Covered bond legislation

Danish covered bond legislation came into force on 1 July 2007, and in many ways it changed the conditions for financing real property in Denmark. 
 

The legislation enabled a breakaway from the traditional Danish mortgage model based on the principle of matching loans and bonds. But mortgage banks have decided to maintain the match funding principle. It is the backbone of the Danish mortgage model and a guarantee of the model’s unique properties.
 

The purpose of the covered bond legislation was to implement a new set of rules from the EU – the Capital Requirements Directive – into Danish law. Covered bonds – or SDOs (særligt dækkede obligationer) – are bonds which meet specific requirements. Legislation sets out the framework for their use in the Danish market.
 

With the introduction of the new covered bonds, Danish mortgage banks may today choose from three types of bonds to fund their loans:
 

• The traditional mortgage bond (RO)
• The covered mortgage bond (SDRO) 
• The covered bond (SDO)

Both commercial banks and mortgage banks may issue covered bonds, but only mortgage banks may issue covered mortgage bonds and mortgage bonds. In practice, there is no essential difference between the two types of covered bond.
 
Both covered bonds and covered mortgage bonds must comply with a number of requirements not applying to mortgage bonds. The most important requirement is that the loans funded must comply with a statutory LTV limit applicable throughout the loan term. In the case of mortgage bonds, loans must comply with LTV limits only at the time the loans are granted.