Securitisation Comparative Guide

• Jurisdiction: European Union
• Law Firm: Gardos Mosonyi Tomori Law Office
• Subject Matter: Finance and Banking, Financial Services, Securitization & Structured Finance
• Author: Dr. Veronika Bakonyi and Erika Tomori
• Published date: 24 July 2023

1 Legal and regulatory framework

1.1 Which laws typically govern securitisations in your jurisdiction?

• Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012 ('Securitisation Regulation');
• The EU Prospectus Regulation (2017/1129);
• The Capital Markets Act (CXX/2001);
• The Civil Code (Act V/2013); and
• The Act on Credit Institutions and Financial Enterprises (CCXXXVII/2013) ('Credit Institutions Act').

1.2 Which bodies are responsible for regulating securitisations in your jurisdiction? What powers do they have?

The regulation of securitisation is harmonised in the European Union through legal acts adopted by the EU legislative bodies (ie, the European Parliament and the European Council). EU regulations such as the Securitisation Regulation and the Prospectus Regulation are directly applicable in Hungary.

Domestic legislation adopted by the Hungarian Parliament includes:

• the Civil Code, which regulates the transfer of receivables other claims and assets, and sets out the rules on assignment;
• the Credit Institution Act, which regulates the licensing and other regulatory aspects of transactions, given that the purchase of receivables qualifies as a financial service; and
• the Capital Markets Act, which regulates the issuance of securities.

The National Bank of Hungary is the competent authority that supervises the financial markets and the capital markets, including securitisation. As such, it has the power to impose administrative sanctions on market participants.

1.3 What is the regulators' general approach in regulating securitisations?

There is no available practice in this regard to comment on.

1.4 What role, if any, does the central bank play in the securitisation market in your jurisdiction?

The National Bank of Hungary is the competent authority that supervises the financial markets and the capital markets, including securitisation. The National Bank of Hungary has the authority to issue licences under which financial services (eg, the purchase of receivables) may be provided in Hungary. A securitisation special purpose entity may initiate its activities following notification of the National Bank of Hungary, which also keeps a register of such entities. If publication of a prospectus is required in the course of a securities issuance, the prospectus must be approved by the National Bank of Hungary prior to publication.

The National Bank of Hungary may impose administrative sanctions (eg, fines, withdrawal of licences) on the originator, sponsor or original lender of a securitisation in the case of non-compliance.

2 Market and motivations

2.1 How sophisticated is the securitisation market in your jurisdiction and how has it evolved thus far?

In Hungary, the number of securitisation transactions is very limited. Securitisations are usually arranged and financed by foreign banks, and the securities issued in the course of the transaction are purchased by foreign investors.

In practice, we differentiate between the following securitisation structures:

• so-called 'traditional' securitisation - that is true sale securitisation; and
• synthetic securitisation.

2.2 In which industry sectors, if any, is securitisation most common in your jurisdiction? What major securitisations have been effected thus far?

See question 2.1.

2.3 What are the benefits of securitisation, for both originators and investors?

For banks, securitisation may be a suitable means to free up their balance sheets and allow for further lending to the economy; it also facilitates the easy transfer of loan portfolios to other institutions or investors.

More broadly, securitisation has the potential to improve efficiencies in the financial system and provide additional investment opportunities. It can also create a bridge between credit institutions and the capital markets, which may result in indirect benefits for businesses and citizens through:

• less expensive loans and business financings; and
• credits for immovable property and credit cards.

In case of receivables arising from, for example, the sale of goods, securitisation enables manufacturers, producers and service providers to acquire further funds from the capital markets through the issuance of bonds, instead of taking out loans from credit institutions.

Securitisation is also a tool for risk sharing, given that the original risks are divided among the investors purchasing the securities.

2.4 What are the risks of securitisation, for both originators and investors?

Increased interconnectedness and excessive leverage make securitisation risky for investors. The experience gained from the 2008 global financial crisis made it clear that if securitisation is non-transparent, or if the receivables underlying the securities are over-complicated and the risks arising from them cannot be properly evaluated, this can result in a highly risky product for investors.

Apart from the credit risks attached to the underlying loans and exposures, investors may face risks arising from the structuring process of securitisations, such as:

• agency risk;
• model risk;
• legal and operational risk;
• counterparty risk;
• servicing risk;
• liquidity risk; and
• concentration risk.

2.5 Is there a developed covered bond market in your jurisdiction and how does it compare and compete with securitisation as means of disintermediation and recycling bank capital?

The covered bond market is more developed in Hungary than the securitisation market. Bond issuance is a well-known and frequently used tool for corporate fund raising. Bond issuance for the purpose of providing further funds for small and medium-sized enterprises (SMEs) has been supported by the National Bank of Hungary in recent years. In 2019, the National Bank of Hungary launched a bond funding for growth scheme, under which the National Bank of Hungary and commercial banks purchased bonds issued by SMEs.

Bonds issued by companies may be listed on:

• the Budapest Stock Exchange Corporate Bond Market; and
• the Xbond Platform, which is operated by the Budapest Stock Exchange especially for bonds issued by SMEs.

2.6 To what extent does the government intervene as a state actor in securitisation (eg, by guaranteeing certain securitised assets, providing credit enhancement to impact transactions or sponsoring public bodies to act as originator of or investor in asset-backed securities issues)?

In 2019, along with the bond funding for growth scheme, the National Bank of Hungary also communicated that it planned to purchase securities covered by loan receivables. In its communication, the National Bank of Hungary noted that one of its goals was to increase the impact of its monetary policy measures on the economy by extending the liquidity of the Hungarian securitisation market. However, as yet we have no details of any such securitisation transactions taking place.

Also, we do not know of any government intervention in the securitisation market in Hungary.

3 Structures

3.1 What securitisation structures are most commonly used in your jurisdiction?

In practice, we differentiate between the following securitisation structures:

• so-called 'traditional' securitisation - that is true sale securitisation; and
• synthetic securitisation.

The most common structure is traditional securitisation, where the receivable is transferred to the buyer and the seller of the financial assets thus ceases to carry any risk relating to the performance of the sold asset - that is, to the solvency of the debtor of the underlying obligation. In a true sale, the buyer is not considered a creditor and the transferred assets are protected from any claims of the transferor's creditors. If the transferor becomes insolvent following the transfer, the assets which are the subject of the true sale do not become part of the insolvency estate; nor are the transferee's rights relating to those assets in any way affected by the commencement of insolvency proceedings. If the originator becomes insolvent, then fraudulent, undervalued and preferential transactions concluded within the suspect period of five years, two years or 90 days (respectively) can be challenged by the insolvency officer. The insolvency remoteness of the transferred assets can thus be achieved by:

• meeting the relevant perfection requirements...