Ukraine prepares launch of securitization and covered bonds
Ukraine is creating a legislative framework for securitization of financial assets and issuance of covered bonds - instruments that should allow banks and other financial institutions to attract long-term financing, particularly for the development of mortgage and other lending.
On September 16, the Verkhovna Rada adopted in the second reading and as a whole the basic draft law No. 15172 "On Securitization and Covered Bonds". In the document card it already has the status "law adopted" and is being prepared for signing. At the same time, the parliament supported in the first reading the related draft law No. 15175 on amendments to the Civil Code - 262 deputies voted for it.
What is securitization
Simply put, securitization allows pooling financial assets - for example, claims under loans - into a pool and on its basis attract funds from investors through the issuance of securities.
For a bank, this means the ability not to wait years until borrowers fully repay the loans issued, but to obtain new resources earlier and use it for further lending. That is why such a mechanism is considered as one of the ways to expand long-term financing and mortgages.
The Verkhovna Rada, when considering the basic draft law, noted that the new mechanisms should give banks and financial institutions the opportunity to attract more long-term capital, promote the development of mortgage lending, attract investment, and potentially reduce the cost of credit resources.
Special platforms and asset pools to appear
The basic draft law No. 15172 defines the rules for conducting securitization, issuance of covered bonds, and state supervision over this market.
Among other things, it provides for the creation of specialized platforms for financing securitization transactions. The law also sets requirements for pools of securitized assets and cover pools, regulates credit notes as a type of securitization securities and the mechanism of legal separation of assets that back the respective securities.
Such separation is important for investors: the assets backing the issued securities must be protected from other obligations of transaction participants in accordance with special rules.
Covered bonds oriented at long-term loans
The second instrument is covered bonds. These are debt securities, the performance of obligations under which is additionally secured by a specially formed pool of assets.
The practical significance of such a mechanism is primarily associated with long-term lending, including mortgages. A financial institution gets the opportunity to attract investors' funds against a portfolio of quality assets and use the obtained resource for new loans.
The parliamentary draft law was developed taking into account EU Regulation 2017/2402 on securitization and EU Directive 2019/2162 on covered bonds.
Rules strengthened before the second reading
Before the final vote, the basic draft law was significantly revised. In particular, restrictions were established for market participants associated with the aggressor state, sanctioned persons, non-transparent structures, and high-risk jurisdictions.
The same restrictions are provided for financial assets that may be used for securitization. In addition, consumer protection in case of transfer of claim under a loan was strengthened, the rules for inclusion of non-performing assets in pools and requirements for risk management and preservation of information about the origin of assets were clarified.
Market regulation will be distributed between the National Securities and Stock Market Commission and the National Bank depending on the type of participant and instrument.
To launch the system, the package of laws is not yet complete
No. 15172 is the central document of the reform, however along with it in April the deputies introduced a package of related draft laws No. 15173-15175.
No. 15175 amends the Civil Code to align its provisions with the new regime of securitization and covered bonds. On September 16, it was only adopted as a basis, so the document still has to pass the second reading.
Two more related documents have not yet passed the parliament. No. 15173 provides for amendments to the Tax Code, and No. 15174 - to the Code of Ukraine on Bankruptcy Procedures. According to the current cards of the Verkhovna Rada, both are still being processed in committees.
Therefore, the adoption of the main law does not yet mean an immediate full launch of the new market: it is necessary to complete the related legislative changes, sign the adopted document and create a subordinate regulatory framework for the operation of new instruments.
The reform is also linked to Ukraine's commitments to international partners. The IMF program documents previously provided for the preparation of legislation on securitization and covered bonds in accordance with international standards and best practices.
Based on materials from: Verkhovna Rada - No. 15172, Verkhovna Rada - No. 15175, NSSMC
