The Securities and Commodities Authority (“SCA”) in the UAE has recently issued Resolution No.22 of 2023, enacted by the Chairman of the Board of Directors (the “Resolution”). The Resolution’s main aim is to regulate and framework the organization of securitization operations in the country. This decision is carved for the purpose of enhancing investments in the country and enabling foreign investors as well as domestic investors to use investment alternatives and various financing opportunities. The Chairman of the board of directors of SCA announced that this Resolution constitutes a considerable and significant step towards the UAE 2031 Vision.[1]

This Resolution and its provisions have been long awaited by economic operators and investors. It was expected to be issued after the issuance of the New Commercial Companies Law No.32 of 2021, as it stands hand in hand on many scales with the provisions of the commercial companies’ law. For example, the recognition of the concept of Special Purpose Vehicles (“SPV”) facilitated the road for the Resolution to refer and address same concept under its own provisions. Whereas it is provided under the Resolution, that the creation of SPVs applies to securitization.

We tackle below the expected rules, prohibitions, and procedures that will be implemented whenever a securitization transaction occurs.

Scope of application

 The Securitization provisions apply to the following entities and in the following circumstances:

• In the event the originator public and private joint stock companies whose shares are listed on the market exchanges;
• In the circumstance where the securitized notes are to be listed in the UAE and all parties to securitization transactions in the UAE;
• In the circumstance where the securitization transaction is performed or executed through a securitization entity regulated by the SCA; and
• In the event the offering of the securitized financial instructions is done for public subscription in the UAE.

The application of the decision shall be limited to the issuance of securitized financial instruments including securitized asset-backed financial instruments, secured securitized financial instruments and securitized financial instruments backed by assets that are secured by real estate mortgage loans.[2]

Parties to the securitization

The securitization establishment shall comply with acting on behalf the issuer and the owners of the securitized financial instruments towards the third parties.

The issuer shall be established in accordance with the decisions issued by the SCA. It may not perform any activity other than issuance of securitized financial instruments resulting from the securitization. Furthermore, the issuer shall have a securitization establishment that shall manage it, take the decisions on its behalf, and represent it before third parties.

The originator is the moral entity owning the financial assets in the securitization portfolio, aiming to sell the financial assets and transfer all rights and obligations related to the same.

Exemptions

The Resolution does not apply to the internal securitization processes managed by banks, financial institutions, and insurance companies operating in the UAE and licensed by the Central Bank. [3]

Moreover, the decision does not apply to the securitization processes carried out by the federal or local governments, neither government institutions and bodies or the companies that are fully state owned or government owned unless directed for the public.[4]

Furthermore, the Resolution does not apply to the securitization processes carried out before the enforcement date of the Resolution.[5]

Criteria of financial assets in securitization portfolio

The Resolution provides for factors and criteria that should be followed when assessing the financial assets in the securitization portfolio. The securitization portfolio constitutes the financial assets subject to the securitization operation. The financial assets should check the following criteria:

• it should be inside the UAE;
• it should arise out of transactions inside the UAE;
• it should arise out of the originator’s main activity;
• it should be legally and legitimately owned by the originator, and it should be enforceable and not pending on a condition;
• it should generate measurable financial flows;
• it should have a homogeneous nature;
• it should be of a minimum limit that is sufficient to cover the original debt and the revenues payable to the owners of the securitized financial instruments;
• it should not be subject to contractual restrictions constituting an obstacle to the originator’s transfer of the financial assets to the securitization entity;
• it should be free from any encumbrances or rights to any other party; and
• the period set for the financial assets to be due should not be less than 12 months, upon transfer to the issuer.

Concept of true sale  

The SCA has implemented the concept of true sale, meaning that the securitization operation constitutes a sale operation and not a mere financing transaction. This legally means for any investor, originator, that it is enduring a transfer of assets operation.

Separability

Under sections 2 and 3 of Article 5, it is stipulated in the Resolution that the securitization assets are segregated and considered separate from the originator and its own creditors. Hence, in the event of insolvency or bankruptcy of the originator, this situation should not and would not have an impact on the SPV.

Prohibitions and penalties

The Resolution provides that the securitization establishment shall comply with prohibiting the creation of any guarantee or warranty rights on the securitization portfolio except for insuring and guaranteeing the obligations related to the securitization portfolio and in favor of the owners of the securitized financial instruments.

In the event of breach or failure to comply with any of the provisions under the SCA’s Resolution, it is provided that the SCA will enforce any of the penalties including serving a notice to the violator and obligating him to rectify the violation within the period specified by the SCA[6], along with imposing a financial fine not exceeding the maximum amount of the fine as stipulated by the law and the decisions issued according to it, and suspending or cancelling the securitization process and issuance of the securitized financial instruments, without prejudice to the Companies Law and the administrative penalties specified under the Cabinet Resolution issued for enforcement thereof.

With our in-depth understanding of the capital market regulations and our commitment to providing tailored legal services, GLA can help clients to seize opportunities, ensure compliance, and navigate the complex legal framework. Contact us to discuss how our legal expertise can unlock growth and success for your business in the dynamic UAE economy.

[1] To enhance the attractiveness of the investment environment in the UAE SCA issues a decision regulating securitization | News | Media Center | Securities and Commodities Authority

[2] Article 2, section 3 (1) of Resolution No.22 of 2023.

[3] Article 2, section 2 (1) of the Resolution No.22 of 2023.

[4] Article 2, section 2 (2) of Resolution No.22 of 2023.

[5] Article 2, section 2 (3) of Resolution No.22 of 2023.

[6] Article 24 of the Resolution No.22 of 2023.

Authors:  Yousef Al Amly, Partner and Rana Moustafa, Associate.

For further information, please contact Alex Saleh (alex.saleh@glaco.com) and Yousef A Amly (y.alamly@glaco.com).