Overview Of The Six Most Important Changes To The Russian Pledge Rules

  1. Concept of a security trustee (security manager).

    Given that the English-law concept of a 'trust' is not recognized by the Russian legal system, currently, under Russian law, only a creditor can hold the security for the debt. As a result, artificial creditor structures are often used to make Russian security viable in multi-creditor financing arrangements. For example, in syndicated loans, concepts of a "parallel debt" or a "joint and several creditor" are frequently used, even though these concepts have not been tested in the Russian courts and do not fit well in the Russian legal system. Secured notes (other than mortgage-backed securities, or "MBS") have not been very popular on the Russian market recently, among other reasons because of the lack of transparent mechanisms (such as trusteeship) for enforcing the security.

    Starting from July 1, 2014, a creditor will, in the agreement, be able to appoint a security manager (trustee) who will hold the security on behalf of the creditors. The security manager will owe a fiduciary duty to the creditors and will be liable for breach of such duty. The creditors will be able to limit the amount of discretion that the security manager has in the exercise of his functions by stipulating reserved matters (any action on which must be approved by the creditors) in the security management agreement.

    The new provisions on security trustees will supplement the new law on note trustees (please see our alert on Russian Note Trustee (a Bondholders' Representative) and Other Changes in Corporate Bond Regulations) which was adopted earlier this year and which will also enter into force on July 1, 2014. They should also extend and supplement the powers of special depositors (i.e., entities responsible for control of collateral (ipotechnoe pokritie) in Russian domestic MBS issuances). There is no doubt that the new concept of a security trustee will strengthen syndicated lending and asset-backed security ("ABS") structures involving Russian collateral and will bring the Russian legal system into harmony with the most developed legal systems in the world in this area.

  2. Pledges over bank accounts

    After July 1, 2014, and subject to the adoption of the necessary regulation by the Russian Central Bank, a person will be able to create a security interest over a bank account. To make use of this long-awaited option, parties will be required to use a specific type of account - a "pledge account."

    It will be...

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