Structured Finance




The Russian securitization market began to emerge in the early 2000s. In the absence of infrastructure and legislative regulation within the country, Russian banks began to organize the raising of funds by issuing bonds secured by pools of auto loans or mortgages in foreign jurisdictions, mainly in Luxembourg and Ireland.

The main motives for securitizing assets for banks and financial companies continue to be the following:

1.    Relatively cheap market financing. Separating originator risks fr om issuer risks by transferring pools of assets to specialized agents allows originators with a relatively low credit rating to issue bonds with high credit quality and, accordingly, lower cost. This can be achieved thanks to the diversification of risks in the collateral portfolio, as well as through built-in credit enhancement measures: division of issues into senior and junior tranches, accelerated depreciation, fixing the order of payment of interest and principal, formation of a reserve fund, duplication of the service agent and the account bank, and independent monitoring of the issuer’s activities. At the same time, the originator bank has the opportunity to preserve the potential profitability of the loan portfolio, leaving itself an excess spread (the difference between the portfolio rate and the coupon for the senior tranche) by repurchasing the junior tranche.

2.    Diversification of long-term funding sources. Banks have rather limited tools for long-term attraction of resources. The maximum term of retail and corporate deposits is one to two years, while most loans are usually provided for longer periods. In this regard, banks have no alternative to market borrowing. Banks issue both unsecured instruments and structured bonds secured by asset portfolios.

3.    Transformation of non-liquid assets into tradeable financial instruments. The ability of banks to raise funds through the sale or collateral of loan portfolios is very limited. For potential investors, there are serious problems with assessing the risks of such investments. The use of ratings fr om recognized international and national credit rating agencies when issuing securities backed by a pool of loans provides greater transparency and certainty for investors.

4.    Risk management. Securitization was initially considered as part of the service business model, when banks took it upon themselves to search for customers and process loans, transferring the associated risks to investors in the market. Securitization allows banks to manage all types of risks simultaneously: credit risk — through the sale of risky assets, liquidity risk — by converging the maturity of assets and liabilities, and interest rate risk — by establishing correspondence between the form of interest payment and principal debt on loans and issued bonds.

5.    Capital adequacy growth. Transferring a loan portfolio to a specialized agent leads to a decrease in the volume of risk-weighted assets and, accordingly, to an increase in the capital adequacy ratio. In Russia, securitization allows the originator bank to unload capital in the amount of the issue of senior bonds. To do this, the requirements of Regulation of the Bank of Russia No. 647-P1 dated July 4, 2018 must be additionally fulfilled. They relate to limiting the originator’s influence on the portfolio in terms of the maximum amount of the loan provided to the issuer to pay for the purchase of part of the portfolio (no more than 35%), the lim it on the issuer’s call option (no higher than 10% of the nominal value of the bonds), and the absence of obligations to provide financial assistance to the issuer and repurchase problem loans. Dumping assets with an increased level of risk is especially important for banks that actively lend to the population, since the regulator periodically increases the capital buffers to risk ratios taken into account in the calculations of capital adequacy ratios for loans with a high debt load and the full cost of the loan.

For investors, bonds issued against a pool of bank and/or other assets are a completely understandable and transparent investment tool. These instruments are characterized by a high level of protection (due to their high level of reliability, senior issues (tranches) of structured bonds secured by loans to the population and small and medium-sized businesses (SMEs) of high quality and with sufficient credit support demonstrate a low level of delinquency and default), as well as higher yields compared to classical instruments with similar credit ratings.

It took a short while to create a domestic legislative framework for securitization in Russia. In 2003, the law “On mortgage-backed securities”2 was adopted, and in 2007 the first issues issued in accordance with Russian law appeared (the issuer was the state-owned Agency for Housing Mortgage Lending — DOM.RF). In 2013, a law3 was passed that broadened the list of assets available for securitization, which facilitated a further increase in the volume and number of issues of structured instruments in the country.

Currently more than 60 Russian companies have placed around 200 bond issues in the domestic and international markets to a total of around RUB 2 tln, and there are 102 issues of structured financial instruments in circulation in the Russian market worth about RUB 1.5 tln. It is noteworthy that Russian companies and banks have experience of issuing bonds secured by all major types of assets, including mortgages and consumer loans, auto loans, credit cards, SME loans, lease contract obligations, project finance contracts, overdue debt, repacked loan agreements, and securities. According to data on repaid obligations, in Russia there have been two bond issues secured by auto loans to the amount of RUB 14.2 bln, seven bond issues secured by SME loans to the amount of RUB 34.2 bln, and one bond issue secured by income fr om a lease portfolio to the amount of RUB 2.2 bln.

However, in terms of scale, the Russian structured finance market is much more inferior than the corresponding markets of most developed countries. The same can be said with regard to its diversity. The share of mortgage instruments among traded structured bonds in Russia is 93%4, and non-mortgage instruments are extremely rare. There is only one major issue of bonds secured by consumer loans, while bonds secured by loans to small businesses or lease agreements are generally absent in the market, whereas in the US and Europe they are quite common tools for raising funds.

1Regulation of the Bank of Russia No. 647-P dated July 4, 2018 “On the determination by banks of the amount of credit risk for transactions that result in raising funds through the issuance of debt securities, the fulfillment of obligations under each of which is carried out in whole or in part by cash received fr om assets transferred as collateral.”
2Federal law No. 152-FZ dated November 11, 2003 “On mortgage-backed securities”.
3Federal law No. 379-FZ dated December 21, 2013 “On amending certain legislative acts of the Russian Federation”.
4Most mortgage-backed securities are issued under the programs of state-owned specialized development institution DOM.RF.


Structure of the US market

Bonds secured by SME loans and lease agreements belong to the class of asset-backed securities (hereinafter, ABS). This class of instruments usually includes bonds secured by income streams fr om assets of all types, except mortgages: auto loans, consumer loans, credit cards, SME loans, and agreements for leasing equipment, vehicles, and factoring.

In the US, CDOs and CLOs5 are also included in this category — bonds secured by a pool of bonds and loans to large businesses, i.e., repacks, as well as bonds secured by income streams fr om insurance, mobile communications contracts and other long-term contracts. Bonds secured by pools of student loans are a separate large class of American market ABS.

5 CDO — collateralized debt obligation, CLO — collateralized loan obligation.

Figure 1. Structure of ABS market debt in the US as of December 31, 2021

Source: Securities Industry and Financial Markets Association

Structure of the European market

European ABS statistics do not include CDOs and CLOs. Nevertheless, the segment of bonds secured by pools of SME loans is quite large. In addition, European companies and banks often securitize their portfolios of obligations under trade contracts (trade receivables). Due to the specifics of the underlying instrument, such investments are short-term.

As noted above, there is no data on the securitization of SME loans in the US. In European countries, the market for securitization of SME loans accounts for about a quarter of the total ABS market.

As for lease transactions, the share of bonds secured by income flows fr om lease portfolios in the US and Europe are roughly equal and amount to 5% of the ABS market.

Figure 2. Structure of ABS market debt in European countries as of December 31, 2021

Source: Association for Financial Markets in Europe (AFME)


According to the Bank of Russia6, in 2021 small and medium-sized businesses received loans worth RUB 10.6 tln, a RUB 3 tln or 38.7% increase compared to 2020. The average loan in 2021 was RUB 6 mln. Loan debt grew by 27.5% last year to RUB 7.4 tln compared to RUB 5.8 tln the year before. The share of debt for loans provided to SMEs in the aggregate loan portfolio of Russian banks grew by 1.7% compared to the start of 2021 and stood at 17.3% as of January 1, 2022.

The quality of the SME loan portfolio, however, improved somewhat — overdue loan debt shrank fr om RUB 641 bln to RUB 610 bln, and its share in the total volume of debt declined from 11% to 8.2%.

6Statistical bulletin of the Bank of Russia “Lending to Small and Medium-sized Businesses” for December 2021.

Figure 3. Dynamics of the SME loan portfolio of Russian banks in 2019–2021, RUB tln

Source: Bank of Russia

Such rapid development of the segment is connected, on the one hand, with government support for SMEs, and on the other — with the growth of competition for high-quality borrowers within the banking system itself.

A preferential lending program for SMEs has been in place in Russia since 20197. Under the program, banks that meet specific criteria can receive subsidies from the state if they provide investment loans to small and medium-sized enterprises at a rate no higher than the key rate + 2.75%. More than RUB 900 bln worth of these preferential loans were provided in 2020, followed by around RUB 700 bln in 2021.

In 2020, to support the economy during the coronavirus pandemic, the Government of the Russian Federation also launched a program for providing short-term targeted loans and concessional loans to SMEs. RUB 150 bln were allocated from the federal budget for this. The main requirement for granting preferential loans was that the employer maintains employment at a level of at least 90% of the pre-pandemic level.

Government support for SME lending is quite substantial, but it cannot fully determine the dynamics of the market. The key factor is the behavior of banks. Large businesses can quite actively raise funds necessary for development in the financial market through the issuance of debt instruments and IPOs, but for SMEs the only alternative to bank financing, if we are talking about business development, is leasing. Things are somewhat simpler with revolving lending: enterprises can use both factoring and short-term commercial credit.

Banks’ preferences in terms of lending to SMEs are determined by tough competition in the corporate lending market and higher profitability from this segment compared to lending to big business. Barring some very rare exceptions, banks that are not among the 30 largest cannot develop partnerships with Russia’s largest companies due to the size of their capital and the range of services provided. At the same time, the consumer lending market is rather tightly regulated by the Bank of Russia, and working with a large number of small borrowers implies strict requirements for the level of business automation and the quality of risk management. Therefore, lending to SMEs is becoming an important area of activity for most Russian banks, both large and relatively small. The latter either use various niche product or customer strategies, or compete with market leaders for medium-sized enterprises whom they are ready to provide better service and greater service flexibility.

However, despite the general interest in this area, the market is rather concentrated. The two largest players — Sberbank and VTB Bank (PJSC) — account for around 60% of the market. Other participants who command smaller portfolios and market shares are far behind the leaders.

7Decree of the Government of the Russian Federation No. 1764 dated December 30, 2018 “On approving rules for providing subsidies from the federal budget to Russian credit institutions in order to reimburse lost income from providing loans in 2019–2024 to small and medium-sized business at a preferential rate.”

The SME lending market is very heterogeneous. Banks’ approaches vary depending on the size of the customer, its industry, and the loan purpose. Simplified approaches are usually used in lending to micro-sized businesses and small businesses, such as automated scoring and the so-called EBRD method based on the analysis of a company’s management reporting and its comparison with benchmark data. Classic multi-stage credit analysis is used in relation to medium-sized businesses, including an assessment of the borrower’s business, its financial indicators, credit history and development plans. Consequently, lending to micro-sized business and small businesses on the one hand, and to medium-sized business on the other hand, differ in terms of level of risk and profitability.

According to the Bank of Russia’s data, working (up to one year) and investment loans occupy practically equal shares in the structure of loans issued by Russian banks. The Bank of Russia does not disclose information on the breakdown of loans for different periods in bank portfolios. However, given the fact that the maturity of SME investment loans is usually two to three years and the maturity of revolving loans is six to 12 months, the share of investment loans in bank portfolios can be estimated at 70–75%. This correlates with data on the maturity of loans that is published by some banks as part of their IFRS reporting.

The situation with data on the coverage of credit risks with collateral is more complicated. Investment loans to medium-sized businesses are usually secured by hard collateral in the form of real estate. As for small businesses and micro-sized businesses, usually neither these companies nor their owners are able to provide hard collateral, and due to this loans can only be secured by the personal property of business owners or vehicles and equipment acquired using borrowed funds. Thus, the level of security of loans and the liquidity of the collateral provided for these loans are quite low.


The following assumptions were made as part of the assessment of the potential of the SME lending market:

1.    The share of investment loans for all banks in the sample was set at 70%. At the same time, it should be noted that the ratio of investment loans to revolving loans at different banks varies significantly depending on the work model and the industry structure of the customer base, therefore, this assumption is considered to be rather crude.

2.    All investment loans in the SME loan portfolio can be securitized. This is also a rather crude assumption. Loans to medium-sized businesses, especially long-term loans secured by real estate, may amount to RUB 100–200 mln or more. Taking into account requirements for granularity of securitized loans, borrowings of this size may not be included in collateral. As ACRA does not have any information on the share of these loans in the banks’ portfolios, for simplicity the Agency proceeds from the assumption that all SME investment loans on the banks’ balance sheets (with the exception of problem ones) can be securitized.

Besides this, it is necessary to take into account the fact that not all banks publish separate reporting for SME loans. Often this reporting is included in general reporting for corporate loans (this applies to Sberbank, BANK GPB (JSC), Promsvyazbank PJSC, and many other smaller banks). Sometimes it is the other way round — loans to small businesses and micro-sized businesses are considered separately, and loans to medium-sized businesses are included in general reporting on corporate loans. For example, this is how reporting is structured at Tinkoff Bank.

The situation with data about the size of loss provisions and/or on the amount of overdue debt by periods of delay is even more complicated — even if there is general information about the volume of the SME loan portfolio, such information may be completely or partially absent. Therefore, for most banks, figures on delinquencies and/or provisions for SME loan portfolios had to be taken as equal to the corresponding indicators either for loans to legal entities or for loans to small enterprises and microbusiness.

In total, a sample consisting of 20 banks was formed based on the criteria of the size of SME loan portfolio and availability and completeness of data in IFRS financial statements: Bank VTB (JSC) (VTB Group), “Bank Otkritie Financial Corporation” (PJSC), CREDIT BANK OF MOSCOW, AO Raiffeisenbank, PJSC Sovcombank, SME Bank JSC, TKB, AK BARS Bank, CB “Kuban Credit” Ltd, PJSC Commercial Bank “Center-invest”, AO UniCredit Bank, PJSC SCB “Metallinvestbank”, Bank “Levoberezhny” (PJSC), Banca Intesa, PJSC BANK URALSIB, NBD-Bank PJSC, JSCB “Energobank”, SDM-Bank PJSC, PJSC Bank ZENIT, and PJSC “CHELINDBANK” (banks are listed by size of SME loan portfolio, from largest to smallest). The total portfolio of SME debt to these banks as of July 1, 2022 was more than RUB 2.5 bln, or 37% of the market. The average ratio of loss provisions for loans to the SME loan portfolio for the sample was 8.1%, while the share of loans overdue 30+ days was 7.7%. All the banks had a credit rating assigned by ACRA and/or Expert RA ranging from BB-(RU)/ruBB- to AAA(RU)/ruAAA on the national scale. Taking into account the volumes and other characteristics, this sample can be considered representative enough to be able to extrapolate the findings to the entire market.

In addition, to estimate the potential of SME loan securitization market, the following criteria were set specifically for banks:

1.    NPL30+ are excluded from pools transferred to special-purpose vehicles (SPVs).

2.    The volume of a bank’s portfolio minus overdue loans should be equal to or exceed RUB 5 bln.

3.    The capital adequacy ratios (N1.2) of banks exceed the regulatory minimum by no more than 1%, and/or the credit rating assigned to banks by ACRA and/or Expert RA on the national scale does not exceed AA(RU)/ruAA, respectively.

After applying the above criteria relating to the sample size, share of investment loans, overdue debt, size of the portfolio eligible for securitization, and capital adequacy ratio, the volume of SME loans that can serve as collateral in securitization transactions was calculated. It amounted to approximately RUB 1.5 tln, or about 22% of the total SME loan portfolio as of July 1, 2021. This figure can be considered the upper lim it of the securitization potential of the Russian SME lending market.

An alternative estimation of market capacity can be made by comparing the Russian and foreign markets. According to a report published by the Organization for Economic Cooperation and Development8, about 3.8% of SME loans due to banks was securitized in developed European countries (the EU and UK) in 2020 and 2021. In relation to the Russian market, this approach gives an estimate of the potential of the SME loan securitization market at about RUB 280 bln, which is significantly lower than our estimate. However, it should be noted that 3.8% is the average value. For example, the Netherlands has no experience of SME loan securitization. Such markets exist in the UK and Germany, but the share of securitized SME loans is about 1–2% of SME debt to banks. At the same time, in Belgium and Italy, the ratio of bonds secured by SME loans to the total volume of the corresponding debt is about 20%, which is comparable to the maximum estimated capacity of the Russian market that we have received.

8Financing SMEs and Entrepreneurs for 2021.

ANALYSIS of the russian leasing market and THE estimated potential of its securitization

2021 was marked by rapid growth of the Russian leasing market. At the end of the year, the volume of new business (new contracts) increased by 62% to RUB 2.3 tln. The lease portfolio9 grew by 25%, from RUB 5.2 tln to RUB 6.5 tln.

The largest increase was in the transportation vehicle leasing segment (+69% vs. 2020), which includes cars, trucks, buses, trolleybuses, and trams (liquid collateral of up to RUB 15–20 mln). The increase was partially facilitated by growth of the value of leased assets, but the key driver was an increase in demand from SMEs (taxi companies, carsharing companies, cargo carriers). In general, the share of SMEs in the total volume of new contracts concluded in all areas of the leasing business increased last year from 58% to 65%.

Another segment, which demonstrated a significant increase in volumes in absolute terms, was the construction equipment leasing segment (+91% vs. 2020). Most construction equipment is characterized by sufficient liquidity and, in most cases, by not very high prices (price ranges are approximately comparable to automotive equipment). The growth of this segment was driven mainly by infrastructure projects in housing construction, as well as construction of roads and other infrastructure facilities. The shares of the abovementioned segments in the volume of new business and in the leasing portfolio of Russian companies and banks are approximately equal and amount in total to about 59%. It should be noted that mostly SMEs act as lessees for these lease contracts.

9 Total amount of lease receivables, incl. VAT, under effective lease agreements.

Figure 4. New business and leasing portfolio volumes in 2017–2021, RUB tln

Sources: Joint research of the United Leasing Association and Expert RA for 202110

10Leasing Market in 2021: New Frontier published in March 2022 by Expert RA. The research was supported by the United Leasing Association.

The leasing financing structure is still dominated by bank loans, the share of which is about 64%. It should be noted that the share of bank loans is quite stable, and has ranged within 60–65% in recent years. The share of bond (market) financing is relatively small at 6%. This situation cannot last forever, given the merger of the largest leasing companies and banks and the current restrictions on the amount of risk per borrower. Theoretically, the share of market financing of leasing business should grow in the long term.

The leasing market is quite concentrated: in 2021, the share of the 20 largest companies (by size of lease portfolio) accounted for about 74% of new business and 82% of the portfolio. At the same time, the market is strictly segmented by areas of activity. Some companies (including JSC “GTLK”, “TransFin-M” PC, LLC “PSB Leasing”, LC “Siemens Finance” LLC) focus on large businesses. The structure of leased assets is dominated by railcars, river and sea vessels, aircraft, and mining and processing machinery and equipment. Small companies, including regional ones, occupy a prominent place in the SME sector. The leader of this segment is PJSC “LC “Europlan”, which ranks fifth in terms of new business and sixth in terms of lease portfolio (over RUB 200 bln). Leasing subsidiaries of the largest banks (Sberbank, VTB Bank (PJSC), Bank GPB (JSC), JSC “ALFA-BANK”) operate in both segments and strive to diversify their portfolios.

Customer focus strongly affects the duration of lease contracts. In case of SMEs, wh ere leased assets are mainly transport vehicles and construction machinery, lease durations are three to four years, while for lease contracts concerning railcars, vessels, and aircraft, wh ere key lessees are large transport companies, the duration is five to ten years or more. The liquidity of leased assets also varies — it is much higher in the segment of transport vehicles and construction machinery, wh ere it is not very difficult to find a lessee or a buyer. Due to the predominance of SMEs among lessees, as well as relatively low prices and liquidity of leased assets, this leasing segment is perfect for securitization of the lease portfolios of companies and banks.

Estimating the potential of the lease transactions securitization market is an even more complex task than estimating the capacity of the SME loan securitization market. This is primarily due to the fact that, unlike banks, leasing companies are not required to compile and publish IFRS financial statements, so even the largest companies often neglect this option. As a result, it is not possible to conduct a segment analysis and an analysis of the quality of portfolios of market leaders to estimate the share of the leasing portfolio that could serve as collateral for securitization. We only managed to find ten companies11 that have appropriate reports on portfolio quality and segmentation.

The total net investments in leasing (before provisions) for the group of companies in the sample amounted to about RUB 800 bln (see Table 1). A comparison of this indicator (debt portfolio on the company’s balance sheet) with the leasing portfolio shows that, due to accounting specifics for VAT and unearned financial income, only 60–65% of the leasing portfolio can be securitized. The quality of the portfolio in the sample is quite high — the weighted average share of debt overdue for over 30+ days was 4.1%. The combined share of motor vehicles and construction machinery in the portfolio of companies was approximately 50%, which is lower than for the entire market due to the characteristics of the sample.

Given the adjustments for accounting treatment of overdue amounts in lease transactions, the market structure (the share of the 50 largest companies with a portfolio volume sufficient for securitization is 90%), share of the motor transport and construction machinery segments in the lease portfolio, and portfolio quality indicators, the total volume of the lease portfolio available for securitization is estimated at RUB 2 tln, or approximately 30.5% of the lease portfolio as of the end of 2021.

The comparison of the Russian market with the European one is of particular interest. According to Leaseurope12, the amount of debt owed by lessees in the EU and the UK under transport and machinery lease agreements amounted to EUR 648 bln and EUR 637 bln in 2019 and 2020, respectively. According to the AFME, in these years, the volume of debt on bonds secured by lease payments was equal to EUR 18.1 bln and EUR 16.5 bln, respectively. By dividing the second indicators by the first ones, we get figures in the range of 2.6–2.8%, which is approximately the same amount of debt under lease agreements that was securitized in the EU and the UK. In relation to Russian data, this allows us to estimate the market potential at about RUB 170–180 bln. It is worth noting that data for different EU countries is heterogeneous — for example, in the Netherlands, Belgium, and France, lease contracts are not securitized at all, and in Italy and Greece, the ratio of debt on bonds secured by lease payments to the total nominal value of lease contracts exceeds 30%. This indicator is comparable to the upper level in our estimate based on the financial statements of Russian leasing companies.

11 VTB Leasing JSC, PJSC “LC “Europlan”, Alfa-Leasing Ltd., JSC Baltiysky Leasing, “TransFin-M” PC, JSC Rosagroleasing, RESO-Leasing LLC, Expert-Leasing LLC, “Element Leasing” LLC, Simple Solutions Leasing Company.

12Annual Statistical Enquiry, 2020.

Table 1. Some performance indicators of Russian leasing companies


portfolio as of January 1, 2021, RUB bln

portfolio share of motor vehicles and construction machinery, %

share of impaired debt, %

acra rating

expert ra rating

VTB Leasing JSC





Alfa-Leasing Ltd.





PJSC “LC “Europlan”





JSC Rosagroleasing





RESO-Leasing LLC





JSC Baltiysky Leasing





“TransFin-M” PC






Expert-Leasing LLC





“Element Leasing” LLC





Simple Solutions Leasing Company








Sources: IFRS financial statements of leasing companies as of January 1, 2022, websites of credit rating agencies

why is the potential of the Russian market not being realized?

The analysis of the Russian market for securitization of SME loans and lease agreements with SMEs indicates its significant potential, which, however, poorly correlates with the actual number and volume of issues. The current situation is undoubtedly caused by a number of macroeconomic and institutional factors, such as high volatility of interest rates, insufficient transparency of issuers’ activities, and investors’ loyalty to more familiar and understandable instruments, but the main reason is the cautious regulatory attitude toward structured finance instruments.

Regulatory factors hindering market development are present on both the demand side and the supply side. First, we will review the factors preventing banks from borrowing more actively on the market through asset securitization.

In accordance with Federal Law No. 39-FZ13, the Bank of Russia establishes criteria for originators to the forms and methods of taking risks at the level of at least 20% of the total amount of obligations under collateralized bonds, although. At the same time, according to the approached used in the US and the EU in line with Basel Standards, originators are allowed to retain as low as 5% of the risk. With this in mind, it is reasonable to reduce the regulatory share of originator’s credit risk in non-mortgage-backed securitization transactions from 20% to 5% for Russian banks as well. In parallel, it will be necessary to amend Bank of Russia Instruction No. 3309-U14 regarding the requirements for forms and methods of risk taking.

At the same time, the procedure for risk taking by the originator can be changed as well. In particular, in European securitization transactions, the originator can purchase equal shares of collateralized bonds in all tranches of the issue, which gives banks more freedom in managing issue risks. This measure will also require amendments to Instruction No. 3309-U.

In addition, the issuance costs of structured instruments can be reduced by simplifying the registration and tax administration procedures relating to SPVs, as well as by a multiple use of SPVs through so-called compartments, each of which includes assets that secure a specific securitization transaction.

Now, let us consider the factors that hinder investments in the instruments under review.

In mature markets, pension funds are the largest investors in this class of instruments. In Russia, opportunities for private pension funds (PPFs) to invest in non-mortgage-backed securitization instruments are significantly limited.

In accordance with Bank of Russia Regulation No. 580-P dated March 1, 2017, it is unacceptable to include senior tranches of non-mortgage-backed securitization instruments even in the common 10% risk lim it of PPFs’ pension savings due to the lack of indication of the applicability of credit ratings with the “.sf” postfix fr om national rating agencies. At the same time, there is a separate 5% lim it in the investment portfolio for mortgage-backed securities with a credit rating of AAA(ru.sf). In accordance with Bank of Russia Instruction No. 5343-U15 dated December 5, 2019, senior tranches of non-mortgage-backed securitization instruments may be included only in the common 10% risk lim it for investments of pension reserves of PPFs.

It is obvious that there is a need for a specific lim it on investments in bonds issued by SPVs/SPCs as part of non-mortgage-backed securitization transactions. Therefore, it is necessary to amend Bank of Russia Regulation No. 580-P dated March 1, 2017 and Decree of the Government of the Russian Federation No. 379 dated June 30, 200316.

The Bank of Russia sets increased risk coefficients for investments in structured finance instruments that do not have an international scale credit rating from international rating agencies. In accordance with Bank of Russia Regulation No. 511-P17, securitization transactions for which a rating has been assigned by an accredited national rating agency are equated to non-rated transactions for the purposes of calculating the risk weight coefficient for bonds included in a trading portfolio or a portfolio of assets at fair value. However, after Federal Law No. 222-FZ18 was adopted, credit ratings assigned by international rating agencies were not de facto used in the Russian securitization market and were replaced by ratings assigned by Russian agencies.

In this regard, it seems reasonable to either include national (.sf) ratings in the regulatory environment or substitute international ratings with national (.sf) ratings that are equivalent to international ratings specified in Bank of Russia Regulation No. 511-P (taking into account the creditworthiness assessment of the Russian Federation). These changes would significantly increase the attractiveness of securitized securities for Russian banks, which would lead to an increase in the liquidity of such instruments and would contribute to more active development of the sector.

Another important issue is the possibility of using structured finance (.sf) ratings on a par with fundamental ratings assigned by Russian credit rating agencies when structured finance instruments are included in the Lombard List and admitted to repurchase transactions with the Bank of Russia. It should be noted that the (.sf) designation serves solely as an indicator of the specifics of rated financial obligations, i.e. the fact that the source of repayment of obligations under a bond is a granular portfolio of assets segregated on the balance sheet of an SPV. Despite some distinctive features of financial securitization instruments, in ACRA’s opinion, (.sf) ratings are comparable to fundamental ratings in the long term. The actual credit quality of securitization instruments that are assigned the highest credit rating is absolutely comparable to the credit quality of corporate and municipal bonds with the corresponding rating.

Limited liquidity and the inability to conduct repurchase transactions in securitization instruments are significant constraining factors for banks making investment decisions. The eligibility criteria for securities that can be used in refinancing transactions are set out in Bank of Russia Instruction No. 2861-U19. SPVs’ bonds generally meet all the criteria for inclusion in the Lombard List and until 2015, some of them were included in it. Today, bonds issued by SPVs as part of non-mortgage-backed securitization transactions are not accepted as collateral for repurchase transactions with a central counterparty (they are assigned a discount value equal to 100%). This, according to the regulator, is due to the absence of risk assessment methodology for securitization instruments. However, an exception was made for mortgage-backed notes issued by JSC “DOM.RF” because their inclusion in the Lombard List contributes to the development of the mortgage market.

Banks’ interest in investing in non-mortgage-backed securitization instruments would be supported by classifying SPVs’ bonds as highly liquid assets, which is currently only possible for instruments rated by international credit rating agencies.

The National Association of Private Pension Funds (NAPPF), the National Financial Association (NFA) and banking associations have repeatedly asked the Bank of Russia to stop discriminating against non-mortgage-backed structured finance instruments. Up to a certain point, the regulator noted that its main objective is to ensure the safety of pension savings and other segments of the financial market, and in the absence of a sufficient number of instruments in the market, it is difficult for it to assess the risks of such instruments. Thus, there was a vicious circle — the Bank of Russia did not see finished products, and banks were not ready to issue them without being confident that these instruments would be redeemed in due volume.

However, the situation has begun to change gradually. The Bank of Russia has responded positively to many of the proposals made in the joint report “Rebooting the Non-mortgage-backed Securitization Market” published by the NFA and the Association of Banks of Russia in December 2021. Some of them have begun to materialize in the regulator’s decisions. For example, on July 22, 2022, the Board of Directors of the Bank of Russia made a somewhat historic decision, allowing the inclusion in pension reserves of bonds secured by SMEs’ obligations and with the maximum rating from ACRA or Expert RA (AAA(ru.sf)/ruAAA.sf).

We hope that this is just the beginning. Of course, there is a long way to go to transform non-mortgage-backed securitization transactions into a real market instrument that appeal to both originators and investors, but the Bank of Russia’s willingness to work together with rating agencies and financial associations to resolve this issue is cause for some optimism.

13Clause 26 of Article 42 of Federal Law No. 39-FZ dated April 22, 1996 “On the securities market.”
14Bank of Russia Instruction No. 3309-U dated July 7, 2014 “On forms and methods for taking risks on collateralized bonds of special purpose vehicles and special purpose companies.”
15Bank of Russia Instruction No. 5343-U dated December 5, 2019 “On the requirements for the composition and structure of pension reserves.”
16Decree of the Government of the Russian Federation No. 379 dated June 30, 2003 “On additional limits for investing pension savings in certain asset classes and the maximum share of certain asset classes in investment portfolios in accordance with Articles 26 and 28 of the Federal Law ‘On the investment of funds for financing the funded portion of retirement pensions in the Russian Federation.’”
17 Bank of Russia Regulation No. 511-P dated December 3, 2015 “On the procedure for calculating market exposures by credit institutions.”
18Federal Law No. 222-FZ dated July 13, 2015 “On activities of credit rating agencies in the Russian Federation, amending Article 76.1 of the Federal Law “On the Central Bank of the Russian Federation (the Bank of Russia),” and invalidating certain provisions of Russian laws.”
19 Bank of Russia Instruction No. 2861-U dated August 10, 2012 “On the list of securities included in the Lombard List of the Bank of Russia.”

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Victor Shpringel
Associate Director, the Methodology Group
+7 (495) 139 04 80, ext. 140
Timur Iskandarov
Senior Director - Head of Project and Structured Finance Ratings Group
+7 (495) 139 04 94
Svetlana Panicheva
Head of External Communications
+7 (495) 139 04 80, ext. 169
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