State Duma started hearings on securitisation

Russian law on securitisation is getting fine-tuned. Parliament has started hearings on amendments to several legislative acts, including the Civil Code, federal laws ‘On banks and banking’, ’On joint stock companies’, and ‘On limited liability companies’, with the view to clarify the legal framework for securitisation of financial assets in Russia.

Although Russian law, as it currently stands, recognises securitisation deals, the practice of courts is unconvincing.

Securitisation is a transaction when an owner of receivables sells them to a specially created entity which borrows money to finance the purchase. As a result debts are transformed into tradable securities. From the lawyer’s perspective it is simply a sophisticated form of factoring or discounting of debts.

The instrument enables particular assets to be isolated from the credit risk of the originator and, therefore, securities backed by them can have a higher rating. The assets then can be set off the bank balances - and not calculated for the capital adequacy purposes - which makes the technique very attractive for financial institutions.

Russian law on securitisation remains patchy. True sale of debts, when the insolvency of the seller does not influence the buyer’s assets base, can be difficult to achieve. The assignment of future or contingent receivables remains murky.

Another problem is formal requirements to the paperwork. In practice there can be numerous contracts that generate receivables and for some businesses administration can be extremely burdensome.

The law intends to clarify these issues by implementing relevant rules into major federal laws. In particular, it should clarify the position of Russian law in relation to the ‘bankruptcy remote’ sale of receivables, re-characterisation of the securitisation deals into the loans secured by the assets, ‘wholesale’ transfers, and assignment of future debts. It also introduces ‘a special finance company’, an equivalent of a special purpose vehicle.



September 22, 2009