Late last year, significant changes to Russia's securitisation market legislation came into force with the introduction of structured bonds – a new type of security. While regulatory issues are yet to be ironed out, these bonds seem likely to meet growing investor demand.
On 16 October 2018, a series of amendments to Russia's Federal Law No. 39-FZ took effect. The law was supplemented by a new article regulating the issue and circulation of structured bonds. This financial instrument can be issued by banks, brokerage and dealer firms, and special purpose vehicles (SPVs).
A structured bond is a debt obligation containing an embedded derivative component that adjusts the security's risk/return profile. The return performance of a structured bond will track the underlying debt obligation and the derivative embedded within it.
These bonds offer investors higher returns. However, exposure to risk is commensurately higher, given that payments under these bonds are linked to fluctuations in the price of goods, securities, currency, interest and inflation rates, etc. Only accredited investors can acquire structured bonds but the Central Bank of the Russian Federation – the Bank of Russia – is exploring the possibility of opening them up to a wider base of retail investors. It is worth noting that retail investors would have a deadline of 10 working days from purchase to terminate the contract unilaterally and receive a full refund of their capital.
Previously, in a tightly-regulated Russian market still subject to sanctions, it was impossible to issue debt securities that did not guarantee returns at full face value. However, following these ambitious changes, we've seen the introduction of new financial instruments similar to the structured notes issued in a range of jurisdictions, including the EU and UK.
The Bank of Russia is primarily responsible for the execution and supervision of legislation in the securities market and issuing additional market regulation. It has had a rather busy 12 months, overseeing what may well amount to a transformation of the country's securities market.
To engage with the Bank – and the wider banking community – high-level events have been organised by Cbonds, a financial data specialist and news agency operating across the region.
I spoke to several stakeholders from Russia's banks at a recent Cbonds seminar, where I gave a presentation on these new structured bonds. They are already shaking up the securities market, which has, traditionally, been dominated by residential mortgage-backed transactions (RMBS). There was a real sense of excitement about these instruments which provide issuers and investors with new opportunities in Russia.
However, the legislation is still quite fresh and the country's regulators are still getting to grips with it. This has led to considerable delays in reviewing the plethora of papers filed by the issuers of structured bonds.
Several Russian financial institutions have entered unchartered territory, issuing these innovative structured bonds and securing 'first-mover' advantage. Demand is expected to rise sharply soon.
Partnering with TMF Group
We are one of the leading providers of administrative and accounting services for securitisation deals and experienced at establishing and managing the SPVs that will help clients issue structured bonds and diversify their activities in Russia.
Talk to us today about how TMF Group can support your operations in the Russian securitisation space.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.