Milli Majlis (National Assembly) has approved in the first reading a legal framework for securitization activities in Azerbaijan.
Report says amendments to the laws “On Banks” and “On the Securities Market” were discussed at today’s parliamentary plenary session.
The bill was prepared in line with the “Strategy for Socio-Economic Development in 2022–2026,” approved by a presidential order dated July 22, 2022. It takes into account international practice, similar legislation in other countries and the characteristics of Azerbaijan’s capital markets.
The document establishes the foundations for securitization activities in the country and sets requirements for securitization companies and service agents. It also covers the sale of assets to securitization companies, the preparation and approval of securitization plans, the issuance of securitized bonds, risk management and transparency requirements.
Securitization is a tool that allows creditors to receive cash flows from assets ahead of schedule. A creditor sells assets to a securitization company at a discounted price to obtain immediate funds. The company then issues securitized bonds backed by those assets, with bond payments made from the cash flows they generate.
The bill regulates requirements for each participant in the securitization process, including the asset seller, or original creditor, and the securitization company issuing the bonds. It also sets out their powers and functions, as well as mechanisms for implementing securitization.
Each securitization process will require a plan approved by the Central Bank of Azerbaijan (CBA). Assets will be sold under a purchase agreement between the asset seller and the securitization company.
The plan must include information about the participants and the assets involved, existing risks and ways to mitigate them, as well as an independent auditor’s opinion on the assets’ compliance with legal requirements. Within 60 business days of the CBA’s approval of the plan, the securitization company must apply to the regulator for state registration of the bond issue.
The bill sets out several measures to reduce risks arising from securitization. The credit risk of assets sold to a securitization company must not exceed that of similar assets remaining on the seller’s balance sheet. The seller must also retain at least 5% of the bonds issued against the assets it sells and hold them until they mature. Other mechanisms include securing monetary claims arising from the assets and issuing bonds in several tranches with different credit risk levels.
Regulating securitization in the securities market and introducing the mechanism is expected to give market participants an effective liquidity-management tool. It will enable illiquid assets to be converted into liquid securities, broaden the range of financial instruments available in the securities market and create additional investment opportunities.
Following debate, the bill was put to a vote and passed in the first reading.
