Dear Clients, Colleagues and Friends,

 

We would like to bring to your attention that on July 30, 2023, the Department of Justice published the draft Regulation of Securitization Transactions Law (Legislative amendments), 2023 (the “Memorandum“) for public review. Comments to the Memorandum may be submitted until September 13, 2023.

 

The Memorandum is published simultaneously with a draft amendment to the Income Tax Ordinance, 1961-5771, which includes tax arrangements that will apply to securitization transactions contemplated by the Memorandum (the “Ordinance Securitization Amendment“). The Memorandum and the Ordinance Securitization Amendment are interrelated and together will create the regulatory framework for securitization transactions in Israel.

 

This new regulatory framework is enacted in order to create a comprehensive legal and commercial framework for securitizations in Israel. Prior to this publication, no coherent legislative, taxation, regulatory, or accounting infrastructure existed for securitization transactions in Israel. The purpose of the proposed new legislation is to increase legal and economic certainty and to set out the key criteria for securitization transactions.

 

A securitization transaction is a transaction in which securities are issued by a special purpose entity (“SPE“) backed by an expected and defined cash flow from a portfolio of loans, receivables or other legal obligations which are purchased and held by that SPE. The SPE purchases the underlying portfolio from another corporation (the “Originator“) which, in turn, receives the proceeds received by the SPE from the issue of its securities. The rationale for using an SPE is to ensure that the credit risk embedded in the transaction is limited solely to the underlying assets, without the risks related to the Originator. To ensure that the securitization transaction is not subject to the Originator’s insolvency risks, it is essential for the underlying assets to be legally and financially separated and segregated from the Originator.

 

Securitization transactions are important financial instruments in capital markets worldwide, and are essential for the development of a non-bank credit market. Participants in securitization transactions include banks, institutional entities, financial companies and commercial companies that are able to securitize their assets and raise capital in the capital markets, using their portfolio of assets.

 

The Memorandum reflects, among other things, several insights derived from the European regulatory framework for securitization transactions, as well as recent developments in financial regulation in Israel. It is based on principles discussed in the inter-ministerial team for the promotion of securitization in Israel, which were published in November 2015, as well as on discussions that took place in subsequent years between the Israeli supervising and legislative authorities, including the Israel Securities Authority (“ISA“), the Bank of Israel, the Capital Markets Authority, the Ministry of Finance, the Tax Authority and the Ministry of Justice.

 

The Memorandum includes four major features with respect to securitization transactions:

 

• Legal Classification as a ‘True Sale’ of the underlying assets:

In order to create sufficient legal certainty, it is proposed that a securitization transaction which meets the conditions specified in the Memorandum will be classified as a True Sale transaction.

 

• Regulating the public offering of bonds issued by an SPE under the Securities Law:

It is proposed to amend the Israeli Securities Law, 1968, and regulate the manner in which bonds issued by a securitization SPE are offered to the public in Israel. The review and approval of a securitization prospectus by the ISA will provide additional scrutiny and protection thereby increasing the legal certainty for both investors and Originators.

 

• Providing an exemption from the Banking (Licensing) Law, 1981 to the securitization SPE:

It is proposed to amend the Banking (Licensing) Law, 1981, in order to allow a securitization SPE, which is not a banking corporation, to hold a portfolio of loans or legal obligations and issue bonds to the public at the same time, including the ability for such SPE to acquire a portfolio of loans from an entity which not a banking corporation.

 

• Regulating the tax aspects of securitization transactions:

As mentioned above, the Ordinance Securitization Amendment includes a new complementary tax framework to be applicable in the context of securitization transactions contemplated under the Amendment.

 

Commencement Day and Transitional Provisions

 

The new securitization law will become effective on the date that the regulations are published by the Minister of Finance or on the day on which fees pursuant to section 55a of the Securities Law are set out by the ISA, whichever is later (the “Commencement Date“).

 

The provisions of the law will apply to all securitization transactions entered into after the Commencement Date notwithstanding that the underlying loan transactions may have been entered into prior to the Commencement Date.

 

Public comments to the Memorandum Law and the Ordinance Securitization Amendment will be accepted until September 13, 2023. Accordingly, both the Memorandum and the Ordinance Securitization Amendment are subject to changes as well as legislative procedures by the Knesset.

 

• For the Memorandum (HE) >> click here
• For the Ordinance Securitization Amendment (HE) >> click here

 

Our firm welcomes this important securitization legislative initiative and sees great potential in promoting securitization transactions in Israel. A dedicated joint team from of our Securities department, Banking and Finance department and Tax department have begun examining the Memorandum as well as the Ordinance Securitization Amendment ahead of the submission deadline.

 

We will be providing comments to the proposed new securitization legislation on behalf of our clients and we are happy to discuss with you the potential implications for your organization. You are welcome to reach out to us for further clarifications at any time regarding this new regulatory initiative and its implications.

 

Sincerely,

The Banking and Finance Department, The Securities Department and The Tax department

Herzog Fox & Neeman