Passage of Legislation on Securitization to Create New Possibilities for Financial Market Participants
The Russian financial market lacks a number of important sectors that exist in developed financial markets. This limits both investment possibilities and possibilities of attracting capital. Expanding the range of instruments is one of the important and promising ways of improving the Russian market. It is necessary to take into account the fact that due to the specifics of Russian legislation (for example, a financial asset is recognized as a security only if there is direct indication of this in the law) new financial instruments cannot appear only by market participants’ desire since relevant legislation is also necessary.
The market of so-called asset-backed securities has been actively developing abroad in recent decades. The purpose of these transactions for entities that hold assets is to refinance their activity. For example, a bank has issued a number of loans to different clients and has rights of claim to third parties among its assets. In order to refinance loans granted it issues securities backed by these rights of claim and sells them. The money raised may be used to issue new loans.
If securitization is legally and economically correct, it is possible to make asset-backed securities highly reliable, that is on the whole even more reliable than the issuer. It is possible to structure such products by creating a set of instruments with various risks and returns on the basis of the same pool of securitized assets.
The development of this area is new to the Russian financial market and requires considerable legislative efforts. A year ago the law “On Mortgage Securities” was passed, which became the first step in this sphere. Further progress is impossible without the law “On Securitization” and amendments to a large number of existing laws. The FSFM considers it necessary to provide new possibilities for market development and has developed a relevant draft law.
The use of either debt securities (bonds that determine specific obligations of the issuer) or equity securities (securities of interest or participation in which the risk of the final borrower’s default is transferred to the investor) is suggested. The bond issuer is either the initial asset owner (in this case securitized assets remain on its accounts, making it necessary to provide a special legal regime for these assets that would preclude them from being used to pay liabilities to other creditors) or an SPV (“a special legal entity”) with a very narrow function. In the second case the investor runs a lower risk, but for the SPV to enjoy full capacity it is necessary to legally determine its specific status, up to recognizing it as a special legal organizational form of a nonprofit organization.
The draft law suggests extending the list of assets that may be used for securitization and making it open for further additions. It should be directly indicated that future claims may be subject to securitization. For this it is necessary to amend the Civil Code of the Russian Federation (the Civil Code currently forbids transfer of such claims, except for contracts of factoring). It will also be necessary to introduce into the Civil Code a direct indication that trust management of rights of claims is possible (this is necessary for raising the legal status of certificates of participation).
For better protection of rights of such securities holders the draft law should determine ways to raise the “credit quality” of securitization instruments – guarantees on bank accounts, insurance against final borrower’s default risk, currency and interest risk hedging. It is also necessary to clearly regulate the specifics of the issue of subordinated securities (several tranches) with the same securitization. In this case “senior” securities are more reliable than “junior” ones, although “junior” tranches have higher earnings. Finally, the protection of investor rights in this sphere is impossible without the introduction of specific bankruptcy procedures of such securities issuers that involve special a order for meeting creditors’ claims.
It is necessary to introduce a special “neutral tax regime” for securitization deals and for holders of such securities so that there is no excessive tax burden due to an extremely long chain of financial institutions.
The draft law is also aimed at introducing special regulation of securitization instruments, including state control over the administration of securitized assets and at setting special requirements for information disclosure by issuers of these securities.
Apart from a special law, it will be necessary to pass amendments to the Civil Code and Tax Code of the Russian Federation, laws “On Join-Stock Companies,” “On the Securities Market,” “On Insolvency (Bankruptcy),” “On Currency Regulation and Currency Control,” “On Banks and Banking Activity.”
Source: Federal Financial Markets Service
