CMA issues policy guidance for asset-backed securities

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In its drive to widen the scope of available capital markets products in the Kenyan market in line with the 10-year Capital Market Master Plan, the Capital Markets Authority (CMA) has published a Policy Guidance Note (PGN) to facilitate the issuance of Asset-Backed Securities (ABS).

The PGN, which was approved by the CMA Board in April 2017, has undergone extensive stakeholder consultation and engagement to ensure that the final product has the input of industry stakeholders, including a 30-day public exposure period in August to September 2016.

Asset-backed securities are securities backed by future cash flow generating assets such as road, water and other infrastructure levies, mortgage loans, credit card receivables, automobile loans and leases, education loan receivables, equipment loans and health care receivables, whose cash flows are used to repay both the principal and interest on the securities issued to purchase those assets. The securities are issued as part of a securitization process, which is the process by which relatively illiquid assets with common features are packaged into interest bearing securities with marketable investment characteristics.

The CMA Chief Executive, Mr. Paul Muthaura, disclosed that the principle-based approval approach, which underpins the PGN, empowers the Authority to fast-track rollout of new products and services in capital markets. This approach ensures that the market is more diverse in terms of the portfolio of investable products, by ensuring a more timely response to the changing capital market dynamics.

The principle-based approval approach is in line with recent amendments to the Capital Markets Act, effected in December 2013 that enhanced CMA’s role in facilitating market development in relation to the introduction of new products.

The ABS Policy Guidance Note has been developed in line with the powers of the Authority under Sections 12A and 30Z of the Capital Markets Act. Section 12A empowers the Authority to issue guidelines to regulate capital market activities and products.  Section 30Z further empowers the Authority to issue guidelines in relation to the form or structure of a special purpose vehicle and documentation requirements for asset backed securities.

The PGN sets out guidance on how the Authority intends to interpret and apply the securitisation provisions of the Act and exercise its powers under the Capital Markets Act. The PGN also provides important clarifications of areas where the Act or its application were deemed to be unclear, following industry engagement. Mr Muthaura noted that ‘’this is expected to facilitate ABS transactions to be brought forward based on a clear regulatory regime on the legal structure of special purpose vehicles among other key refinements.’’
He said that the PGN has addressed the conflicts that were identified between the Act and the Capital Markets (Asset Backed Securities) Regulations, 2007, and confirmed that with the benefit of the PGN the Authority had submitted proposals to the Cabinet Secretary for the repeal of the 2007 regulations.

“Any further amendments to the Capital Markets Act as it applies to Asset-Backed Securities will be developed once the market has been fully operationalized. The issue of the PGNs on diverse products is expected to accelerate the increase of the scope of available capital market products in Kenya’s capital markets, in close consultation with industry stakeholders. The first product to be introduced through this approach were Exchange Traded Funds in October 2015,’’ he said.

The publication by CMA paves the way for the rollout of ABS in Kenya, which is expected to support investment in capital-intensive infrastructure assets as well as cater for the repackaging of future cash flows to raise capital. Mr. Muthaura reiterated that the Authority will be using the same approach of principle-based approval to catalyze the transformation of Kenya into a capital markets hub as envisaged in the 10-year Capital Market Master Plan.
Benefits of securitization are many; For a seller of assets or originator for instance, it may be an alternative source of funding to borrowing, allow reduction of risk to a particular geographic area or maturity or type of lending, or reduce exposure to a particular borrower or trade creditor; For a non-seller, originator who originates assets directly into a special purpose vehicle (SPV), the objective is to earn fees from origination of assets into the SPV & earning fees as Servicer. It also creates new long-term asset products for investment for pension funds, insurance companies, collective investments that traditionally have long term liabilities to hedge and mobilises capital for economic development.

Other benefits include spreading of risk by allowing investors exposure to sectors they are not currently invested in or exposed to through a liquid instrument; allowing banks and other providers of short term risk capital to manage liquidity and interest rate risk; reducing pressure on Central Banks to waive single risk or sector exposure limits by providing funding mechanism to repackage and divest from such a risk or sector and providing an additional funding mechanism for various projects e.g. infrastructure and promote the provision of credit, among many other benefits.