OREANDA-NEWS. Fitch Ratings says the Discontinuity Cap (D-Cap) remains unchanged at 'Moderate' (four notches) on all its 12 rated regulated UK covered bond programmes, following the agency's review of the counterparty risk in programmes with a less conservative remedial period for account bank replacement.

Issuers of affected programmes have indicated they will amend their documentation to mitigate counterparty risk and to be in line with Fitch's counterparty criteria. Hence, there has been no need to reflect this in a more stringent assessment of the 'liquidity gap and systemic risk' and 'asset segregation' components of the D-Cap assessment and there is no impact on the covered bond ratings.

At present, out of the 12 Fitch-rated regulated UK covered bond programmes, five have the account bank's remedial period at 30 business days. The affected issuers have confirmed to Fitch that the account bank's remedial period in the document is to be amended to 30 calendar days within a set timeframe. For the remaining seven regulated programmes, the account bank's remedial period is at 30 calendar days. Therefore, there is no impact to the D-cap (see Covered Bonds Surveillance Snapshot - excel file for the full list of 12 regulated UK covered bond programmes rated by Fitch).

The D-Cap of a non-regulated dormant pass-through covered bond programme, Bank of Scotland Plc's Intelligence Finance covered bond programme (BoS IF), was revised to 'High' (two notches) from 'Minimal' (8 notches) on 7 July 2015. The revised D-Cap reflects the risk of payment interruption after recourse switches to the cover pool, as both the reserve fund and account bank replacement provisions in the programme are not fully in line with Fitch's criteria. There is no impact to BoS IF's covered bonds' 'AAA' rating, but the rating is now vulnerable to a downgrade of BoS by one notch, reducing the cushion to zero notches from six previously (see 'Fitch Affirms Intelligence Finance Covered Bonds at 'AAA'; Outlook Stable').

Fitch views programmes with an account bank remedial period of 30 business days at increased risk of default in the event of the cover pool becoming the sole source of payment, versus the 30 calendar days outlined in the agency's counterparty criteria. This has become more meaningful with the Basel III liquidity coverage ratio requirement, which aims to ensure banks have sufficient liquidity to meet their financial obligations on a 30 calendar-day horizon. Account banks in covered bond programmes with a less conservative remedial period than the agency's counterparty criteria may lead to a tightening in the D-Cap assessment, which may ultimately impact covered bond ratings (for additional information on Fitch's review of the account bank remedial period see 'Covered Bond Counterparty Risk Flagged in D-Cap Review', dated 27 March 2015).

The D-Cap review does not include Bradford & Bingley's Covered Bond Programme, since the 'AA+' covered bond rating is based on the guarantee from HM Treasury. For NRAM plc Covered Bond Programme, Fitch no longer rates this programme following the early redemption of the remaining two outstanding bonds on 20 July 2015.