A Revival of SROs in Russian Financial Markets2

Banking

In this issue:

Coming off the naughty stepSecuritisation has taken a battering in recent years. A complex financing technique, little understood by the public, it was an easy scapegoat as a principal cause of the global financial crisis. For a while after the crisis it seemed as if various supervisory authorities would regulate it to the point of extinction. In this article Jonathan Walsh considers the changing attitudes to securitisation →

Investing in Dutch residential mortgages There has recently been a huge increase in the types of lenders and investors entering the Dutch residential mortgage market from the Netherlands and abroad. Instead of investing in Dutch residential mortgages through securitisation or by purchasing an existing mortgage portfolio, these new players establish a mortgage platform and originate Dutch residential mortgages themselves by using existing intermediaries. Philippe Steffens and Floor Overbosch consider the legal landscape that is assisting this growth →

Project Hercules closes in SpainThe largest real estate transaction in Spain since the financial crises has recently closed. Project Hercules was also the largest ever sale of a mortgage loan portfolio in Europe. Rossanna D’Onza examines the deal structure to explain why the deal was such a success →

German Parliament questions the role of the three European AuthoritiesThe Finance Committee of the German Bundestag has criticised the three European Authorities over draft guidelines proposed by the European Banking Authority in relation to a directive on deposit guarantee schemes . Manuel Lorenz takes a look at what has caused so much concern →

SROs in the Russian Financial MarketsRecent developments in Russia suggest we are about to see an increase in sectorial coverage of SROs. Both the Central Bank of Russia and The Ministry of Economic Development have produced draft legislation which places SROs at the centre of effective supervision of financial markets in Russia. Max Gutbrod examines what this means for the regulation of financial markets in Russia →

Banking NewsletterEdition 12 | June 2015

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2 Banking Newsletter | June 2015

Coming off the naughty stepSecuritisation has taken a battering in recent years. A complex financing technique, little understood by the public, it was an easy scapegoat as a principal cause of the global financial crisis. For a while after the crisis it seemed as if various supervisory authorities would regulate it to the point of extinction.

Thankfully, that did not happen. But over the past six or seven years (depending on when you think the financial crisis actually hit) rules aimed at stifling the securitisation market have been pumped out on both sides of the Atlantic. We have had rules on bank capital, rating agencies, investors and more. The additional regulations are complex, in some cases contradictory, and affect all aspects of securitisation transactions and the parties involved in such transactions.

Such heavily policed technical rules with real sanctions are a far cry from principles-based self-regulation. During this period, prudent bankers and lawyers specialising in securitisation have generally kept their heads down and rebadged as compliance and regulatory specialists.

However, fashions change and so do regulatory priorities. There will still be plenty who will disagree but evidence is mounting for what many in the industry have known all along: that the basic narrative equating securitisation with the financial crisis was always deeply flawed.

How has this come about? First, it turns out that not all securitisations are (or indeed were) bad. In fact, statistical analysis in an October 2014 paper issued by the European Banking Authority showed that, excluding collateralised loan obligations and so-called subprime transactions, securitisations in Europe significantly outperformed corporate bonds in the decade up to 2010 (ie the period leading up to and just after the global financial crisis).

Secondly, a consensus has formed among national states, politicians and public servants across Europe that the real economy needs to be stimulated. Consequently, banks are being encouraged to lend, especially to small and medium-sized enterprises. Unfortunately the same banks – deluged with regulation – are also being told to lend conservatively. That is where securitisation would have helped in the past, being used by banks as a way of managing their balance sheets – selling loan assets to diversify the investor base and also the risk.

This second point appears to have finally registered and is perhaps tipping the balance in favour of a healthy and properly regulated securitisation market. As part of the wider EU capital markets review, the European Commission recently issued a consultation paper, ‘An EU framework for simple, transparent and standardised securitisation’, inviting industry comment.

Such heavily policed technical rules with real sanctions are a far cry from principles-based self-regulation


This is unprecedented in the sector, in that it is not just another paper seeking to further restrict the securitisation market, but an open cri de coeur. It comprises 18 questions, all of which have the underlying theme that securitisation is a much-needed tool for helping the financial markets to function and inviting suggestions as to how to fix it. The Bank of England and the European Central Bank have already published a joint response paper which is very supportive of the EU consultation exercise.

Even more encouragingly, there is also a suggestion that the EU as a whole gives serious consideration to simplifying legal issues and structures, including, for example, relating to how assets are sold, and looks to introduce transparency and standardisation across the market. There is even the very serious possibility that standardised, well-structured, legally-sound securitisation transactions could attract very favourable capital treatment. Shocking though it may be to the gainsayers, there is a real risk that a well-regulated and beneficial securitisation market could emerge to function side-by-side with the EU capital markets.

I sincerely hope that the industry engages with the Commission in this initiative. There is the very real prospect that this consultation exercise may result in exonerating a much-maligned financing technique, make it simpler to understand and document, and assist banks in the real economy to free up lending lines. The term ‘securitisation’ may even make it back into financial dictionaries and into names of bank teams (instead of ‘asset-backed/ financial solutions’). The only pity is that this exercise was not carried out two years ago, as we might already be in the middle of a brave new world.

This article was first published in Legal Business on the 8th May 2015.

Jonathan WalshTel: +44 20 7919 1613 Email: [email protected]

Jonathan Walsh leads Baker & McKenzie’s Global Securitisation Practice and is a Partner in the firm’s Finance Group based in London. He is recognised as a leading practitioner in the field of securitisation by: Legal 500; Chambers; Legal Experts; Global Counsel 3000; and the International Who’s Who of Capital Markets Lawyers.

Jonathan has acted for conduit sponsors, originators, lead managers and trustees on both term and commercial paper transactions, including the setting up of ABCP programmes, involving several jurisdictions and in relation to asset classes including trade receivables, corporate loans, residential mortgages, commercial mortgages, consumer loans, auto loans, insurance premium financing, securities and equipment leases.

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There is even the very serious possibility that standardised, well-structured, legally-sound securitisation transactions could attract very favourable capital treatment

The underlying theme is that securitisation is a much-needed tool for helping the financial markets to function and inviting suggestions as to how to fix it


Investing in Dutch residential mortgages is on the riseThere has recently been a huge increase in the types of lenders and investors entering the Dutch residential mortgage market from the Netherlands and abroad. Instead of investing in Dutch residential mortgages through securitisation or by purchasing an existing mortgage portfolio, these new players establish a mortgage platform and originate Dutch residential mortgages themselves by using existing intermediaries.

The Dutch residential mortgage market is attractive to investors for a number of reasons: the number and volume of newly originated mortgages is rising; there are relatively low levels of arrears; the margins are attractive; there are standardised underwriting policies; the main banks are not increasing their market share, so there is room for new entrants; and the legal framework in which the deals are taking place is very conducive to deal doing. This article focuses on the legal landscape that is assisting this growth.

Acquisition of mortgage receivables is straightforwardThe mortgage loan agreement is entered into between the original lender and the borrower. The original lender transfers the mortgage receivable rather than the mortgage loan agreement, which would require the cooperation of the borrower, to the purchaser. The transfer is then registered with the tax authorities.

Existing security provides collateral support to the original lender and the purchaserDutch mortgage deeds typically provide that they secure the loan to the borrower for the purpose of acquiring the relevant property and any other liabilities and moneys that the borrower, now or in the future, may owe to the original lender.

The current view is that where a mortgage receivable secured by a mortgage is assigned, the security will (partially) pass to the purchaser, provided that the mortgage deed: (i) specifically states that it will pass; or (ii) does not include an indication to the contrary. Any further claims of the original lender against the borrower will also be secured by the mortgage right and as a consequence it will be jointly held by the original lender and the purchaser following the assignment of the mortgage receivable to the purchaser.

The relevant mortgage receivables purchase agreement typically contains arrangements between the original lender and the purchaser with respect to the management and enforcement of the mortgage right.

The mortgage right will be jointly held by the original lender and the purchaser following the assignment of the mortgage receivable


The right to reset interest rates in the future It is uncertain under Dutch law whether the right to reset the interest rate on the mortgage loan follows the mortgage receivables with which it is connected as an ancillary right. However, the Dutch Civil Code explicitly refers to the right to stipulated interest as an example of an ancillary right and therefore the position could be taken that the right to reset the interest rate would transfer along with the mortgage receivable.

Lack of redtapeBy acquiring Dutch residential mortgage receivables the purchaser is, in principle, required to have a Dutch licence to provide consumer credit. An exemption however is available for the purchaser if it outsources the servicing of the residential mortgage receivables and the administration thereof to an entity that is adequately licensed under the Dutch Financial Supervision Act. This reduces the entry red tape for purchasers.

Guarantees that protect the bank and borrower are availableCertain mortgage loans have the benefit of a National Mortgage Guarantee (Nationale Hypotheek Garantie, “NHG”). This is an insurance scheme for mortgage loans which protects both borrowers and lenders and covers 90% of the outstanding principal, accrued unpaid interest and disposal costs in the event of foreclosure. The Home Ownership Guarantee Fund (Stichting Waarborgfonds Eigen Woningen), a non-profit private entity, is responsible for the administration and granting of the NHG. The NHG is available to all mortgage lenders in the Netherlands. The NHG is only granted when certain criteria are met. The NHG can be issued up to a maximum amount of EUR 245,000 as of 1 July 2015.

Set-off risk should be mitigated Under Dutch law a borrower has a right of set-off if it has a claim that corresponds to a debt with the same counterparty. Under those circumstances it is entitled to pay its debt as well as to enforce payment of the claim. The borrower’s claim could arise for instance from current account balances or deposits made with the original lender. After assignment of the receivables to the purchaser and notification thereof to the borrower, the borrower would also have set-off rights against the purchaser, provided that the legal requirements for set-off are met.

The insolvency risk of the original lender can be mitigatedCollection foundations are traditionally used as a means of mitigating the insolvency risk of the original lender. If the original lender becomes insolvent prior to forwarding the payments it has received in respect of the mortgage receivables to the purchaser, the purchaser has no right of any preference in respect of such amounts and thus has a credit risk exposure to the original lender.

Insolvency risk is mitigated by using a collection foundation

The right to reset the interest rate could transfer along with the mortgage receivable


The insolvency risk is mitigated by using a collection foundation. The original lender undertakes to direct debit all amounts of principal and interest payable by the borrower to a designated collection foundation account maintained by a collection foundation, which would be a bankruptcy remote Dutch foundation (stichting). The purchaser would then take a pledge over the collection account.

Philippe SteffensTel: +31 20 551 7410Email: [email protected]

Philippe Steffens is a partner in the Amsterdam office of Baker & McKenzie. He specialises in advising financial institutions, originators, investment firms and trustees on a wide range of Dutch and international securitisations, repackagings, CLO transactions and other structured credit transactions across a broad variety of asset classes, including residential and commercial mortgages, auto loans and leases, consumer credit and trade receivables.

Floor OverboschTel: +31 20 551 7170Email: [email protected]

Floor Overbosch is an associate in the Amsterdam office of Baker & McKenzie. She focuses on securitisation, structured credit products and whole loan transactions including CLO and repackaging transactions, involving a wide variety of asset classes. Her clients are mainly investment banks, financial institutions, asset managers and investment firms.

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Think Big! Project Hercules closes in SpainThe largest real estate transaction in Spain since the financial crises has recently closed. Project Hercules was also the largest ever sale of a mortgage loan portfolio in Europe. The sale was structured through the establishment of an asset securitisation fund (fondo de titulización de activos) and is likely to pave the way for the greater use of securitisation funds, as a flexible and efficient vehicle, for future sales of loan portfolios in Spain.

Baker & McKenzie advised the Spanish Fund for Orderly Bank Restructuring (Fondo de Reestructuración Ordenada Bancaria - FROB) and Catalunya Banc, S.A. (CX), a Spanish bank undergoing resolution, on the sale of CX’s EUR 6.39 billion loan portfolio. The portfolio consisted of mainly credit rights arising from performing and non performing loans and credit agreements with individuals secured by residential mortgages. The aim of FROB, CX and its advisers in defining the perimeter of the loan portfolio and the structure of the sale was to make the loan portfolio as attractive as possible to investors, whilst ensuring the best possible sale price for CX. This would ensure that any state aid required from FROB to prevent further losses in CX could be kept to a minimum and would not jeopardise the planned privatisation of CX.

Part of the attraction for international investors in the portfolio was the tax benefits of structuring the sale through the establishment of an asset securitisation fund and the simultaneous transfer of the portfolio to the fund. The credit rights arising from mortgage loans and credit facilities were transferred to the fund by virtue of tax efficient mortgage participations (participaciones hipotecarias - PHs) and mortgage transfer certificates (certificados de transmisión de hipotecas- CTHs) issued by CX and subscribed for by the fund.

Since the fund could not assume liabilities arising from revolving credit facilities included in the portfolio, FROB granted the fund a EUR 400 million revolving credit facility to finance the purchase from CX of future credit rights arising from drawdowns by the debtors under those facilities. Other non-eligible credit rights and real estate assets acquired by CX between the cut-off date and closing were acquired by special purpose vehicles set up by the investor.

The sale was achieved through a private auction process, which started in March 2014 and involved several international investors. The sale finally went through on 15 April 2015 with The Blackstone Group International Partners LLP (“Blackstone”) in a deal worth EUR 4.18 billion.

The fund issued senior bonds, subscribed for by Blackstone, and subordinated bonds, subscribed for by FROB, which ensured that the latter could still benefit from any potential uplift in the value of the assets.

The largest ever sale of a mortgage loan portfolio in Europe

The aim in defining the perimeter of the loan portfolio and the structure of the sale was to make the loan portfolio as attractive as possible to investors, whilst ensuring the best possible sale price for CX

The establishment of the fund and the tax efficient structuring of the asset transfers was critical to the success of the deal


The establishment of the fund and the tax efficient structuring of the asset transfers was critical to the success of the deal. From a legal perspective, the transaction combined the features of a typical M&A joint venture with the techniques and mechanics normally employed in securitisation deals.

Rossanna D’OnzaTel: +34 2304555Email: [email protected]

Rossanna D’Onza is a partner in the Madrid office of Baker & McKenzie. She is experienced in a wide range of finance transaction, including structured finance, financial restructuring, project finance (infrastructure), real estate finance, and acquisition finance, acting for banks, other financial institutions, investors and corporates. She has been very active in the restructuring of the Spanish banking sector, advising FROB, Sareb and foreign investors in the structured sale and purchase of loan portfolios.

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German Parliament questions the role of the three European AuthoritiesThe Finance Committee of the German Bundestag has criticised the three European Authorities. The members are concerned that draft guidelines proposed by the European Banking Authority (the “EBA”) in relation to Directive 2014/49/EU on deposit guarantee schemes (the “Directive”) would not allow for sufficient flexibility within the German banking system to accommodate the specific risk profiles of the banks.

The Finance Committee is concerned that the lack of flexibility will result in the unfair allocation of contributions among banks in Germany. BaFin, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht), which is the financial regulatory authority for Germany, has been “instructed” by the Finance Committee not to follow the guidelines, if such guidelines do not allow for a fair allocation of contributions among the participating financial institutions.

One Finance Committee member has said that the guidelines are an attempt to fill the gaps left by the Directive, which is contrary to the legislative intent of the primary legislation, and therefore exceeds the European Authorities’ mandate. The member also pointed out that European Directives apply in Germany only by virtue of the implementation law passed by German parliamentary bodies. Therefore, Germany should not tolerate such regulatory “excesses” by the European Authorities. This raises interesting questions about the balance of power between national legislators and the European Authorities.

The Directive is part of a larger project of “banking union”. A key feature of which is the “Single European Rulebook”, which will be to a large extent developed by the EBA. The intention is that Eurozone banks, whether under the direct supervision of the European Central Bank (the “ECB”) or not, will be subject to a single supervisory mechanism. The Single European Rulebook will provide ECB with “step-in rights” so that it can override national regulators in order to ensure the consistent application of the Single European Rulebook.

There is a risk therefore that the ECB would step in to override the decision of BaFin if it refused to apply the EBA guidelines. This would be counterproductive to the aims of the Finance Committee and result in BaFin losing power.

This conflict shows that European Authorities’ powers to make secondary and tertiary regulation should be applied with care because the “one size fits all” approach severally limits the flexibility of member states to adjust EU legislation to the national market and national specificities.

Further conflicts between national parliaments and the European Authorities can be expected while the Single European Rulebook for banks is built.

The guidelines are an attempt to fill the gaps left by the Directive, which is contrary to the legislative intent of the primary legislation, and therefore exceeds the European Authorities’ mandate

This raises interesting questions on the balance of power between national legislators and the European Authorities

This would be counterproductive to the aims of the Finance Committee and result in BaFin losing power


Manuel LorenzTel: +49 69 2 99 08 606Email: [email protected]

Manuel Lorenz is a partner in the Frankfurt office of Baker & McKenzie and focuses his practice on financial services, capital markets and corporate law. He heads Baker & McKenzies’s German capital markets practice.

Manuel Lorenz was admitted to the Frankfurt bar in 1991 and qualified as a solicitor in England and Wales in 1996.

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SROs in the Russian Financial MarketsIn the 1990s there was a great deal of focus in the then nascent regulation of Russian financial markets on self-regulatory organisations (“SROs”). Potentially that was because SROs were seen to be a key part of the regulation of financial markets in the US, and US regulation was seen as being robust enough to accommodate the requirements of voucher privatization. Later on, for instance when deposit insurance was discussed, SROs no longer seemed quite so attractive. Notwithstanding that, a general law for SROs was adopted in 2007 (the “General Law”).

As of January 2015 there were 1191 registered SROs in Russia, 767 of which are established in sectors where SRO membership is obligatory. The largest number of SROs operate in the building sector (which has almost 500 SROs). However, there are also numerous SROs in areas such as auditing, energy inspections, housing and utility sectors.

Recent developments would suggest we are about to see an increase in the sectorial coverage of SROs. The State Duma in January 2015 passed (at first reading) a draft law prepared by the Central Bank of Russia (“CBR”) on SROs in financial markets (the “Draft Law”), which the Government endorsed subject to some amendments. The Ministry of Economic Development, at a Government meeting later in the same month, went further by proposing a more fundamental change to the regulation of financial markets in a concept paper (the “Concept Paper”) which was endorsed by the Russian Union of Industrialists and Entrepreneurs.

Discussions on the Draft Law and the Concept Paper are partially of a technical nature and not always very clear. What is clear however is that the Draft Law and the Concept Paper set out general principles for the regulation of SROs in the financial markets. However, although the Draft Law and the Concept Paper see SROs as fundamental to the effective supervision of financial markets they each take different approaches to the regulation of SROs.

For instance in the Draft Law each non-commercial organisation willing to obtain the status of an SRO would have to develop basic standards for its activity and file them with the CBR for approval: at least 34% of all organisations on each financial market would be required to join the SRO established for that market. Basic standards would include requirements for SRO membership and would also regulate the relationships between the SRO and its members and the members and its customers. If several SROs were established in one financial market they would jointly file one common basic set of standards with the CBR. The Draft Law provides that the CBR may grant a SRO supervisory rights over its members. However these powers would not be exclusive as the CBR would retain its supervisory powers in parallel with the SRO.

Recent developments suggest we are about to see an increase in the sectorial coverage of SROs

Although the Draft Law and the Concept Paper see SROs as fundamental to the effective supervision of financial markets they each take different approaches to the regulation of SROs


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The Concept Paper in turn, makes SROs jointly and severally liable for the obligations of their members. A SRO would have the right to choose a mechanism for ensuring members are held liable, namely through a compensation fund or individual or collective insurance. SROs would be granted the power to decide on the amount of compensation to be given to a consumer as a result of the loss caused by a SRO member, as well as the amount of damages to be paid within the pre-court procedure. It is not clear however how the SRO would fund such compensation payments.

It would appear that changes to the regulation of financial markets in Russia are inevitable, but what is not so certain is the form that those changes will take.

Max GutbrodTel: +7 495 787 2700Email: [email protected]

Max Gutbrod is a partner in the Moscow office of Baker & McKenzie. He has been working on financial service and legislative matters for many years. He is currently advising clients on the new proposed law on SROs in the financial sector.

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It is not clear however how the SRO would fund itself in order to be able to pay compensation

A Revival of SROs in Russian Financial Markets2

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