Reduction of non-performing debt, which remains at a stubbornly high level, is viewed by most people as essential for the long-term health of the banking system in Cyprus. In order to help achieve this objective, the Cyprus Government has proposed legislation to introduce debt securitisation, a measure originally recommended by the "troika" of international lenders, which it believes will facilitate the disposal of debt, including non-performing debt.
Hitherto, there has been stubborn resistance in certain quarters to measures such as securitisation and modernisation of foreclosure procedures, generally on populist grounds. In addition, there is a more reasonable concern that pooling of portfolios can impair investors' ability to judge risk and that competitive securitisation markets with multiple originators may bring about a decline in underwriting standards, as was the case in the US in the period prior to 2008.
Under the draft legislation, banks and other specified institutions, referred to as "originators", would be able to set up companies known as securitisation special purpose entities (SSPEs) to which they would transfer portfolios of loans. The SSPEs concerned would then issue securities or bonds to investors, using the income and repayments from the loans as collateral.
The proposed law was submitted to the European Central Bank (ECB) on 3 January 2018 for an opinion, based on arts 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third and sixth indents of art.2(1) of Decision 98/415 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions [1998] OJ L189/42, as the draft law relates to the Central Bank of Cyprus (CBC) and to rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets. Following the submission of an amended draft law on 22 February 2018,1 the ECB issued its opinion on 4 April 2018.
The draft law gives the CBC the powers and responsibility for regulating and supervising securitisations as well as for safeguarding the proper functioning of the securitisation market in Cyprus. The draft law also establishes the procedure that an originator would need to follow to notify the CBC that it intends to carry out a securitisation. In order for any SSPE set up by an originator to commence its activities, the originator of the proposed securitisation must notify the CBC in writing of its intention to carry out a securitisation transaction and provide the CBC with the information required under the draft law.
While generally welcoming the establishment of a framework for securitisation in Cyprus, the ECB expressed several concerns and requested the necessary modifications to be incorporated into the draft law to deal with them. One area of concern is the power the draft law grants to the CBC to oppose a proposed securitisation in advance. This power would be unusual in European securitisation markets and, in the opinion of the ECB, may discourage securitisation activity. The ECB also expressed concern regarding the requirement imposed on originators to provide underlying borrowers, collateral providers and guarantors with 45 days' prior notice of the proposed transfer of loans to an SSPE, which is inconsistent with usual practice elsewhere. It considers that introduction of such a notice requirement would create a disproportionate cost and administrative burden for originators.
The draft law also includes a provision on the disclosure of data, according to which the processing of personal data of the debtor or of another person in good faith in connection with a securitisation or a proposed securitisation is permissible under data protection law and does not require prior authorisation by the Commissioner for Personal Data Protection.
The draft law, duly amended to take account of the ECB's comments, is expected to be introduced into the legislative process later this year. When enacted it should provide a valuable means of reducing non-performing loans.
Previously published in the Journal of International Banking Law and Regulation
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