The Israel Securities Authority (the ISA) recently published a policy document entitled “Developing the Securitisation Market Public Issues of Asset-Backed Bonds”; this follows the earlier consultation document for public comment which was published by the ISA in September 2019.
A securitisation transaction is one in which there are issued securities backed by an expected and defined cash flow from a credit portfolio. The securities are issued by a special purpose entity (SPE) which holds the underlying assets, after these assets have been transferred to it by another entity (the originator), which in turn receives the proceeds of the securities issue. The reason for the use of the SPE is in order to limit the credit risk to the underlying assets, by protecting investors from the originator’s insolvency risks. The underlying asset portfolio serves as the sole source of debt service funds. Generally, the originator manages the portfolio of underlying assets after the transaction, but it may also be managed by a servicer other than the originator.
The ISA recognises that securitisation transactions are important financial instruments in capital markets worldwide, and that a regulated securitisation market has many benefits, but that at the same time, the harm caused by an unregulated market may be significant (it has not been forgotten that such transactions were one of the key causes of the 2008 financial crisis).
Indeed, it believes that one of the lessons of the financial crisis was the prevalence of overly complex securitisation transactions, involving underlying assets with a complex credit risk, which posed considerable challenges for pricing, were problematic in other aspects and eventually generated particularly large losses for investors.
For this reason, the focus of the policy document, one aim of which is to increase market players’ familiarity with and understanding of the main features of securitisation transactions, is to introduce the features of transactions which, to use the term employed in the European regulatory framework, are “simple, transparent, and standard” (though the ISA recognises that as the market develops, it is conceivable that more complicated transactions than those described in the document will be executed).
The ISA believes that a regulated, transparent securitisation market, based on a solid regulatory foundation that would assist investors in understanding the risks and opportunities inherent in various transactions, may make an important contribution to the local capital market and to the Israeli economy.
The published policy document (in English) may be found here.