In a much anticipated development, the UAE Securities and Commodities Authority (SCA) has recently issued Chairman of the Board of Director’s Resolution No. (22/RM) of 2023 regulating securitization and all parties to securitization transactions or operations in the UAE (the “Securitization Regulations”).
The Securitization Regulations should have been issued a long time ago to support efforts to promote the economic development of the UAE especially since it is a tax efficient jurisdiction. It was largely expected after the issuance of the New Commercial Companies Law No. 32 of 2021 that recognized the concept of special purpose vehicles (SPVs), which are companies established with the aim of separating the obligations and assets associated with a particular financing transaction from the obligations and assets of its originator. This applies to credit operations, borrowing, securitization, issuance of bonds, transfer of risks associated with insurance, reinsurance and derivatives operations, in accordance with the provisions of the SCA decision regulating securitization.
The Securitization Regulations are very straightforward and confirm exactly what is expected from a securitization transaction:
Concept of true sale
The SCA has settled the lack of clarity around the concept of true sale and whether it exists under the laws and regulations in the UAE. This has finally been confirmed in Article 5 of the Securitization Regulations stating the concept of true sale of the securitized assets and that provides that such operation is considered a sale and not a financing transaction, which removes any doubt with respect to the transfer of the assets.
Another noticeable point in the Securitization Regulations is the issue of bankruptcy remoteness which is a requirement in any securitization transaction. This also is covered in Article 5, Clauses 2 and 3, which clarify that the securitized assets are segregated from the originator and its own creditors, and thus the insolvency of the originator does not have an impact on the SPV.
Transfer of assets
In relation to the assets and their transfer, the Securitization Regulations state that the securitized assets must be free from any encumbrances or rights to any other party. However, it anticipates a notification of a third party debtor of the transfer of their debt to the SPV, otherwise the debtor would be liberated if it paid the originator. It would have been better to follow the provisions of Article 4 of Decree Law No. 16 of 2021 on Factoring and Transfer of Accounts Receivables, which provides that an assignment is effective between the transferor and the transferee even if the debtor was not notified of the same.
Scope of application and exemptions
The Securitization Regulations apply to public and private joint stock companies whose shares are listed on the market exchanges, or when the securitized notes are to be listed in the UAE, or when the securitization transaction is conducted through a securitization entity regulated by the SCA. The Regulations do not apply to internal securitization transactions conducted by banks or financial institutions which are regulated by the UAE Central Bank when the securitized notes are issued on a private placement basis, or securitization transactions conducted by government entities and government-fully owned companies.
In conclusion, the Securitization Regulations mark an excellent step by the SCA and along with the Federal laws on the Pledge of Movable Assets and on Factoring and Transfer of Accounts Receivables, provide alternative ways of financing to companies established in the UAE, all of this in the context of the modernization of the financial regulatory and economic landscape in the UAE.
To speak to us in relation to the Securitization Regulations, financial regulatory matters, or issues more generally, please reach out to Mazen Boustany or your usual Baker McKenzie contact.