BAKU, Azerbaijan, November 3. The legal
framework for securitization activities in Azerbaijan, as well as
requirements for securitization companies and servicing agents, is
being established by parliament, Trend’s correspondent reports from the plenary
session.
This is stipulated in a draft law on amendments to the Law "On
the Securities Market".
The draft law has been prepared with the aim of establishing a
legal framework for securitization activities, in accordance with
the "Strategy for the Socio-Economic Development of the Republic of
Azerbaijan for 2022–2026," approved by a decree of the President of
the Republic of Azerbaijan, while taking into account international
practice, similar legislation in foreign countries, and the
specific characteristics of the country's capital markets.
The draft law defines the foundations for securitization
activities in Azerbaijan, including requirements for securitization
companies and servicing agents, the sale of assets to a
securitization company, the preparation and approval of a
securitization plan, the issuance of securitized bonds, and
requirements regarding risk management and transparency in
securitization operations.
Securitization is a financial instrument that allows creditors
to receive funds in advance against cash flows expected from their
assets.
Specifically, a creditor sells the assets they hold to a
securitization company at a lower price in order to obtain
immediate access to the cash flows expected from those assets. The
securitization company, in turn, issues securitized bonds backed by
the acquired assets, with payments on these bonds being funded by
the cash flows generated by the underlying assets.
The draft law establishes requirements for all participants in
the securitization process, including the seller of the assets (the
original creditor) and the securitization company issuing the
bonds. It also sets out provisions regarding their powers,
functions, and the mechanisms for implementing the securitization
process.
Each securitization process is required to be accompanied by a
securitization plan approved by the Central Bank. The sale of
assets will be executed pursuant to a purchase-and-sale agreement
concluded between the asset seller and the securitization company.
The securitization plan must include information regarding the
participants in the securitization process and the assets serving
as the subject of the securitization, details on existing risks and
methods for their mitigation, as well as an opinion from an
external auditor confirming that the assets comply with legislative
requirements. Within 60 business days following the approval of the
securitization plan by the Central Bank, the securitization company
must apply to the Central Bank for the state registration of the
bond issuance.
The draft outlines several methods aimed at mitigating risks
that may arise during the securitization process.
Specifically, the credit risk associated with assets sold to a
securitization entity must not exceed the credit risk of similar
assets remaining on the seller’s balance sheet. Furthermore, the
seller of the assets is required to acquire at least 5% of the
bonds issued against these assets and hold them until the end of
their circulation period.
Additionally, the draft provides for mechanisms such as securing
monetary claims on assets through various forms of collateral or
guarantees, as well as issuing bonds in multiple tranches with
varying levels of credit risk.
The regulation of securitization activities in the securities
market and the implementation of this mechanism will provide market
participants with an effective liquidity management tool. It will
facilitate the conversion of illiquid assets into liquid
securities, expand the range of financial instruments available in
the securities market, and create new investment opportunities for
investors.
Following discussions, the draft law was put to a vote and
adopted in the third reading.
