On 20 October 2011, the Australian Prudential Regulation Authority (APRA) announced, in a letter to all Authorised Deposit-taking Institutions (ADIs), that Prudential Standard APS 120 Securitisation had been amended to remove the prohibition on the issuance of covered bonds by ADIs.

The amendment to APS 120 was made to reflect the recent passage by the Australian Parliament of the Banking Amendment (Covered Bonds) Act 2011 that amends the Banking Act 1959 to facilitate the issuance of covered bonds by ADIs. The implementation of a legislative framework for the issuance of covered bonds by ADIs was one of the key initiatives of the Australian Government in its competition in banking reform package announced late last year.

The amendment to APS 120 will take effect upon its registration on the Federal Register of Legislative Instruments, which is expected to take place shortly.

APRA also announced its intention to release, in early November 2011, a discussion paper and draft Prudential Standard APS 121 setting out the proposed prudential requirements for ADIs issuing covered bonds under the Covered Bonds Act. APS 121 will focus mainly on the capital treatment of covered bonds.

ADIs will be able to issue covered bonds in accordance with the Covered Bonds Act prior to the finalisation of APS 121 (expected to occur in early 2012) although in doing so APRA encourages ADIs to take into account the proposals contained in its discussion paper.

APRA also intends to amend APS 120 to incorporate enhancements to the Basel II Framework in Australia. This will take effect from 1 January 2012