The Danish mortgage sector aligns bond redemptions with European standards
The Danish mortgage banks aim to introduce a new standard for redeeming mortgage bonds in connection with the introduction of TARGET2-Securities (T2S) by the European Central Bank (ECB).
T2S is a new European-wide settlement platform for securities transactions. The system is scheduled for full implementation by 2016. The current practice – i.e. marking a specific portion within the individual ISIN as “redeemed” – cannot continue in a T2S context. Instead Danish mortgage banks have agreed that redemption and payment will be executed on the day before the bond payment date. The technical change in relation to Danish mortgage bonds means that, in the future, investors holding callable mortgage bonds will no longer have to hold the bonds redeemed for the approximately six weeks that typically elapse between announcement and settlement of the redeemed amount.
Instead, the mortgage banks will announce the aggregate amount redeemed in each bond series, which will be disbursed on the payment date. The time of announcement will be the same as today.
This model has been chosen in order to avoid a large number of potentially illiquid redeemed bonds in the Danish bond market. The alternative to the model chosen would have been a very large number of new ISINs, as the bonds redeemed would have had to be separated out into specific redemption bonds.
The mortgage banking sector has been in close dialogue with the market participants and is pleased that the entire sector will continue to use a joint model. For many years, the issuance of standardised bonds across the range of Danish issuers has served to sustain a large and efficient market for callable mortgage bonds to the benefit of investors, Danish homeowners and businesses.
The new redemption model is expected to be implemented in second half of 2015, depending on the progress of the T2S project.
Contact information and description of the new redemption model is available at the websites of the Danish Mortgage Banks' Federation and the Association of Danish Mortgage Banks:
www.realkreditforeningen.dk
www.realkreditraadet.dk
Best regards
The Danish Mortgage Banks' Federation (Realkreditforeningen) and the Association of Danish Mortgage Banks (Realkreditrådet)
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