Securitizations under Turkish Legislation
Introduction
In its most basic form, securitization is the process of pooling and repackaging illiquid assets or rights with the purpose of converting them into tradable and interest-bearing financial instruments to be issued to capital market investors.
In Turkish law, securitization can be defined as the process whereby receivables or rights, arising from a loan relationship are "pooled" and are either used as collateral or transferred to a special purpose entity for issuance of securities.
Under the Capital Markets Law No. 6362 ("CML") and the related secondary legislation, securitization transactions differ in terms of the financial method used for fund raising through issuance of securities. The securitizations are therefore classified under two different structures: on-balance sheet and off-balance sheet securitizations.
The Banking Regulation and Supervision Agency (BRSA) has classified securitizations in two forms: "traditional securitization" and “synthetic securitization.”
Securitizations under the CMB Legislation
Within the framework of the CML and its related secondary legislation, securitization transactions are primarily addressed under the following:
- Series: III-59.1 — Covered Bonds Communiqué (III-59.1) ("Covered Bonds Communiqué")
- Series: III-58.1 — Asset or Mortgage-Backed Securities Communiqué (III-58.1) (“AMBS Communiqué”)
The Covered Bonds Communiqué regulates "Turkish covered bonds," which are typical on-balance sheet instruments, whereby the cover pool assets, forming the collateral for investor receivables, are grouped in a bankruptcy-remote cover pool. If the cover pool is insufficient to cover investor receivables, such investors have a dual recourse to both the cover pool assets and the other assets of the issuer.
The CMB Communiqué on Covered Bonds regulates covered bond issuances, which are capital market instruments in the nature of debt securities that constitute the general obligations of its issuers, collateralized by cover pool assets. In this type of securitizations, banks or other financial institutions that are acting as issuers, ringfence the eligible assets within a segregated cover pool on their balance sheet and allocate such to the claims of the covered bondholders and the counterparties to the credit protection agreements that are entered into for the protection of the covered bondholders and the cover pool. If the issuer is unable to perform fully or in part its payment obligations towards the covered bondholders or the counterparties of the credit risk protection agreements, these secured parties, whose claims are not satisfied by the cover assets, may have a dual recourse to the issuer’s other assets without waiting for the cover pool assets to be liquidated.
The AMBS Communiqué, on the other hand, regulates securitizations whereby cover pool assets of the originator are transferred to a bankruptcy-remote special purpose vehicle (SPV) (a separate legal entity managed independently from its founder), through a true sale in exchange for a consideration, in a manner that ensures the cover pool assets are legally isolated from the originator's balance sheet. Such structured finance transaction then allows the SPV to issue asset-backed securities or mortgage-backed securities based on the underlying assets or mortgages.
In addition to these two main Communiqués, there are also specific regulations governing securitization transactions in Turkish capital markets legislation, such as the Project-Based Securities Communiqué No. III-61/B.1.
A common feature of all securitizations is that the asset pool used —referred to in practice as the “reference portfolio” or the “cover pool”— may consist of homogeneous or heterogeneous assets. The assets comprising the cover pool may include commercial loans, mortgage loans, vehicle loans, credit card receivables, diversified payment rights or other types of credit originated by a bank or financial institution (“Originator”). In addition, liquid financial instruments referred to as “substitute assets” in the relevant legislation may also be included in the cover pool.
Covered bond issuances have, so far, dominated the securitization scene of the Turkish capital markets; however, there have also been a couple of asset-backed securities issuances sold through private placements. In addition, Turkish banks routinely engage in diversified payment rights (“DPR”) securitizations and are generally able to obtain funding from international financial institutions through such structures. Furthermore, between 2018 and 2020, Turkish banks also carried out hybrid structures through issuances of asset-backed securities backed by mortgage-covered bonds, thereby contributing to the deepening of the Turkish capital markets.
Securitizations under the Banking Legislation
The BRSA defines "securitization" as a securities issuance in which the credit risk associated with an exposure or risk pool is divided into at least two different tranches, payments are dependent on the performance of the transferred risk or risk pool, and the distribution of losses is determined by the ranking of these tranches. This broad definition is also consistent with the Basel Capital Accord. In this context, Basel II has referred to the set of rules applicable to securitization transactions in the calculation of the minimum capital adequacy standard ratio, which expresses the ratio of bank capital to risk-weighted assets, as the "securitization framework." This framework was revised in the aftermath of the 2008 financial crisis and renewed under Basel III. The latest revisions to the framework were made in 2020, with an effective date of 2023, and new rules on the securitization of non-performing loans were added.
The Turkish banking legislation —which has become largely aligned with Basel III with the post-2019 regulations of the BRSA— recognizes two types of securitizations: traditional and synthetic.
Traditional securitizations
In the BRSA regulations, "traditional securitizations" are defined as the transfer of ownership of the assets subject to securitization, to a special purpose securitization company issuing the securities, either directly or through secondary participation, such that payments related to the issued securities cease to be the liability of the originator bank. This definition implies that securitization is carried out by transferring the cover pool assets to the SPV by way of a true sale.
For a bank wishing to carry out securitization using this method, the principal structural objective is the legal isolation of the securitized assets from the bank's credit risk. Such isolation from credit risk is achieved through the transfer of the assets, through true sale and for consideration, to an SPV, which is bankruptcy remote and remains unaffected from the default of the originator bank.
Synthetic securitizations
As an alternative to traditional securitization, another type of securitization, referred to as "synthetic securitization," has been defined in the BRSA regulations, which combines credit derivatives. In this type of securitization, the credit risk of an underlying pool of exposures is proposed to be transferred, either in whole or in part, using credit derivatives or guarantees.
Conclusion
In summary, while the CMB regulates securitizations from the point of view of issuance of securities, the BRSA regulates securitizations through the framework of banks' risk management, capital adequacy, balance sheet impact, and risk transfer (SRT) perspective. Asset-backed or mortgage-backed securities created in accordance with the VİDMK Communiqué are only recognized as a "securitization position" for the purposes of banks' capital adequacy calculations, to the extent that they are compliant with the relevant BRSA regulations.
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