Baker & McKenzie : Securitisation law for the domestic ABS market

The Russian Federal Service for Financial Markets (“FSFM”) has prepared two draft laws to amend existing legislation in order to facilitate the domestic securitisation of assets in Russia and the taking of security over receivables and bank accounts (the “Draft Securitisation Law”). The Draft Securitisation Law was submitted to the State Duma on 1st September.

The aim of the Draft Securitisation Law is to create a legal framework for the domestic securitisation of various assets other than mortgages, which are currently regulated by a separate law on Mortgage-Backed Securities (the “MBS Law”). Draft Securitisation Law does not contemplate the adoption of a separate securitisation law but instead provides for various changes to existing laws, including the Russian Civil Code, the Tax Code, banking, insolvency and securities laws. The MBS Law will also be amended by the Draft Securitisation Law for consistency purposes.

Although the Draft Securitisation Law provides for a number of useful concepts such as a domestic SPV, use of factoring to achieve a “true sale”, nominal bank accounts, the possibility of pledging bank accounts, a number of these concepts require further revision or elaboration. Unfortunately, the Draft Securitisation Law would be of limited use for a large number of cross-border securitisations given that the proposed regulations and benefits are largely focused around the domestic SPV. Similar to the MBS Law, the Draft Securitisation Law contemplates the adoption of various secondary legislation, including by the FSFM and the Russian Central Bank, which would need to be adopted for the proposed regulations to work properly.

The Draft Securitisation Law will be discussed in a number of readings at the State Duma and it remains to be seen which changes will be introduced to amend the current deficiencies and inconsistencies. The key provisions of the Draft Securitisation Law can be summarized as follows.


Special Purpose Entity

The Draft Securitisation Law introduces a new domestic corporate entity for securitisation purposes - the special finance company (“SFC”). The SFC can be incorporated in the form of either a joint-stock company or a limited liability company. It may not conclude employment agreements and management and accounting of the SFC is required to be outsourced to separate management companies. The Draft Securitisation Law establishes certain requirements that the SFC should meet, including the following:

  • the SFC may be set-up only for purposes of issuing asset-backed notes. The foundation documents of the SFC will need to indicate the number of issuances for which such SFC is to be created. It is, however, unclear whether the SFC could be used in connection with any bridge or warehousing arrangements;
  • the SFC may not be voluntarily reorganized or liquated without the consent of the holders of the asset-backed notes until it has redeemed all of such outstanding notes; and
  • provisions of Russian corporate law on buy-back, approval of major and interested party transactions do not apply to the SFCs, which will make it easier for the SFC to approve the securitisation transaction.


Asset-Backed Notes

The collateral backing the notes issued by the SFC should comprise receivables and/or securities. The Draft Securitisation Law clarifies that the notes can be secured by the pledge of existing receivables and/or future receivables.

The SFC may issue different classes of notes which can be subordinated. The nominal value of all notes issued by the SFC should not exceed its charter capital amount by more than a factor of 20. The minimum amount of charter capital for the SFC in the form of a limited liability company and closed joint-stock company is RUB 10,000 and RUB 100,000 in the form of an open joint-stock company. In certain cases notes issued by the SFC can be placed only with qualified investors (e.g., when the collateral backing the notes includes defaulted or future receivables).

Finally, the Draft Securitisation Law establishes that further regulations:

  • should be adopted by the FSFM establishing the requirements for the structure and size of the collateral backing the notes issued by the SFC, procedure for its valuation and restriction on the amount of the SFC’s debt; and
  • may be adopted by the Russian Central Bank establishing requirements that Russian banks need to comply with in connection with the sale of the receivables portfolio backing the notes to the SFC, servicing of such portfolio or purchasing the notes of the SFC.

These regulations may provide for unnecessary over-regulation of the market (it is unclear, for example, how uniform requirements for the structure of the pool and its size may be established given that a broad variety of asset classes may serve as collateral for the notes including auto loans, credit cards, SME loans, consumer receivables, leases, trade receivables) and will likely impede the application of the law as without these regulations it would not be possible to close a deal.


True Sale

Under Russian law, receivables can generally be transferred by way of assignment or by way of factoring. Factoring has a separate legal treatment and is generally a more securitisation-friendly receivables transfer mechanism when compared to assignment. Factoring, however, can currently be used to sell only a limited type of receivables (generally trade receivables) rather than loan portfolios (auto loans, credit cards, consumer loans, SME loans, etc.).

The Draft Securitisation Law provides that the SFC may acquire receivables only by way of factoring and introduces certain changes to Chapter 43 of the Russian Civil Code regulating factoring. These changes, however, do not allow for a transfer of loan portfolios by way of factoring. Neither the proposed changes remove the residual risk of the need to obtain a factoring license to the extent it is undertaken by non-banking institutions. The Draft Securitisation Law unfortunately does not expressly provide that the transfer of assets to the SFC is done by way of “true sale” raising an issue whether such transfer can be treated as a transfer by way of security, which is possible under Chapter 43 of the Civil Code.

The key changes proposed by the Draft Securitisation Law in relation to the transfer of receivables include the following:

  • the Draft Securitisation Law provides for voluntary public registration of factoring agreements. Such registration will be used to: (i) confirm the right to the receivables (absence of such registration would not, however, invalidate the transfer and the transfer would take place at the moment specified in the factoring agreement); and (ii) establish priority in case of multiple transfers (the agreement registered first takes priority). The procedure for such registration and the authorized body undertaking such registration should be established separately;
  • wholesale assignments are now expressly recognized as well as wholesale assignments of different types of receivables. However, the proposed changes do not provide for any specific identification requirements in relation to such assignments;
  • in case of transfer of future receivables it is clarified that such receivables are deemed to be transferred to the purchaser from the moment of their origination or thereafter. In limited cases to be set out in a separate law, it may be possible to transfer future receivables at the moment of conclusion of the factoring agreement;
  • the originator and debtor may agree in writing that the debtor waives the right to raise defences including by way of set-off against the financial agent (SFC) with certain exceptions. It is unclear, however, whether such agreement should be concluded after the factoring agreement has been signed between the originator and the SFC or whether such consent can be incorporated into the original agreement between the originator and the debtor. It is also unclear whether such waiver would be effective to terminate the relevant defences and the right of set-off or simply give a claim to the originator for the breach of such agreement;
  • the proposed changes helpfully provide that the debtor is prohibited from claiming back from the purchaser (SFC) any amounts that the debtor pays to the originator or to the purchaser in case the originator fails to perform its obligations under the agreement with the debtor (e.g., under a loan agreement); and
  • the Draft Securitisation Law provides for new rules in relation to the notification of debtors. In particular, the draft law clarifies that such notification could be made either by the purchaser, or by the originator. Once such notification has been given, only the purchaser (SPV) is entitled to provide further notices to the debtor. It is unclear whether a servicer would be entitled to give such notices on behalf of the purchaser (SPV). The notification can provide instructions for payments by the debtor either to the purchaser or to any other person.

The Draft Securitisation Law introduces certain helpful amendments to the insolvency legislation to support a “true sale”. These include:

  • the transfer of receivables to the SFC may not be invalidated on grounds of preference or suspicious transactions (including undervalue transactions) during insolvency of the originator provided that the notes backed by such receivables are publicly placed and (or) publicly traded and the pool of such receivables does not exceed the amount of the outstanding notes by more than 20 per cent;
  • the factoring agreement with an SFC and the transfer of receivables may not be repudiated during the insolvency of the originator as an executory contract; and
  • in case of insolvency of the SFC, the claims under the subordinated obligations shall be satisfied in accordance with the agreed waterfall.


Pledge of Receivables and Bank Accounts

The Draft Securitisation Law introduces new regulations for the pledge of receivables and expressly provides for a possibility to pledge funds on bank accounts, which is currently questionable. The key features of the proposed regulations are as follows.

Pledge of Receivables

  • the pledge of future receivables (both under existing contracts and those yet-to-be concluded) as well as partial pledge of receivables are expressly permitted. A wholesale pledge of receivables is also expressly recognized and the law provides that such receivables could be identified through any generic description in the pledge agreement;
  • the pledgor is required to notify the debtor in writing of the pledge within seven days from the date of the pledge agreement unless it is otherwise provided in the agreement;
  • a new type of pledge is proposed - a pledge of receivables through security assignment of such receivables from the moment of conclusion of the pledge agreement. Such pledge would allow the pledgee to receive funds directly from the debtor upon default; and
  • a pledge of receivables can be enforced through a simple assignment of such receivables to the pledgee.

Pledge of Bank Accounts

  • the Draft Securitisation Law introduces pledge of funds on bank accounts and deposits by way of a pledge of rights under the relevant bank account / deposit agreements. However, such pledge can be created only if the relevant bank account (deposit) agreement with the bank expressly allows such pledge;
  • the account bank should keep a record of all the pledge agreements. The pledge over the bank account is deemed created only upon notification of the bank by the pledgor and record of the pledge agreement by the account bank;
  • the pledge can be created in respect of all existing and future funds on a pledged account, or in respect of a fixed amount;
  • the pledgor is free to use the funds in the pledged account, however certain restrictions could be included in the pledge agreement. Upon default and after receipt of the notice from the pledgee, the bank is not authorised to debit funds from such account in accordance with the instructions of the pledgor if such debit will reduce the balance of the account below the amount of the secured obligations; and
  • a pledge of funds in a bank account can be enforced through the direct debit of funds from such account in favour of the pledge under a payment demand.


Nominal Accounts

The Draft Securitisation Law introduces a new type of bank account – the nominal bank account (“NBA”), which is an account used for operations with funds not belonging to the holder of the account. Using an NBA is intended to minimize commingling risk in securitisation transactions whereby the originator would be able to open nominal accounts which would hold funds belonging to the SPV and accumulate collection from the debtors. The key features of an NBA include:

  • an NBA agreement should indicate the owner of the funds held in such account;
  • an NBA agreement may provide for the necessity to obtain the consent of the owner of the funds to withdraw money from the NBA;
  • unless otherwise stated by law or contract, the NBA holder may not use the funds in his own interests and unilaterally amend or terminate the nominal account agreement and close the account;
  • the rights of the account holder can be restricted in respect of the NBA and pledged accounts;
  • the bank is obliged to present to the owner of the funds held on an NBA, information on the account, including the information on available funds, their transfers, claims, injunctions and restrictions on the account; and
  • the funds held in an NBA may not be used for the purposes of satisfaction of obligations of the NBA account holder.

The use of such accounts may be quite helpful in the context of trade receivables, lease and factoring securitisations, as well as in general banking transactions. Although the operation of such accounts may be difficult in the absence of supporting regulations of the Russian Central Bank. For retail assets (consumer loans, auto loans, credit cards, etc.) the use of such nominal accounts to reduce the commingling risk may be of limited application given that borrowers would typically deposit funds to repay their loans in their current bank accounts held with the relevant bank-originator which could not be structured as NBAs. Upon insolvency of such bank any balances held in the borrowers current accounts would not be segregated and would form part of the insolvency estate of the originator.


Tax Issues

The Draft Securitisation Law introduces important amendments to the Russian Tax Code providing for a specific regime for securitisation transactions involving SFCs. Such amendments include the following:

  • the proposed changes provide a tax neutral status for the SFC. Income derived by the SFC shall not be subject to any profits tax;
  • the rules on charging VAT on assignments have been clarified. In case of assignments (including by way of factoring), the base for charging VAT is defined as the difference between the purchase price received from the sale of the receivables and the nominal amount of the receivables. Previously for certain types of receivables there was a risk that the whole amount of the purchase price could be subject to VAT;
  • the tax authorities should be notified of opening and operation of NBAs and are prohibited from debiting such accounts; and
  • balances on the pledged accounts can be debited by the tax authorities – or operations with the pledge account can be frozen – only to the extent of balances in the account which exceed the amount of the secured obligation.
Questions regarding this issue may be addressed to Vladimir Dragunov, Partner, at Baker & McKenzie, Moscow (+7 495 787 2700) or your regular contact in the securitisation and structured finance group.