Ukraine’s National Securities and Stock Market Commission (NSSMC) has approved a document outlining the Concept of Implementation of the Legislative Framework for Covered Bonds and Securitization in Ukraine. The Commission believes that implementing these mechanisms will help accelerate the country’s economic recovery.
What is covered bonds and securitization?
Covered bonds and securitization are mechanisms for issuing bonds whose payments are secured by a pool of financial assets. The investor has insurance in case a bank or other institution goes bankrupt. However, there are differences between the two mechanisms. While only banks or other credit institutions can issue bonds, securitization can be carried out by non-bank institutions. Moreover, securitization transfers both the rights and the risks to investors, whereas covered bonds only transfer the rights.
Benefits and conceptual description
The concept document outlines the mechanisms and structural elements required for the issuance of covered bonds and securitization. It also highlights the benefits for the Ukrainian economy, based on the experiences of other countries that have implemented these mechanisms. Additionally, it provides a conceptual description of the legislative changes necessary to implement the main elements of securitization.
Both instruments have the potential to help banks and other financial institutions improve the credit rating assigned to the relevant instrument, especially if the structure uses additional credit risk mitigation mechanisms. This, in turn, can reduce the cost of borrowing and attract more external investors, including those who do not typically invest in developing economies.
The NSSMC’s decision to approve the Concept of Implementation of the Legislative Framework for Covered Bonds and Securitization is a significant step towards implementing these mechanisms in Ukraine. The concept document lays out the basic requirements for the issuance of covered bonds and securitization, which will have to be further developed during the preparation of the draft law. It also explains the benefits of these mechanisms for the Ukrainian economy and the changes required to Ukrainian legislation to implement them.
