The Securities and Commodities Authority (SCA) issued a decision regulating securitization to provide investors with new investment alternatives and institutions with various financing opportunities.
Decision No. (22/Chairman) of 2023, issued by H.E. Mohamed Ali Al Shorafa Al Hammadi, Chairman of the SCA board, stated that its provisions apply to all matters related to securitization and all parties to securitization transactions in the UAE in the cases where the originator is a listed public or private joint stock company, upon offering the securitized financial instruments for public subscription in the UAE, and when the securitization is performed by a securitization establishment.
The project is considered as one of the transformational projects carried out by the UAE government. It aims at diversifying the investment and financing means in the capital markets to attract financial investment and increase the financial instruments available in the markets.
The project is key in supporting the efforts to make the UAE a global hub for the new economy for the next ten years.
This transformational project supports the UAE government's endeavor to accelerate the achievement of the most active and competitive economy targets (the most suitable sub-axis of "We the UAE 2031' Vision" mentioned below) within "We the UAE 2031' Vision", which requires qualitative and doubled efforts that help achieve the government’s aspirations and positively affect the society and the different sectors of the economy.
The decision stated that its provisions do not apply to the internal securitization processes managed by banks, financial institutions, and insurance companies operating in the UAE and licensed by the Central Bank. The decision said that its provisions identify all parties to the securitization transaction and establish a securitization special purpose entity for issuing securitized financial instruments based on a private placement in accordance with the private placement concept under the SCA's decisions. Moreover, the decision does not apply to the securitization processes carried out by the federal or local governments and the government institutions and bodies or the companies that are completely owned by any of them, unless directed for the public, in addition to the securitization processes carried out before the enforcement date of this decision. The application of the decision shall be limited to the issuance of securitized financial instruments including securitized asset-backed financial instruments, secured securitized financial instruments and securitized financial instruments backed by assets that are secured by real estate mortgage loans.
The decision also clarified that it is required—concerning the financial assets included in the securitization portfolio—to meet all criteria, including being inside the UAE, being arising out of transactions inside the UAE, arising out of the originator's main activity, they shall be legally and legitimately owned by the originator and they shall be enforceable and not pending on a condition, they shall generate measurable financial flows, they shall have a homogeneous nature, and they shall be of a minimum limit that is sufficient to cover the original debt and the revenues payable to the owners of the securitized financial instruments.
As per the decision, the transfer of financial assets shall be deemed as valid between the parties to the securitization agreement and towards third parties, from the date of transferring those financial assets, unless the parties agree on otherwise under the securitization agreement.The process of financial assets transfer to the issuer shall meet the real sale criteria stipulated in the decision. The future financial assets in the securitization portfolio may be transferred by the originator to the issuer in accordance with the securitization agreement, provided that those financial assets shall be realizable and determinable in the time when they become valid or in any other time as agreed upon between the parties to the agreement.
As for the criteria of the real sale of securitized financial assets, the decision clarified that the transfer of all rights and obligations related to the securitized financial assets by the originator to the issuer without performing any transaction, may make the transfer process as financing process instead of a sale of financial assets and the financial assets, subject of the securitization agreement, may become separated from the originator and its creditors, as they will not be able to make any disposition thereof, and the issuer shall not be able to recourse to the originator because of the losses arising out of the securitization portfolio transferred to the issuer, unless within the limits of the guarantees or credit enhancements provided by the originator.
The decision stated that the securitization establishment shall comply with prohibiting the creation of any guarantee or warranty rights on the securitization portfolio except for insuring and guaranteeing the obligations related to the securitization portfolio and in favor of the owners of the securitized financial instruments. Any rights, guarantees, or warranties created in violation of that article shall be deemed as null. Moreover, the establishment shall perform its duties independently and in favor of the issuer and the owners of the securitized financial instruments only, and it may not use the financial assets in the securitization portfolio for meeting its own needs. Furthermore, it shall be responsible towards the owners of the securitized financial instruments and the stakeholders for the proper performance of its duties. The securitization establishment shall also comply with acting on behalf the issuer and the owners of the securitized financial instruments towards the third parties, along with representing them in all judicial cases whether as plaintiff or defendant and refraining from establishing and managing an issuer if the securitization processes belong to a company that the establishment has joint interests with. Moreover, it may not achieve private interests by using the issuer's financial position or merging it with other issuers managed by it, along with taking the sufficient procedures ensuring that the liquidator shall not dispose of the securitization portfolio in the cases of its bankruptcy or bankruptcy of the originator.
The issuer shall be established in accordance with the decisions issued by the SCA. It may not perform any activity other than issuance of securitized financial instruments resulting from the securitization process along with any purpose achieving completion of the securitization process. Furthermore, the issuer shall have a securitization establishment that shall manage it, take the decisions on its behalf, and represent it before third parties. The decision clarified that it stipulates that an "obligor" shall not be convicted of a crime or felony involving a breach of honour, breach of trust, moral turpitude or violating public ethics, unless he has been exonerated, and he shall not be subject to a bankruptcy judgment without being exonerated, and there shall not be judicial cases, complaints or investigations before the Public Prosecution related to trust and integrity and there shall not be bounced cheques as a result of commercial business repeatedly. Moreover, an "obligor" shall not have a precedent of failure to repay debts or inability to repay bank loans for commercial purposes or the financial obligations resulted from a judicial decision or judgment, even if this was not accompanied by declaration of bankruptcy. The obligor shall be deemed as insolvent in the event that he is unable to meet his current or previous obligations on the due date thereof, along with establishing his financial solvency and ability to meet his obligations towards the financial assets in the securitization portfolio according to his contract with the securitization establishment.
The manager of issuance of the securitized financial instruments placed for subscription shall ensure that the securitization establishment and the issuer meet all the requirements for offering the securitized financial instruments and subscription thereto, along with preparing the subscribers records according to the market requirements and coordination with it to complete the listing of the securitized financial instruments in the event of agreement to list them in the financial market. According to the decision, the securitized financial instruments may be listed and traded according to the market's regulations and rules and after registration with the SCA. In the event of not listing the securitized financial instruments that are subject to private placement in the market, their ownership transfer shall not be deemed as enforceable between the seller and the purchaser unless in the event of registering them in the record of ownership transfer of the securitized financial instruments with the registrar licensed by the SCA that is appointed by the securitization establishment; as that record includes names of the securitized financial instruments owners, categories and sequence. The rights of the owners of securitized financial instruments are limited to the securitization portfolio that is exclusively concerned with meeting their rights after deducting the rights of creditors who have claims arising out of establishing the issuer or the relevant operation or liquidation processes. The rights of the owners of the securitized financial instruments shall be always secured by the securitization portfolio or the right to recourse to the originator as per the securitization agreement.
The decision also clarified that the SCA may, in the event of violating the decision's provisions or the rules issued according to it, enforce any of the penalties including serving a notice to the violator and obligating him to rectify the violation within the period specified by the SCA, along with imposing a financial fine not exceeding the maximum amount of the fine as stipulated by the law and the decisions issued according to it, and suspending or cancelling the securitization process and issuance of the securitized financial instruments, without prejudice to the Companies Law and the administrative penalties specified under the Cabinet Resolution issued for enforcement thereof.