A Q&A guide to structured finance and securitisation law in the Russian Federation.
This Q&A provides an overview of, among others, the markets and legal regimes, issues relating to the SPV and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.
To compare answers across multiple jurisdictions, visit the Structured lending and securitisation Country Q&A tool.
This Q&A is part of the PLC multi-jurisdictional guide to structured finance and securitisation. For a full list of contents visit www.practicallaw.com/securitisation-mjg.
How active and/or developed is the market and what notable transactions and new structures have taken place recently?
To what extent have central bank liquidity schemes assisted the securitisation market in your jurisdiction? Were retained securitisations common in the last 12 months?
Is securitisation particularly concentrated in certain industry sectors?
The global financial crisis that started in 2007 has had a negative impact on global securities market, in particular on asset-backed securities (ABS), and the Russian market was no exception. However, securitisation transactions are still being carried out. In light of insufficient regulation and limited capacity of the Russian market, many transactions used to be done through foreign special purpose vehicles (SPVs). However, the number of domestic transactions has been increasing recently.
Securitisation is mainly concentrated in the banking sector. The most commonly used underlying assets are mortgages, car loans and consumer loans. Recent deals include the following:
Issue by Delta Credit Bank of RUB5 billion (as at 1 May 2011, US$1 was about RUB27.5) mortgage-backed bonds rated A2 by Moody's Investor Services in March 2011.
Issue of by the Agency for Housing Mortgage Lending of RUB13,546,706,000 mortgage-backed bonds in June 2010. Three tranches of bonds (A1, A2 and B) were issued rated, with tranches A1 and A2 rated by Moody's Investor Services Baa1 and Baa3, respectively.
Issue by Northern Lights B.V. of EUR300 million (as at 1 May 2011, US$1 was about EUR0.7) asset-backed notes in April 2010.
Issue by VTB24 of RUB15 million mortgage-backed bonds in November 2009 rated Baa1 by Moody's Investor Services.
What are the main laws governing securitisations?
Is there a regulatory authority?
There is no specific legislative regime for securitisation in general. However, issuance of mortgage-backed securities (MBS) is regulated by the Federal Law No. 152-FZ on Mortgage-Backed Securities, dated 11 November 2003 (as amended and restated) (MBS Law).
There is no special regulatory authority in the sphere of securitisation. Regulatory functions relating to issues surrounding securitisation are performed by the Federal Service for Financial Markets (FSFM) and (for banks) the Central Bank of Russia (CBR).
Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?
National or supra-national rules concerning capital adequacy (such as the Basel International Convergence of Capital Measurement and Capital Standards: a Revised Framework (Basel II Accord) or the Capital Requirements Directive)? What authority in your jurisdiction regulates capital adequacy requirements?
The usual reasons for securitisation are:
A need for cheaper financial resources to develop lending business.
Diversification of investors (reduction of refinancing risk).
Reduction of credit risk.
Balance sheet optimisation.
Assets sold to an SPV would normally be taken off the balance sheet that is maintained under Russian accounting standards (RAS). Under the IFRS, which are to be applied by Russian banks, off-balance sheet treatment is not always achievable as it may be difficult to de-consolidate the issuer from the originator's group.
The CBR sets and monitors prudential ratios. In particular, the CBR establishes the capital against risk-weighted assets ratio (N1 normative). As of 9 May 2011, the minimum ratio for banks is:
10% for banks with capital of not less than RUB180 million.
11% for banks with capital of less than RUB180 million.
The fact that it may be difficult to achieve off-balance sheet treatment for banks under the IFRS reduces the capital adequacy benefits of securitisation transactions.
In addition, under the MBS law, the CBR sets certain special ratios for banks that are issuing MBS (for example, extended mortgage loans to capital) and is entitled to approve special rules for the calculation by them of certain other ratios (including the above N1 ratio).
Provisions contained in Basel II Accord are not mandatory for Russian banks at the moment, although the CBR is working on the implementation of these principles.
What form does the SPV usually take and how is it set up?
What is the legal status of the SPV?
How is the SPV usually owned?
Are there any particular regulatory requirements that apply to the SPVs?
Russian law generally does not restrict companies from engaging in any activities, except for the MBS Law, which contains such limitations for SPVs that are established to issue securities in accordance with the MBS Law. Including the relevant restrictions in the constitutive documents of a company would not help much either, because a company's transactions in violation of its constitutive documents can generally be invalidated only if the counterparty knew or should have known about the violation. Therefore, creating an issuing SPV in Russia outside of the MBS Law framework is quite risky and not viable.
The MBS Law is the only Russian legislative act that provides legal framework for the establishment of an SPV. However, an SPV established under the MBS Law is not as bankruptcy remote as SPVs established in certain western jurisdictions that are commonly used for securitisation transactions. In addition, Russian law does not have a clear and robust mechanism of establishing an orphan SPV. That is why it is not uncommon to use entities established outside of Russia to own an SPV established under the MBS law to achieve orphan status (for example, Agency for Housing Mortgage Lending used a Dutch stichting to own a Russian SPV).
SPVs that issue securities under the MBS Law are established in Russia.
SPVs that are used for cross-border securitisations are mainly established in The Netherlands, Ireland or Luxembourg. These jurisdictions are particularly attractive to Russian issuers because of their developed legal and tax infrastructure, favourable double tax treaties with Russia, and access to a broader scope of investors.
It is possible to achieve a certain level of bankruptcy remoteness for SPVs created under the MBS Law, although these SPVs are not as bankruptcy remote as in certain other jurisdictions (see Question 4).
The assets that validly belong to the SPV should not be treated as the originator's assets (but see Question 17 in relation to the originator's insolvency). However, shares in the SPV can be sold at an auction if the originator is a shareholder of the SPV. For this and other reasons, SPV's originators are normally not shareholders of SPVs (for example, even in the issue of Russian MBS by the Agency for Housing Mortgage Lending under the MBS Law the issuing SPV is not owned by the Agency, but is rather owned by a Dutch stichting).
Depending on marketing considerations and certain other factors, securities may be issued by the SPV either publicly or privately.
Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?
If in your jurisdiction, please briefly summarise the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?
If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.
Securities issued under the MBS Law are normally listed on the Russian Trading System (RTS) and/or Moscow Interbank Currency Exchange (MICEX). Securities issued by foreign SPVs are normally listed on foreign exchanges (London Stock Exchange (LSE) and Irish Stock Exchange (ISE) are most often chosen for listing). Following recent amendments to Russian legislation that made possible public circulation in Russia of foreign securities, future listings in Russia of ABS issued by foreign SPVs are a possibility.
The list of documents that must be submitted to an exchange to list debt securities may vary depending on the exchange. Under the RTS Rules, the necessary documents include, but are not limited to:
Corporate documents (including the charter of the issuer, certificate of state registration and list of affiliates (if applicable)).
Documents regarding the registration of the issue of debt securities.
Necessary disclosure documents.
Depending on the intended quotation list for the securities, various additional requirements can apply, such as:
Requirements for the duration of existence of the issuer and absence of losses in prior periods.
Volume of the issue.
Corporate governance requirements.
Availability of financial statements in accordance with international accounting standards (IAS) or the US generally accepted accounting principles (GAAP).
Some exceptions are available for MBS issued under the MBS Law. For example:
Mortgage-backed bonds can be included into A1 and A2 quotation lists (that is, top quotation lists in Russia) without, among other things, the need for the issuer to exist for at least three years (which is required for other issuers).
The absence of losses requirement applies from the fourth year of the issuer's existence (for ordinary issuers the requirement is not to have losses in two of the last three years).
Russian law does not recognise a concept of trust. The decision on the issue of securities approved by the issuer and registered with the FSFM (or, for banks, the CBR) contains terms and conditions of the securities issued under the MBS Law. If MBS are issued in a documentary form, a certificate of the security also certifies the security owner's rights. If there is any discrepancy between the certificate and the decision on the issue of securities, the terms of the certificate prevail.
Receivables under loan agreements dominate among securitised assets. This is dictated by both the strength of the origination market and greater legal certainty of securitisation of these receivables as compared to other receivables. If new laws on securitisation are approved, more securitisations of assets that are not related to lending would be expected (see Question 29).
Receivables can be transferred by entering into sale and purchase, exchange or other contract (including contribution into the charter capital of the SPV) and, if the circumstances surrounding the transfer so permit (broadly, if the transaction is not only connected to Russia), such agreement can normally be governed by foreign law. However, irrespective of the chosen type of a transfer document or the governing law, certain restrictions that Russian law imposes on assignment of claims under Russian law-governed contract will apply (for example, assignability of assets, relationship between the borrowers and the SPV will be governed by Russian law).
There are also certain requirements as to the form of assignment. Under Russian law, an assignment must be in writing and the legal form of the assignment must be the same as that of the underlying agreement. For example, if the agreement giving rise to the receivables is notarised or subject to state registration, the assignment must likewise be notarised or registered. If the transferred receivables are based on an agreement that is not subject to state registration but is secured by a mortgage (which must be registered), the transferee will need to register the change of a mortgagee to be able to enforce the mortgage, unless the mortgage was certified by a mortgage note (zakladnaya), in which case the change of mortgagee does not need to be registered. A mortgage note is a security which may be transferred by executing an agreement and making a note on transfer in the body of the security or the relevant entry in the custody account, if rights to the mortgage note are recorded by a custodian.
Due to the absence of a special universal legislative regime for securitisations, there are no specific requirements or exemptions for transferring receivables in a securitisation transaction.
Russian legislation lacks guidance on assignment of certain types of claims. While some progress has been achieved recently through court interpretation of the relevant legislative provisions, some ambiguity remains. Therefore, issues related to the assignability of receivables must be analysed on a case-by-case basis, particularly in relation to receivables which are not commonly securitised.
In particular, securitisation of certain types of receivables may be hindered by the risks related to the right of a debtor to invoke against the assignee claims that it had against the original creditor at the moment when the debtor was notified of the assignment. The Supreme Arbitrazh Court of Russia took a view that this right also covers claims of the debtor in relation to latent defects of the goods or services that existed before the notification of the debtor of the assignment, but were detected after the notification. This may be particularly problematic for securitisation of claims under continuing contracts with a large number of debtors that may have claims against the originator, or claims under contracts for supply of goods or services that may have latent defects.
According to the clarification by the Supreme Arbitrazh Court of Russia, a future right is transferred to the assignee only after it has accrued to the assignor. For example, where one wishes to securitise receivables in relation to a future sale of goods or services, it is likely that the actual transfer of the relevant receivables will only be deemed to have occurred after the assignor has sold the relevant goods or services and has become entitled the purchase price. This increases the originator risk in securitisations of future receivables.
The security attached to the receivables normally follows the receivables, unless the agreement for the transfer of the receivables or the law provides otherwise. Change of a mortgagee is subject to state registration, unless the transfer is performed by the transfer of a mortgage note (see Question 12).
The transfer of receivables governed by Russian law may be prohibited both by law and contract.
An agreement documenting the underlying claim may provide that any assignment of claims will require debtor's consent. Therefore, it must be ensured that origination documents do not contain such provisions. However, inclusion of these provisions into contractual claims which are commonly securitised is quite uncommon.
Under Russian law, certain receivables (such as claims closely related to the identity of the creditor) cannot be transferred (see also Question 13). In addition, irrespective of the law governing the assignment, Russian law restrictions on assignability of Russian law-governed receivables will apply (see Question 12).
Data protection rules are also relevant in relation to securitisation transactions. In particular, Russian rules on banking secrecy and personal data protection are relatively broad in their application and development of special mechanisms would often be required to address them, as well as inclusion of certain provisions into origination documents.
Re-characterisation of a transaction is possible when the goal that the parties intended to achieve is different from the one stated in the agreement(s) they entered into. The risk of recharacterisation of a straightforward sale of the receivables is insubstantial, but securitisation transactions tend to be quite complex and may contain clauses that provide for, among other things, retention of certain interest of the originator in the assigned pool of loans. These clauses must be thoroughly considered and carefully drafted to minimise the risk of recharacterisation.
Two types of transactions may be invalidated following the commencement of the originator's insolvency:
Suspicious transaction. This is a transaction that:
was entered into after, or not earlier than one year before, the acceptance by a court of the bankruptcy petition relating to the originator, and at undervalue (in particular, where the terms of the transaction are materially worse for the originator than the terms of analogous transactions); or
was entered into after or not earlier than three years before the acceptance by a court of the bankruptcy petition relating to the originator, and was aimed at causing damage to the creditors, caused such damage and the counterparty knew about the aim of the transaction when it was entered into.
Preference transaction. This is a transaction that:
leads, or may lead, to preferential satisfaction of claims of a creditor over those of other creditors; and
was entered into after or one year, or in certain cases six months, before the acceptance by a court of the bankruptcy petition relating to the originator.
For an originator which is a credit institution the above hardening periods are measured from the moment of the appointment by the CBR of a temporary administration to manage the originator.
The insolvency officer will need to successfully challenge the above transactions in court for them to become void. The timeline will, to a large extent, depend on the circumstances of the case. In certain cases it is easier for the insolvency officer to challenge a transaction with the originator's affiliate than with a third party. To address this risk, SPVs are normally established as orphan SPVs, which should prevent their classification as affiliates of the originator.
In addition, under Russian bankruptcy law, bankruptcy officers of the originator may (subject to certain exemptions) repudiate its transactions if those transactions have not been fully performed by the parties and either:
The performance of those contracts will lead to losses when compared with the performance of similar transactions.
The transactions impede the recovery of the originator's solvency.
The relevant transactions will be considered terminated from the moment when all the parties receive notification of the repudiation. The relevant party will have an unsecured claim against the originator for compensation of loss. Although the repudiation risk should not be significant for the outright assignment of the existing receivables (as opposed to the assignment of future receivables and revolving structures), it may affect servicing arrangements with the originator.
There are also other insolvency related risks that must be considered at the structuring phase of a securitisation transaction (for example, commingling risk or risks related to the imposition of a moratorium on the performance of the originator's obligations).
Securities issued under the MBS Law and transaction documents entered into in relation to their issuance are governed by Russian law.
If securities are issued outside of Russia, securitisation documents are normally governed by English law (some documents may be also governed by the law of the jurisdiction where the SPV is established due to the local law requirements). In these transactions any agreements of a Russian originator are normally concluded with foreign parties. This should provide a sufficient foreign element, thereby allowing the transaction documents to be governed by foreign law.
However, there are certain limitations to the application of foreign law. For example, certain restrictions under Russian law on the assignment of claims apply irrespective of the choice of foreign law to govern the assignment (see Question 12). In addition, the following conflict of law rules must be considered, among others:
A Russian court will apply rules of Russian law if it cannot determine, or cannot accept evidence provided to it as to the contents of, foreign law.
Certain imperative norms (imperativnye normy) of Russian law can be applied irrespective of the choice of foreign law due to their special importance or an express provision of the law.
If, at the moment of the choice of law, a transaction related only to Russia, mandatory rules of Russian law would apply irrespective of the law governing the agreement(s).
Agreements relating to immovable property located in Russia must be governed by Russian law.
Requirements of Russian law as to the form of cross-border transactions of Russian companies must be complied with.
Foreign law cannot be applied if its application would contradict public order.
Under Russian law, securitised claims, as well as securities documenting such claims (such as, for example, mortgage notes) can be pledged (see also Question 12). Russian law does not provide procedure for the perfection of security.
Russian law does not recognise a concept of trust. Therefore, a trustee as a special holder of security is not involved in the issue of securities under the MBS Law. However, a licensed depositary must be retained to maintain a register of the pool of the underlying receivables and to keep the documents certifying rights to the receivables. Such a depositary, acting in the interests of the holders of MBS, is also controlling operations with the receivables. It is not authorised to give consent to any operations with the receivables that would be contrary to the MBS Law or the terms of issue of the relevant securities. However, the depositary is not a pledgee in relation to the receivables (which are charged in favour of each holder of the securities).
Russian law would normally recognise a foreign trust as the owner or pledgee of Russian assets. In a cross-border securitisation of Russian receivables, the receivables are normally transferred to a foreign SPV, which then charges them to a foreign trustee for the benefit of the holders of the relevant securities.
Common methods of credit enhancement in securitisation transactions with Russian assets are:
Issuance of tranches of ABS with different level of seniority.
Over-collateralisation (that is, transfer of assets of a greater value than consideration paid for them by the SPV).
Insurance (with monocline insurance being a rare credit enhancement method due to the impact of the financial crisis).
Common liquidity support methods for securitisation transactions with Russian assets are:
Loans from to the SPV.
Loans from a third party.
Cash reserve funds.
Derivative instruments are commonly used in cross-border deals to hedge currency and interest rate risks, due to the fact that the underlying assets are often denominated in Russian Roubles and have a fixed interest rate (which is fairly typical for loans extended by Russian originators) and securities backed by these assets are denominated in foreign currencies and often have floating rates.
The cash flow index in the Model Guide applies to cross-border deals involving Russian originators. Partly due to the fact that securitisations in Russia are mostly concentrated in the banking sector, originators normally act as servicers (see payment number 3) and back-up servicers are normally appointed to reduce servicer-related risks. While the funds remain in Russia, cash flow may be subject to certain mandatory requirements of Russian law. To reduce related risks, servicer accounts may be swept on a regular basis.
Methods of profit extraction referred to in the Model Guide can be used in Russian cross-border securitisations. However, due to a number of factors the availability of these methods must be considered on a case-by-case basis. The following issues, in particular, must be considered:
Originator's equity stake in the SPV may affect the bankruptcy remoteness of the transfer of the receivables (instead, profit participation instruments or notes with appropriate yield that will be payable after all other transaction payments are made may be considered).
Any equity held by the originator will become part of the bankruptcy estate in the event of the originator's bankruptcy.
Derivative transactions in Russia may be subject to certain restrictions (for example, when entering into swap arrangements with the originator). In particular, Russian law requires at least one party to these transactions to be a credit institution or a professional securities market participant.
Servicer fees may attract Russian value added tax (VAT).
The rights retention may increase re-characterisation risk (see Question 16).
As of 9 May 2011, the rating of Russia as assigned by Standard & Poor's, Moody's and Fitch was BBB (stable outlook), Baa1 (stable outlook) and BBB (positive outlook), respectively.
The following four main risks are analysed by a rating agency when it rates Russian securitisations:
Risks pertaining to the underlying assets (for example, quality of the loan portfolio).
Risks pertaining to the transaction structure (for example, commingling risk, currency and interest rate risk).
Legal risks (for example, bankruptcy remoteness issues).
Country risks (for example, a risk of imposition of limitations on currency transfer and conversion).
Risks pertaining to the transaction structure and legal risks are managed by:
Establishing a transaction structure that would provide the rating agency with sufficient comfort (for example, by creating an "orphan" SPV to enhance bankruptcy remoteness, or by including a back-up servicer to step in if the originating bank is no longer able to perform servicer functions).
Appropriate hedging (for example, by entering into currency and interest rate swaps with appropriate counterparties).
Country risks can be managed, in particular, by appropriate insurance. This would normally only be relevant if an issuer wants the securities to have a better rating than the Russian sovereign rating.
What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.
Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.
Are there any other tax issues that apply to securitisations in your jurisdiction?
The general principle is that the transfer of the receivables is not subject to VAT if the sale of goods or services that created the receivables was not subject to VAT. This applies, for example, to receivables under cash loans. The applicability of VAT to the transfer of other types of receivables must be considered on a case-by-case basis.
Russia has a wide network of double taxation treaties, including with the UK, Ireland, The Netherlands and Luxembourg. Therefore, it should be possible to structure a cross-border securitisation in a way that ensures that withholding taxes will not be payable. However, some uncertainties may remain (for example, in relation to the excess of the receivables over the price paid by the SPV if the receivables were bought at a discount).
Other tax issues that should be borne in mind include:
Limitations on deductibility of losses by the originator when the receivables are sold at a discount.
Profit tax that may apply to income from the sale of the receivables and servicing fees.
VAT that may apply to servicing fees.
Tax implications of extraction of excessive cash.
Tax issues are important and should be considered thoroughly with tax advisers at the structuring phase of the transaction.
With refinancing being one of the key driving factors behind Russian securitisations, and given a moderately developed derivatives market (partly due to the lack of regulatory guidance) and the impact of the global financial crisis, synthetic securitisations are not used by Russian originators.
None of these structures can be used in domestic securitisations, although the MBS Law allows establishing an SPV for multiple issuances of MBS.
In relation to cross-border transactions, structures referred to in the Model Guide may be used (subject to appropriate structuring based, in particular, on legal considerations). However, it is not very likely they will be popular in the current market.
The State Duma (the lower chamber of the Russian Parliament) passed two draft laws in their first reading on 21 October 2009:
The Draft Law on Amending Certain Legislative Acts of the Russian Federation (as Applied to Securitisation of Financial Assets).
The Draft Law on the Specifics of Securing Financial Obligations.
These draft laws are aimed at creating a legislative framework for securitisation transactions in Russia and affect a number of aspects of securitisation law, such as the creation of SPVs, pledges, rules on assignment and factoring, and insolvency remoteness issues.
The draft laws raised some issues and were directed to the appropriate committee of the State Duma for further improvement. Unfortunately, the approval of the draft laws has not progressed since October 2009 and it is not clear whether their approval in the foreseeable future should be expected.
Qualified. Russia, 2000
Areas of practice. Corporate and financial transactions, in particular, structured finance transactions, securities offerings, and mergers and acquisitions.