Having been involved in the establishment of covered bond programs for Canadian financial institutions from the outset, we are pleased to see that the Government's March 2010 budget contemplates the introduction of covered bond legislation. In this regard, the Government stated:

"One of the lessons of the global financial crisis is that financial institutions need to have access to a variety of funding sources. The Government will help federally regulated financial institutions diversify their funding sources by introducing legislation setting out a framework for covered bonds...The legislation will increase legal certainty for investors in these debt instruments, thereby making it easier for Canadian financial institutions to access this low-cost source of funding."

We look forward to further developments in this area.

Covered Bonds are bonds with full recourse to the issuer, but also with recourse to a pool of assets, generally residential mortgages, that secures or "covers" the bond in the event the originator becomes insolvent. The recourse to the issuer combined with the cover pool of assets generally results in the bonds being assigned AAA credit ratings.

In an effort to ensure the cover pool is sufficient to satisfy the outstanding indebtedness in the event of a default on the part of the issuer an asset coverage test is employed to measure the level of over collateralization required to be maintained in the cover pool. The cover pool is dynamic and the issuer is required to replenish the cover pool as necessary to meet the asset coverage test requirements which gives no credit to non-performing assets.

The announcement of covered bond legislation is a welcome one to provide certainty for investors and ensure Canadian financial institutions are competitive with the offerings of institutions from other jurisdictions which have covered bond laws. We note that the announcement refers to federally regulated financial institutions (to date only such institutions have launched covered bond programs), however, this constraint may affect others who may wish to enter the market in the future.

Royal Bank of Canada was the first Canadian financial institution to launch a covered bond program followed by Bank of Montreal, Bank of Nova Scotia and CIBC. Ogilvy Renault LLP acted for Royal Bank of Canada in connection with the establishment of its program and its European issuances and most recently with Royal Bank of Canada's domestic issuance of covered bonds.