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					  International Finance Corporation

RUSSIA PRIMARY MORTGAGE MARKET
      DEVELOPMENT PROJECT



      Legal Aspects of
   Securitization in Russia


     Yuri Tuktarov, Legal Adviser, IFC
           11 September, 2006
    TABLE OF CONTENTS

     A. What does the Russian law look like?
•    Fragmented
•    Dogmatic
•    Regulative

     B. Why changes take so long?
•    New securitization vision
•    Hard to achieve efficient consensus
•    Details should be established in law

     C. What we can expect in the future?
•    Asymmetric regulation of assets
•    Costly structure regulation
•    Development of several elements
           Russian law is

     Highly-
1)   Fragmented
2)   Dogmatic
3)   Regulative
     Fragmentation of law

                LAW-MAKERS

Legislator   Government   Courts   Scholars


     HAVE DIFFERENT ATTITUTE TO


                   LAW
     Fragmentation of law
Explanation: legislator and government due to their
  functions facilitate economic development.



   Legislator
                     ≈ FOR     BUSINESS
  Government
     Fragmentation of law
Explanation: scholars and courts are focused on
  formal and dogmatic understanding of law.


  Scholars

                     ≈ FOR          LAW
    Courts
    Fragmentation of law

Legislator        Scholars
Government        Courts

Reasoning -       Reasoning -
Pragmatic         Logical
Economic needs    Dogmatic
Economic growth   Formalistic
        Consequence № 1
Legislator      Scholars
Government      Courts

Written law     Operational law
(legislature)   (jurisprudence)

  We have better legislature
    than jurisprudence.
      Dogmatic. Example 1.

               CIVIL CODE



BANK LOANS                NON BANK LOANS


  Due to licensing of banks courts thought
 that assignment of bank loans to non-
 bank organization is illegal (till 2001).
      Dogmatic. Example 2.

“In capacity of object for fiduciary administration can
be enterprise, immoveable, value papers and other
property” (art. 1013 Civil Code).

But, there is strong opinion that claims can not
be an object for fiduciary administration.


Consequence: parties to securitization are not
allowed to use administrator’s escrow accounts to
protect cash flow.
                DOGMATISM

• Assignment of bank loans to non-bank organization
  is void (till 2001)

• Claims could be purchased for money only by a
  bank (till 2003)

• Rights to bank account could belong only to the
  owner of the money (no escrow account)

• Rights to a mutual fund could be only equal (no
  tranching of certificates of participation)
      And even disadvantages can become
       securitization advantages

 Difficulties                      FULL
in taking out new              PREPAYMENT
loan to refinance             RISK DECREASE
the old one



No bankruptcy                SPV is in better
for recovery under           position than secured
invalid contract             creditor of Originator
         Consequence № 2


Legislature is a direct and short way
  to change the law and economy.

But legal practice still could be
  different from the legislator’s
  intent.
                      Regulation
                              Quality

Financial crisis in the beginning of 1990s is still in the minds of
people (“MMM”). Law-makers tend to be paternalistic.

 The existing legislature was built 12 years ago at time of “bright
rules”. Example: a transaction which violates any provision of the
law is void (art. 168 Civil Code).

 It is easier to prohibit than regulate or allow. Limited number of
legal entities can be security issuer (only societies). For SPV we
can not use legal entities but societies.
        Regulative Regulator
                       Quantity
                           [Russian   securities]
CONTRACT LAW                          PROPERTY LAW


Impact on securitization:

1) No tranching and subordination
2) No combinations inside of instruments
- Debt and trust
- Debt and credit derivatives
- Debt and collateral agreement
  Why changes take so long?


Russian law is       Securitization
  highly             provides new
- fragmented         vision on
- dogmatic       +   habitual legal
                     concepts
- regulative
 Securitization New Vision

         New Assignment Concept
  [from privacy of contract to circulation of rights]

                        SPV
  [from owners’ priority to ABS investors’ priority]

          Asset-Backed Securities
   [from equality of rights to their subordination]

       ABS Information Disclosure
[from performance & management to pool & parties]
     What we can expect?

1) Asymmetric asset regulation

2) Costly regulation for Russian
   securitization structure

3) Development of several elements,
   which could be useful for any
   securitization
Asset Asymmetry Regulation


• Securities (bonds,
  promissory notes)
• Mortgage Certificates
• Mortgage loans
  (Register)
                          • Car, consumer loans
                          • Other current receivables
                          • Future receivables
Mortgage Certificate Advantages
     over Mortgage Loan
                 SIMPLE VERIFICATION
1.   Prima facie evidence or presumption of consideration (burden of proof
     lies with debtor)
2.   Conveyance restrictions and limitations are prohibited
3.   Defenses are limited to certificate based only (against subsequent
     certificate holder)
4.   Set-off is not allowed (against new certificate holder)

             MORE EFFECTIVE TRANSFER
1.   Simple perfection of transfer (by endorsing)
2.   Strong bone fide protection (even stolen certificates can be purchased
     by innocent buyer)

                     EX POST BENEFITS
1.   If rights are registered the borrower may not be required to present
     the Mortgage Certificate
2.   If rights are registered the recovery of Mortgage Certificate becomes
     easier as the holder would not need to go to court
   Burdensome Russian structure


• Russian SPV shall be governed by licensed
  management company

• In local transactions claims shall be accounted
  for by a depository company
Development of several elements


•   Escrow accounts
•   Collateral accounts
•   Taxation treatment
•   Pledge of receivables
Thank you!

				
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