Enacting Securitisation Legislation in New Markets

1. Robin Ward Citibank, London The Process of Enacting Securitisation Legislation and Regulations in New Markets 6 December 2007

2. Establishing a Legal Framework for Securitisation • Explicit government support for securitisation sends a positive signal to the financial markets • For effective legislation, it is important to : • be clear about the objectives - e.g. develop the local capital market, expand the international investor base, expand liquidity in the local market • recognise the limitations in the current legislation and plug the gaps • be realistic about the time it takes to legislate (primary & secondary) • involve onshore and offshore experts early and often (investment banks, rating agencies, stock exchanges, clearing systems) • not be too aggressive or too cautious in permitted structural limits 1

3. Some Shortcomings in Existing Legislation • Legal Barriers • The application of general principles of law may lead to undesired uncertainty. As a consequence, risks may not be unequivocally transferred to the party willing to assume them • Legal subordination • True sale – bankruptcy considerations • Licensing requirements • Economic Barriers • High transaction costs may make securitisation economically prohibitive • VAT on transfer of assets • Registration fees on each loan • Withholding tax on interest • Notification requirements 2

4. Some Desired Tax Effects of Securitisation • Transfer of the underlying assets does not trigger VAT, sales tax or stamp tax • The transfer of collections from the home jurisdiction to the jurisdiction of the off-shore SPV is free of withholding tax • The payment of cross-border interest on any element of the securitisation is free of withholding tax • The enforcement of claims by the off-shore SPV does not constitute the establishment of a permanent establishment for income tax purposes in the home jurisdiction • Payments for servicing do not trigger VAT taxes • Registration taxes/fees should be kept to a minimum 3

5. Other considerations • Is the objective to establish a framework for purely domestic or cross border securitisations? • Domestic frameworks need to consider the following: • Can a local SPV issue securities cross-border? • Can a local SPV clear through the international clearing systems? • Should the law specify permitted securitisation structures? • Minimum equity requirements of SPV • Minimum profit requirements of SPV • Minimum qualifications of the SPV manager • Role of trustee • Data protection • Transferability of future assets • Revolving structures, i.e. can the SPV reload assets periodically? 4

6. Other considerations • Cross border frameworks need to consider the following: • Enforceability of foreign law in home country • Ability of offshore SPV to sue in domestic court • Whether local courts will uphold rulings passed in foreign courts • Risk weighting of covered bonds (UCITS Directive) • Licensing requirements of servicer • Speed of legal process in domestic courts 5

7. The table below outlines the way Russia enacted its legislation and how some issues were addressed. The process was led by the Cabinet. Case Study - Russia • November 2003: Russian MBS Law adopted • July 2006: Russian MBS Law became operative • 2008: Further amendments being drafted to allow the Central Bank of Russia to accept domestic ABS for repo and to bolster the bankruptcy remoteness of the Mortgage Agent. 6

8. The table below outlines the way France enacted its legislation and how some issues were addressed. The initiative was led by the Ministry of Finance. Case Study - France • 1988: Securitisation law passed, which allowed banks to securitise finance receivables; created an onshore “SPV” – the fond commun de créances (FCC); established onshore regulated management companies and custodians. • 1996: Modifications to the law allowed corporates to securitise receivables; allowed FCCs to reload assets periodically and reissue units. • 2003: Further amendments allowed FCCs to issue bonds as well as units; reduced the requirement for identification of assigned receivables; allowed seller bank accounts to be redesignated as accounts of the FCC (compte d’affectation spéciale). • In draft: More modifications are in the pipeline enabling insurance risks to be securitised, simplifying the notification of receivables, simplifying the change of servicer and allowing the FCC to be a legal person in order to benefit from double tax treaties. 7

9. The table below outlines the way Greece enacted its legislation and how some issues were addressed. The initiative was led by the Association of Greek Banks with the cooperation of the Bank of Greece. Case Study - Greece • 2003: Securitisation law 3156 enacted, which set the framework for a true sale of assets to an SPV. It exempted interest from withholding tax, exempted transfers from stamp tax and made registration of mortgages a formality, requiring only a single registration for a whole pool. Followed by Bank of Greece guidelines late 2003. • 2007: Covered bond law 3601 enacted. Followed by Bank of Greece guidelines November 2007. These broadly followed the UCITS Directive and specified two approved structures. 8

10. The table below outlines the way Turkey enacted its legislation and how some issues were addressed. Efforts were led by the Capital Markets Board with the co-operation of various Ministries. Case Study - Turkey • March 2007: Law 5582 amending the laws relating to the Housing Finance System was enacted. The amendments related to foreclosure process, consumer protection, capital markets and taxation. Introduced (i) “housing finance funds” as domestic bankruptcy-remote securitization vehicles, (ii) a regulated real estate appraisal system, (iii) specifications for minimum underwriting criteria, (iv) minimum servicing criteria, (v) variable rate mortgages and (vi) abolition of restrictions on prepayment penalties. • August 2007: CMB communique Serial III, No: 33 bye-law on principles regarding covered bonds enacted. Banks, participation banks and Mortgage Finance Corporations can now issue covered bonds. • August 2007: CMB communique Serial III, No: 34 bye-law on principles regarding mortgage backed securitisation enacted. • Next steps: Enacting the principles for establishment and licensing of Mortgage Finance Corporations, and bye-laws for covered bonds and securitisation of assets other than mortgages. 9