The stock market will be restored through mortgages on the primary market. Interview of the Chairman of the NSSMC on the launch of securitization in Ukraine

Builders will be accredited by bankers and the Ukrainian Financial Housing Company. The NSSMC believes that it is necessary to structure the «financial highway».
According to the law on the split, shortly before the appointment of Ruslan Magomedov to the position of the Сhairman of the National Securities and Stock Market Commission (NSSMC), the function of regulating non-state pension funds, construction financing funds, and real estate transaction funds was transferred to the NSSMC. And on July 1, 2021, the law on Capital Markets and Organized Commodity Markets entered into force, which introduced, in particular, significant changes in the functioning of the derivatives market, which is overseen by the NSSMC.
Then came the adoption of the law on Virtual Assets, according to which partial regulation of the market and licensing of crypto-currency companies was entrusted to the NSSMC. In addition, the NSSMC is one of the main stakeholders of the pension reform.
Recently, the Chairman of the NSSMC, who has 14 years of experience in the fund and banking sectors, announced the start of preparations for the launch of a new direction – securitization. UBR.ua spoke with Ruslan Magomedov about the essence of the new project and the attraction of foreign investments in the economy of Ukraine.
What is this direction and why right now, because there are enough projects of the NSSMC?
Let’s first find out what securitization is. This is a fairly coordinated financing mechanism. It provides for the originator to attract funds from the target company, which places securities of various classes, provided with a reference pool of assets, which at the same time is a source for future payments on securities.
This mechanism involves the participation of a fairly large number of participants, the main of which are: originator, conduit, special purpose company, providers of credit and liquidity enhancement, payment agent, rating agency, audience.
We see great prospects for the economy of our country in this mechanism, because we need to attract significant foreign investments right now. The approximate volume of necessary investments can be estimated by reviewing the report «Rapid Assessment of Damage and Recovery Needs – August 2022», jointly prepared by the World Bank, the Government of Ukraine and the European Commission.
Preparations for the launch of this direction began a long time ago, but just now, during the war, the demand for such a mechanism increased. The NSSMC is actively working in this direction, gathering the necessary expertise for the preparation of a draft of the relevant law.
At first glance, it looks like a panacea for many problems in the economy. Is this mechanism new? Do you think that the adoption of the relevant law will ensure the attraction of foreign investments to restore the economy?
Undoubtedly, it is possible to build agreements without specific laws, but under such circumstances, so-called «seams» are formed in financial models. During financial engineering, many financial instruments are used, the symbiosis of which was not provided for by the current legislation. That is why the adoption of the relevant law is a necessary (but not sufficient) condition for the effective functioning of this mechanism.
What exactly does the relevant law need in order for this mechanism to work in Ukraine as you expect
First of all, it is necessary to structure the entire financial route, since only «packaging» the reference pool of assets into securities is not a guarantee that someone will want to purchase such a financial product. For successful placement, the product must meet investment expectations — a certain return-risk ratio.
As for profitability, the reference portfolio should be formed from those assets that are capable of generating forecasted cash flows. And the industry itself, represented by the relevant assets, is understandable to investors from the point of view of their existing expertise.
More difficult are the identification and quantification of risks. In addition, investors should be assured that the creation and monitoring of the assets/collateral itself is in accordance with the best current global practices.
If choosing an asset to form a portfolio for securitization, what kind of asset can it be and why?
In my opinion, this is a mortgage loan that should be structured into residential mortgage-backed securities. It is about the primary real estate market. There are several reasons for this choice:
the RMBS market is the largest among structured transactions (RMBS – Residential Mortgage-Backed Securities, the most common form of securitization, such securities are secured by a pool of homogeneous mortgage loans secured by residential real estate – ed.);
lending to the primary real estate market will allow restarting the domestic economy;
credit financial institutions, which in this case act as originators, are supervised by the NBU;
PJSC «Ukrainian Financial Housing Company» («Ukrfinzhitlo»), which performs the function of a provider of state lending programs, can act as a conduit.
You mentioned credit financial institutions. And what about moral hazard: will bankers abuse their position as originators in the process of accrediting developers or selecting borrowers?
I believe that Ukrfinzhitlo itself should play a decisive role in this matter. It should be a filter, that is, determine the criteria for selecting loans for the purpose of further structuring. Alternatively, if the assets do not meet certain criteria, they will not participate in further structuring, will not be purchased from these financial institutions.
Among the participants in the securitization process, you mentioned rating agencies. Do we understand correctly that the adoption on December 1 as the basis of the draft law on Rating is a link in this process?
This bill is aimed at establishing the legal basis for determining ratings and their use, bringing the activities of rating agencies in Ukraine into compliance with the requirements of EU Regulation No. 1060/2009, and establishing liability for rating agencies for violating the requirements of the law. Is this law necessary for effective securitization? Definitely.
You set yourself quite ambitious goals in rather difficult times. What is the key to your confidence in success?
However, we have a lot of work ahead of us. The NSSMC is ready for a constructive dialogue, for communication with all interested participants in order to quickly launch this mechanism in Ukraine. We all now have one goal — we are working for victory and restoration of economic stability, so we must be as united as possible in all endeavors.
Informational reference:
Ruslan Magomedov was appointed as the Chairman of the NSSMC by the decree of President Volodymyr Zelenskyy in February 2021. The formation of the current composition of the NSSMC was completed in April 2021.
Source: UBR.ua