mean that large amounts (SEK 3 billion and more) are issued and that a number of dealers, under normal circumstances, show both bid and offer prices. Also, only benchmarks are deliverable in the future contracts. When a new benchmark-loan is issued, the issuers make sure that the amount issued meets the requirements for a benchmark sized deal. After the initial day of issuance the issuer can, without further notice, issue “on tap” the size he requires to match the lending.
Agents and market makers
The bonds are sold into the primary market through banks acting as agents for the issuer. These banks also act as market makers in the secondary market. Currently, there are seven market makers in treasury bonds and bills on the secondary market. A majority of the market makers in government bonds are also market makers in covered bonds. The market for government and covered bonds, as well as treasury bills, is a telephone and screen-based over-the-counter market. Market makers display indicative two-way prices on an electronic information system (the PMI Information system) which is instantaneously relayed by Reuters and Telerate. Fixed prices are quoted on request and most deals are concluded via telephone. Trading in the secondary market takes place on all business days between 09.00 and 16.15 (local time). The number of loans to be quoted is regulated in an agreement between the issuer and the market-maker.
Bonds are quoted on a yield basis with bid and ask spread of (under normal market conditions) 2 bp for the liquid benchmark bonds. The settlement day for bonds is three business days after the trading date. T-bills are quoted on a simple yield basis and are settled two business days after the trading day. The normal trading lot in government securities and liquid mortgage bonds is SEK 100-200m. Of course, prices are given for other lots as well.
Sweden has a liquid and smoothly operating repo market with almost all banks and broker firms involved in the trading. The repo market in Sweden started in the late 1980s, and has developed fast over the last few years. The Swedish National Debt Office offers a repo-facility in government bonds and treasury bills and mortgage companies offer their market makers a repo-facility in their own bonds. The repo transaction is viewed as a 'sell-buy back' or 'buy-sell back' deal and the ownership of the security has to be transferred. There are no standard conditions for a repo transaction and the counterparties have to agree on maturity, settlement day and delivery for each deal. Most often, though, repos are settled two banking days after the trading day. Repo rates lie within the spread between treasury bill yields and deposit rates. The spread between bid and ask prices are between 5 and 10 basis points depending on the maturity.
Almost all public listed securities in Sweden are registered at the VPC (the Swedish CSD part of the NCSD-group). In general, Swedish bonds are domestically settled via the VPC. Domestic settlement requires a custodian account with one of the Swedish banks or securities firms. Foreign investors can either have a custodian service with a Swedish bank or securities firm or settle via Euroclear or Cedel.
Accrued interest is calculated from the previous coupon date to the settlement day. The interest rate is calculated by using ISMA's 30E/360 day count - "End-of-month" convention.
Swedish government and covered bonds have five ex-coupon days which means that there is negative interest when settlement occurs within five business days before the coupon date.
Most Swedish bonds pay coupon annually. There are, however, bonds that pay coupon semi-annually. All domestic banks act as paying agents.
Swedish krona bonds redeem at par upon maturity.
A special small bond Exchange called "SOX", is a special part of Stockholm Stock Exchange. All bonds registered at "SOX" must have low denominations in order to be suitable for private investors. The trade in the "SOX" market is held by the Swedish Commercial banks and some stock brokers.
The trade in the SOX market is fully computer based. A normal "trading amount" in the SOX market is SEK 100.000 per transaction.
Swedish Market Maker Agreement - Duties of the market maker
This is a description of essential terms and conditions of a typical Swedish market maker agreement.
The market maker has a duty to:
- help the issuer sell bonds under it’s benchmark-loans on tap into the market,
- actively support trading of these bonds in the secondary market, and
- continuously quote indicative rates in the PMI-system
These obligations apply to a limited number of the issuer’s loans – the benchmark loans. Typically 5-6 loans of a big issuer have this status with respect to outstanding volume. Using the on-tap issuing technique a loan typically reaches benchmark status when the outstanding loan amount is SEK 3-5 bn. (At the peak of the life of the bond it typically has a volume of SEK 20-30 bn. After that the volume falls due to active repurchase operations by the issuer. With one year to go to maturity a loan is no longer of benchmark status. This paves the way for a controlled redemption of the remaining part of the loan.)
The bid ask spread shall be in line with present market conditions and the trading lots shall typically exceed SEK 50 million.
Conditions for the obligations
The obligations of a market maker are conditional upon a number of things of which the following could be mentioned;
- that no change in the economic, financial or political conditions have occurred which in the reasonable opinion of the market maker would create a major obstacle to the fulfillment of the obligations;
- that the bonds, in the reasonable opinion of the market maker, can not be placed in the primary or secondary market on normal market conditions.
If so, the market marker shall notify the issuer and may withdraw from the duties wholly or in part for a shorter or longer time.
The market maker also has an obligation to trade two futures (2 and 5 year) of the issuer in a similar way as that of the benchmark bonds.
The issuer on his side has an obligation to (under normal market conditions) supply the market maker with a repo facility in the outstanding benchmark bonds. (This facility used to be unlimited. Today however the limit is set by the available cover in the cover pool of the issuer.)
With respect to transparency the issuer shall make public at the end of each week figures on outstanding benchmark loans as of the last day of the previous week.
Real Estate Investment in Sweden
Information concerning the Swedish investment market is provided by the Swedish government agency Invest in Sweden Agency (ISA).
Real Property Register and Mortgage Deeds
Real property register
Lantmäteriet - the Swedish mapping, cadastral and land registration authority - has the overall national responsibility for the Swedish cadastre and through its local offices it also carries out cadastral surveys such as subdivision of land into new real property units and making changes to existing units. Lantmäteriets Real Property Register contains information about Sweden´s real estate; this information is of fundamental importance for Swedish society and the market economy. Other real property data that can be obtained from Lantmäteriet includes information concerning tax assessment values and registration of ownership. You can also get information concerning ownership of property - who owns a given property - or about the measures that must be taken if you want a property subdivision to be carried out. You can also follow prices for houses and second homes on the real property market in different parts of Sweden.
Lantmäteriet has responsibility for supporting the development of a secure and rational national credit market through development of specialised products including the computerised Mortgage Deeds System for real estates and the Corporate Mortgage Certificate System for companies. This is done in close co-operation with banks, credit institutions and the major property companies.
The Mortgage Deeds System (MDS)
A mortgage deed is proof of a mortgage on a property. The use of MDS facilitates the granting of credit and increases security in the handling of mortgage deed. Using the system also results in decreased costs for the process of granting loans.
The MDS converts printed mortgage deed into digital mortgage deed. Conversion to a digital format results in decreased costs for storing the deeds and a significant increase in security. All customers who are connected to the system can handle the documents on a desktop PC.
Today, most Swedish banks, credit institutions, real estate and insurance companies are connected to MDS, and more than seven million mortgage deeds, out of a total of approximately nine million, are now digital.
Property owners who have not pledged their mortgage deeds can also have them converted into digital deeds. The digital deeds are then placed in the Owner's Archive.
Although the MDS is not a public register, property owners can always make a request (Property Owner Request) to Lantmäteriet for information regarding the identity of the registered holder of their digital mortgage deeds.
The Property Price Register contains information about sold real properties all over the country and includes all types of real properties. Aside from transfer via purchase the Property Price Register contains information about transfers via trade, gift or inheritance. The information goes back approximately six years.
Credit information agency
Credit information agencies collect information regarding the financial position of companies and the financial and personal circumstances of individuals.
Everyone over the age of 15 is on the computer files of Sweden's largest credit information agencies.
Anyone planning to conduct credit information operations normally requires a permit from the Data Inspection Board. The Data Inspection Board carries out inspections to ensure that the operations are being conducted in a proper manner.
Particulars concerning a private person may only be provided to a third party if there is a legitimate reason, for example an investigation into creditworthiness. The person concerned must always receive a copy of the information that has been supplied.
Negligence on the part of a credit information agency can result in a liability to pay damages and those responsible may be fined or imprisoned.
Source: The Swedish Data Inspection Board (Datainspektionen)
Information in a credit register
The credit information registers run by the largest Swedish credit information agencies can be expected to contain the following information concerning a private individual:
- The latest two years income
- Marriage settlements
- Property owner details
- Balance of dept with the Enforcement service
- Payment complaints, claims
The sources of information for the credit information agencies include the Swedish Tax Agency (Skatteverket), the National Land Survey of Sweden (Lantmäteriet), bailiffs and courts. The register contains information about every Swede above the age of 15 years.
Additional information is available for credit market companies (i.e. banks, mortgage lending institutions and finance companies). This classified information consists of a credit register and a register covering abused credits. This information is supplied by the credit market companies and comprises about 95 % of all credits granted to consumers in Sweden. The register encompasses personal loans, check accounts, other bank accounts, mortgages and credit cards.
Source: UC (a leading Swedish credit information agency)
The valuation of real estate
Code of conduct and legal framework
The valuation of real estate is not regulated by law in Sweden. SFF (Samfundet För Fastighetsekonomi), the professional Swedish organisation of real estate valuation experts has, however, issued a code of conduct regarding the procedure for the valuation of real estate. The code of conduct is aimed at securing professional, reliable, ethical and independent behaviour of SFF members.
The Swedish Financial Supervisory Authority has also issued rules on the valuation of property in the annual accounts of banks and mortgage credit institutions, based on the present market value of the property.
Legislation on covered bonds and also the new Capital Requirements Directive has affected they way in which valuations for lending purposes are carried out. The financial institutions have to structure the valuation business in a different way than before. Different valuation models are demanded and will be included in the daily lending activities.
Valuation Bases and Methodology
The predominant approach to valuation for lending business is the market value, calculated using either the comparison or the cash flow method. The cash flow method usually takes into account the expected risks and revenues over a five to ten year forecast. The comparison method approximates the market value by comparing the property with other properties of a similar character and state of repair.
Valuation Report: Form and Content
SFF has produced a Code of Practice, which covers the following elements:
Requirement of independent position in conjunction with external valuation engagements
Requirement concerning reporting of any conflict of interest in conjunction with internal valuation services
The valuer’s possibility to act as an agent and representative in real estate sales, disputes concerning the value of properties, etc.
Performance of valuation services
Relationship to customers
Charging of fees
Relationship to colleagues
Publicity, advertising, and canvassing
Relationship to the Society
Use of AVMs
AVMs are used in Sweden for the valuation of single family houses for a variety of purposes, including mortgage origination, quality control in the origination process, non purchase mortgage loan underwriting and securitisation. No rules or guidance (legal or professional) currently exist in Sweden for the use of AVMs, however in Sweden, banks have their own internal guidelines or procedures related to their use.
In Sweden, valuers are self-regulated by the Professional Organisation of Real Estate Valuation Experts. A Code of Conduct regarding the procedure for the valuation of real estate aims, amongst other things, at guaranteeing the independent behavior of its members.
Authorisation as an SFF real estate valuer requires a university education including at least 140 university points. Authorisation as an SFF agricultural valuer requires a university education with at least 80 university points (two years of full time studies), and 120 university points (three years of full time studies) are required to become an SFF authorised residential property valuer. Dispensation from the academic requirement is granted during the first few years following the establishment of authorisation for valuers with a good service record who possess substantial experience. Currently, dispensation from the academic requirement is only granted in exceptional cases.
An SFF authorised valuer must undergo nine additional days of education every three years.
Authorisation requires three years practical experience, with a good service record, of valuations of the types of properties to which the authorisation relates.
Current knowledge requirement
Authorisation requires that the valuer regularly works with valuation issues and that he keeps abreast of developments within the relevant areas. The current knowledge requirement is reassessed every third year.
A valuer who is authorised by SFF must constantly maintain such a position in relation to the customers of the valuation services that the valuer’s integrity or his objectivity cannot be called into question
Use of valuer title
The title of ‘authorised valuer’ is protected by the Swedish Society of Real Estate Economics.
External v. Internal
In Sweden, the SFF Code of Conduct regarding the procedure for the valuation of real estate aims, amongst other things, at guaranteeing the independent behavior of its members.
Mortgage banks in Sweden use internal or/and external valuers. The largest mortgage banks, have their own valuers.
Professional Indemnity Insurance
There is no legal obligation for valuers to have professional indemnity insurance cover in Sweden.
All authorised valuers need an Indemnity Insurance.
Source: 2007 EMF Study on the Valuation of Property for Lending Purposes