Chambers Securitisation 2019 Guide 5 March 2019
1 Structurally Embedded Laws of General Application
1.1 Insolvency Laws
The Hungarian securitisation market is not significantly developed. Based on the very limited market, it seems that securitisations are governed by UK law, with UK jurisdiction. Hungarian law applies only to those elements of the transaction where the parties do not have the right to choose the law that applies to their contracts.
Although Hungarian entities are more frequently securitising claims against Hungarian debtors, Hungarian law-governed transactions are very rare. This follows not only from the size of the Hungarian market, but also from the lack of legislation specifically applying to securitisation prior to the amendment of regulation 2017/2401 on the amendment of EU regulation 575/2013/EU (hereinafter: ‘CRR’) and EU regulation 2017/2402 on simple, transparent and standardised (“STS”) securitisation (hereinafter: ‘STS Regulation’). The transfer of receivables was regulated by the Civil Code and, depending on the structure of the transaction, the general obligations of the Capital Market Act could have applied.
The landscape significantly changed on 1 January 2019, when the STS Regulation and an amendment to the Capital Market Act to supplement the rules of the STS Regulation entered into force.
This Guide provides an introduction to the Hungarian rules relating to securitisation as of 1 January 2019. However, it is important to note that there is currently very limited practice to comment on for two reasons:
- the number of transactions is very limited, so there is no real market practice to comment on
- the new rules have just entered into force, so there are significant uncertainties in relation to the interpretation of said rules
The most important characteristic of a true sale is that the receivable is transferred to the buyer, so the seller of the financial assets ceases to carry any risk related to the performance of the sold asset – ie, to the solvency of the debtor of the underlying obligation. If the buyer of the asset has a right of recourse (ie, remains entitled to re-transfer the assets and/or to claim payment from the seller) in case of the debtor’s non-payment, the transfer qualifies as a security within the framework of either a factoring or a simple secured loan transaction. Other elements of the transaction that may give rise to the re-characterisation of the transfer as providing security include if the transfer takes place at a price that may not be considered a realistic market price, or if the transferor retains control over the transferred financial assets. As it is possible under Hungarian law to provide receivables as security, re-characterisation does not automatically invalidate the transaction. However, if the receivable is provided as security, it is required under Hungarian law to register the security interest over the receivables. Failure to do so might have various detrimental effects depending on the various types of transactions, primarily resulting in a less favourable priority position.
In a true sale, the buyer is not considered a creditor, and the transferred assets are protected from any claims of the transferor’s creditors. In a secured loan, however, the transferee belongs among the creditors, and the transferred assets form part of the transferor estate, which serves as coverage of its debts, although the transferor as a secured creditor (if all the perfection requirements have been met) enjoys priority vis-à-vis the ordinary creditors.
If the transferor becomes insolvent following the transfer, those assets that are the subject of a true sale do not become part of the insolvency estate, nor will the transferee’s rights relating to those assets be in any way affected by the commencement of the insolvency procedure. However, those assets that serve as security become part of the estate; with the exception of certain specific forms of securities, the creditor will cease to be entitled to exercise any of its rights relating to the collaterals. From the beginning of the insolvency procedure, only the insolvency officer may sell or otherwise deal with any assets of the insolvent debtor; secured creditors only have the right to receive
It is normal practice to obtain an opinion of counsel to support the bankruptcy remoteness of the transfer. If the transfer meets the requirements of a true sale, the
If the originator becomes insolvent, then fraudulent, undervalued and preferential transactions concluded within the (respectively) five-year / two-year / 90-day suspect period can be challenged by the insolvency officer. The insolvency remoteness of the transferred assets can thus be achieved, in addition to meeting the relevant perfection requirements, by making sure that the transaction is concluded at market value and on
1.2 Special-Purpose Entities
Hungarian law does not contain special rules on SPEs that would help to make the transferred financial assets bankruptcy remote. Still, the parties may decide to set up an SPE, in which case it is primarily the directors’ liability to make sure that the SPE is operated on a solvent basis, meeting its obligations as they become due. Otherwise, enforcement and insolvency procedures may be initiated against the SPE. The primary way to maintain solvency is to limit the scope of the SPE's activities to securitisation
In order to help the insolvency remoteness of the SPE, securitisation might be the exclusive activity of the company, and it cannot pursue activities or undertake obligations that would entail obligations beyond those undertaken in relation to securitisation.
In the bankruptcy of the seller, the assets of the SSPE cannot be used by the seller's creditors. If the SSPE issues securities in several tranches, an investor of tranche “A” cannot seek enforcement from receivables in tranche “B”. The same applies
1.3 Transfer of Financial Assets
Financial assets like claims arising from a loan and other receivables are usually transferred by assignment. In order to effectuate a transfer, the assignment has to have a legal cause. The two typical legal causes are sale and purchase, and providing security. In the first case, the seller assigns the claims for consideration permanently, while in the latter the claims are transferred merely as security. Recourse factoring belongs to this second group: the factor provides a loan to the assignor, and accepts that repayment of the loan will primarily take place by the payment of the assigned receivables by the debtors, provided that the assignor will be obliged to repay the loan if the debtors of the assigned receivables fail to pay.
Unless specifically prohibited by law, existing claims are transferable, with the exception of so-called personal claims which, by their nature, are tied to a specific person. Furthermore, only claims that do not serve as collateral for other transactions can be transferred within the framework of securitisation. Future claims may only be assigned if the legal basis from which the receivable will arise (for example, the loan agreement in the case of loan receivables) already exists at the time of the assignment. Non-assignment clauses are ineffective against third parties; therefore, an assignment will be effective even if it would be a breach of contract between the debtor and the assignor.
Irrespective of the legal causes, the method by which the receivables are transferred is the same: assignment.
Although the claim is transferred by the assignment (provided it is based on a valid legal cause), the assignment in itself does not have any immediate effect on the obligations of the debtor. To make the transfer effective against the debtor, the debtor must be notified of the assignment. Such
Following a notice of assignment, the debtor either continues to perform its obligations to the
If the assignment has been made on the basis of a sale and purchase transaction, no further step is necessary. However, if the claims are transferred in a factoring transaction or otherwise as a security, the factoring agreement or the security assignment has to be registered in the online charges registry. Lack of registration does not affect the validity of the contract, but the transfer shall not be effective against third parties like the other creditors of the debtor.
1.4 Construction of Bankruptcy Remote Transactions
Under Hungarian law, securitisation may be achieved by three means: transfer of receivable, novation and declaration of trust. Although legally possible, novation is not used on the market for two reasons. First, it requires a tripartite agreement, which is not convenient in the transfer of a large number of receivables. Second, the consequence of novation is that
2 Tax Laws and Issues
2.1 Taxes and Tax Avoidance
Neither value added tax (VAT), stamp duty, other documentary tax nor registration duty is imposed on the sale of receivables.
SPEs are subject to the general corporate tax, the rate of which is currently 9%. Financial institutions are subject to an extra tax.
Amounts paid in respect of the securitised Hungarian receivables, including default interest paid to a legal entity, will not be subject to withholding tax.
Bilateral agreements on double taxation and the prevention of fiscal evasion may also be relevant.
Hungary has concluded the FATCA Model 1 agreement with the USA. As a result, an SPE may qualify as a reporting financial institution, and will not be subject to withholding under section 1471 of the US Internal Revenue Code if it duly performs its obligations.
3 Accounting Rules and Issues
3.1 Legal Issues with Securitisation Accounting Rules
No special accounting rules apply either to SPEs or to securitisation transactions. EU Regulation (EC) 1606/2002 on the application of international accounting standards (International Accounting Standards Regulation) directly applies to companies registered in Hungary. Companies usually prepare their annual accounts in compliance with the national accounting standards. Those that are listed on a stock exchange must prepare their consolidated accounts in compliance with International Financial Reporting Standards (IFRS).
Under national accounting standards, a receivable or
Dealing with Legal Issues
4 Laws and Regulations Specifically Relating to Securitisation
4.1 Specific Disclosure Laws or Regulations
General legislation applies to securitisation transactions and SPEs. The Civil Code regulates the transfer of receivables, other claims and assets, and the rules on assignment also apply to the transfer of receivables in the course of securitisation. Purchasing receivables may qualify as a financial service, and in this
The Capital Market Act distinguishes between public and private offerings. The rules for private offerings are applicable in a limited number of cases – eg, if the security is only offered to qualified investors, or if the security is offered to fewer than 150 investors in a Member State of the European Union. In all other cases, the rules for public offerings apply.
Under the Securitisation Regulation, the European Securities and Markets Authority has been mandated with regulating the disclosure requirements. The disclosure obligation under the Securitisation Regulation extends, eg, to information relating to the underlying exposures. The ITS and RTS to be adopted by the Commission (not available at the date of preparing this report) will contain the forms of disclosure.
The National Bank of Hungary (“NBH”) may impose administrative sanctions on the originator, sponsor or original lender of
Taking into account the fact that private issuance does not require a licence from the regulator and that it is much simpler from a documentation perspective, issuers usually start with private offerings. Investors in private offerings are either institutional investors or retail investors (as special rules apply if the number of investors is below 150 or the aggregate value of the securities issued does not exceed EUR100,000 within 12 months). No public information is available on this market segment. The rules relating to
It is normal practice to obtain a legal opinion on whether the offering qualifies as private or public. As the conditions of the Capital Market Act are clear, the opinion should only be qualified by the usual reservations relating to the operation of law in general.
4.2 General Disclosure Laws or Regulations
In a private offering, the Capital Market Act requires the issuer or the dealer to ensure that information is provided to all investors to enable them to make an informed assessment of the market position, the assets and liabilities, financial position, profit and losses, the legal status, any foreseeable future developments, and the prospects of the issuer and of the rights attached to such securities. In certain cases, the offering of debt securities must take place through an investment service provider.
In a public offering, as a general rule, the issuer, the offeror or the person requesting admission to trading on a regulated market or registration in a multilateral trading facility shall publish an issue prospectus. One exception to this rule is if the base prospectus has already been authorised by the competent supervisory authority of any Member State, and publication of a notice is not mandatory in that Member State.
4.3 'Credit Risk Retention'
There are no special Hungarian rules on credit risk retention. This issue is regulated by the Securitisation Regulation. The basic rule is that the originator, sponsor or original lender of
Non-compliance with the risk retention obligation is supervised by the NBH. The NBH may, among other sanctions, impose fines on the relevant entities and may also withdraw their licence.
4.4 Periodic Reporting
The general rule of the Securitisation Regulation, subject to certain exceptions, provides that the originator, sponsor and SSPE of
- all materially relevant data on the credit quality and performance of underlying exposures;
- information on events that trigger changes in the priority of payments or the replacement of any counterparties; and
- information about the risk retained
The NBH may impose administrative sanctions on an issuer that fails to comply with the rules on reporting.
4.5 Activities of Rating Agencies (RA)
Rating Agencies’ securitisation activities are not regulated. The Securitisation Regulation provides that, where a third party needs to be authorised by the competent authority in order to assess the compliance of securitisations with the STS criteria, said
4.6 Treatment of Securitisation in Financial Entities
Capital and liquidity rules regarding credit institutions and investment firms are harmonised throughout the European Union: Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 and Directive 2013/36/EU of the European Parliament and of the Council on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC implemented Basel III requirements. There are no special Hungarian rules on this topic.
The corresponding rules for insurance companies are also harmonised by Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) – as transposed into Hungarian law by Act LXXXVIII of 2014 on the Business of Insurance and Government Decree 43/2015 (III. 12) on the capital and solvency requirements of insurance and reinsurance companies – as well as Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).
4.7 Use of Derivatives
With the exception of rules on synthetic securitisation (see below), there are no rules that apply to the use of derivatives in securitisations.
Specific Accounting Rules
4.8 Investor Protection
There are no rules on investor protection that apply specifically to securitisation. The rules on disclosure intend to help investors by providing them with transparent information. In case of a breach of the rules on disclosure, the NBH may impose sanctions on the party obliged to disclose.
The general rules of investment protection apply: the Investor Protection Fund may provide protection for eligible investors if the investment service provider fails to deliver the assets (securities or money) that are registered as the holdings of the investor and have been transferred to the possession of the provider under the contract. The maximum compensation is EUR100,000.
4.9 Banks Securitising Financial Assets
There are no special material rules that apply to banks that securitise their assets or invest in securitisations.
4.10 SPEs or Other Entities
Generally, an SPE can be set up in any corporate form that provides for limited liability. However, if the SPE is intended to be set up as a securitisation special purpose entity (“SSPE”) in accordance with the Securitisation Regulation, then some restrictions apply. The SSPE can only choose the corporate form of private or public limited company, or it might operate as a branch of an EU-based company. The SSPE cannot be part of
4.11 Activities Avoided by SPEs or Other Securitisation Entities
Typically, securitisation entities try to avoid activities that may qualify as financial services, in order to avoid banking regulations including licensing requirements applying to the SPE. The difficulty is that purchasing receivables or similar financial claims as a business qualifies as a financial service, and it is difficult to avoid such
According to the interpretation of the NBH, the servicing of receivables is a fundamental part of the purchasing of receivables. Therefore, if the seller acts as a
SPEs are often set up in foreign jurisdictions in order to avoid being characterised as a financial institution.
4.12 Material Forms of Credit Enhancement
As the Hungarian securitisation market is very small, it is not possible to comment on typical forms of credit enhancements. In addition, as mentioned above, SPEs are often established outside of Hungary, and different elements of the transaction are governed by a law other than Hungarian, so the requirements of the applicable law are taken into account when selecting the form of credit enhancement. From a legal perspective, all typical credit enhancement tools are available, and one or more of these are typically used in securitisation transactions. Usually, the guarantee of a related entity is used; cash reserves and letters of credit are also applied in transactions.
There is no settled case law available on subordination. Based on the bankruptcy rules, it could be argued that the bankruptcy administrator will not honour the terms of the subordination agreement; therefore, it would confer purely contractual rights on the parties.
4.13 Participation of Government Sponsored Entities
There are no Government Sponsored Entities on the securitisation market, and there is no practice to comment on.
4.14 Entities Investing in Securitisation
Securitisation transactions are usually arranged and financed by foreign banks, and the securities issued in the course of the transaction are purchased by foreign investors.
5.1 Bankruptcy Remote Transfers
As described above, the transfer of financial assets requires an agreement between the transferor and the transferee with respect to both the legal basis or title of the transaction and the transfer (assignment) itself. One document may cover both agreements, or they may be dealt with in separate documents. The legal basis is usually sale and purchase on arms’ length market conditions. The assignment is usually concluded separately, at a later stage, on the basis of the agreement that serves as its legal basis. The transfer is bankruptcy remote if it is based on a true sale. The requirements of a true sale transfer are described above. The mere agreement of the transferor and the transferee is enough for a true sale, with notice to the debtor or registration not being required; other perfection requirements do not apply either. (For the legal relevance of notice, see 1.3 Transfer of Financial Assets)
The documentation used to effect a bankruptcy remote transfer usually covers the following principal subject matters:
- a description of the assets to be transferred;
- the undertaking to sell and to purchase those assets;
- the counter value – ie, the purchase price to be paid by the transferee in exchange for the transferred assets;
- the method by which the sale is consummated;
- the assignment itself;
- servicing of the assets; and
- representations, warranties and covenants.
5.2 Principal Warranties
Besides the standard warranties covering existence, capacity and approvals, the seller typically makes the following representations and warranties:
- that there is no material adverse change;
- that financial documents give a true, complete and fair view;
- that there is no litigation that would adversely affect the transaction; and
- that no stop purchase event or early amortisation event has occurred.
5.3 Principal Perfection Provisions
The transfer of claims is effective if and when an assignment is concluded on the basis of a valid legal cause. This means that neither notice, registration nor any other measure is required for the transfer of receivables becoming perfect. However, in order to limit the debtor’s right to set-off and the scope of defences the debtor may raise, it is customary to notify the debtors at an early point in the transaction. However, there are transactions where the debtors are only notified
5.4 Principal Covenants
Sellers in securitisations typically undertake the following covenants:
- to provide the purchaser with financial statements;
- to obtain and maintain all authorisations;
- to send notice to the purchaser of the occurrence of certain events (eg, stop purchase event, change of control);
- to obtain a solvency certificate;
- to provide information in relation to rescinded or extinguished receivables; and
- to carry out the necessary formalities in relation to the release of security.
If the seller acts as servicer, it is typical to include covenants covering these activities as well. Such covenants usually include the obligation to protect the rights of the purchaser, and to maintain all systems necessary for the collection and management of receivables, for example.
5.5 Principal Servicing Provisions
Due to the fact that servicing could require a licence, parties typically avoid having the Hungarian seller act as servicer. If a servicer is appointed, its tasks typically cover the collection of payments from the
5.6 Principal Defaults
Typical default under the notes in the case of securitisation include non-payment, breach of obligation under the transaction documents, and the insolvency of the issuer.
5.7 Principal Indemnities
Indemnification obligations of the originator vis-à-vis the issuer exist typically in case of losses arising from the breach of the transaction documents (eg, transfer documents being invalid or ineffective, sanctions being applied in connection to the processing of personal data, tax sanctions being incurred on a secondary or joint liability basis). Furthermore, the servicer could also undertake indemnification obligations vis-à-vis the issuer in relation to losses arising from servicing (eg, receivables not enforced).
Other Principal Matters
6.1 Other Enforcements
No special regulations have been implemented concerning the enforcement of securitisation. Special care must be taken in connection with any transfer of data falling under the scope of special secrecy requirements (such as banking secrets, securities’ secrets or insurance secrets), as secrecy breaches may negatively influence the enforcement of securitisation.
6.2 Effectiveness of Overall Enforcement Regime
Since no special regulations have been implemented concerning the enforcement of securitisation, it is yet to be seen how the jurisprudence will apply the already existing mechanisms of enforcement for securitisation.
7 Roles and Responsibilities of the Parties
The issuer is established in order to carry out some specific purpose. The activity of the SSPE is twofold: first to purchase the receivables, and second to create and sell the securities in the market (hence the SSPE is the 'issuer').
A sponsor is usually a financial institution that, upon the mandate from the originator or the investor of a securitisation transaction, will establish a securitisation transaction by purchasing exposures. Occasionally, the originator may be a third party who buys the pool with the intention to securitise it thereafter; in that case, the originator is also named as
The sponsor’s main responsibilities include the arranging of the following:
- the structure of the risk profile of the receivables to create different tranches of notes;
- the economics of the transaction;
- credit enhancement;
- liquidity support; and
- profit extraction methods
7.3 Underwriters and Placement Agents
It is usually a bank that acts as
- advises the originator or the sponsor on how to structure the transaction;
- devises 'tranches' of securities with different investment characteristics (see more on tranching below), and the allocation of the cash flows generated by the underlying financial assets;
- generates the offering documents;
- markets and sells the securities; and
- provides liquidity support to the issuer
A servicer acts on behalf of the
Investors are the ultimate purchasers of the notes issued by the SPE. As holders of the notes, the investors are entitled to receive the payments (principal and interests) based on the cash flow generated by the underlying assets. The largest investors in securitisations may be alternative investment funds or hedge funds, but also pension funds, insurance companies and, to a lesser degree, commercial banks.
In order to look after and preserve the rights of investors, the SPE often appoints a representative of noteholders. Generally, the representative oversees the cash
8 Synthetic Securitisations
8.1 Synthetic Securitisation
Due to the additional counterparty credit risk and potential complexity related in particular to the content of the derivative contract, the Securitisation Regulation provides that the STS criteria should not allow synthetic securitisation. The CRR provides that originators may calculate risk-weighted exposure amounts and expected loss amounts for the securitised exposures also in case of
In Hungary, no specific rules apply to synthetic securitisation, from which it also follows that the parties are free to use this tool. As no specific rules apply to synthetic securitisation, the parties can shape the transaction as they see fit. Although legally possible, synthetic securitisation is not present in the Hungarian market. As the CRR is directly applicable in Hungary, there are no special capital adequacy rules relating to synthetic securitisation.
9 Specific Asset Types
9.1 Common Financial Assets
The typical assets securitised are trade receivables. Although loans could be securitised, the significant changes after 2008 in relation to foreign currency loans could lead to lawsuits relating to the validity of these contracts. The uncertainties relating to these receivables make them less appealing.Back to news
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