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Developments and opportunities in Malta

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By Dr Michael Xuereb, MFSA – Following several years of fund platform developments, the MFSA has more recently been focusing its efforts on upgrading and enhancing the product structuring framework.

The Securitisation Act, which came into effect in 2006, introduced important legal changes which greatly improved the scope for structuring new investment products under Maltese law. This legislation was followed by other important developments including the setting up of the European Wholesale Securities Market (`EWSM'), a specialised market for debt securities targeting institutional and professional investors in Europe.

Following a settling in period the Securitisation Act was earmarked for further development aimed at integrating securitisation into the financial services value chain. This would also involve the introduction of certain add-ons that would render the Act more amenable to specific types of product structuring and give it an edge over comparable frameworks elsewhere.

Given the inroads the jurisdiction had made in the insurance sector, particularly captive insurance, the first initiative was to explore ways in which the Malta could meaningfully tap the insurance-linked securities (ILS) market.

Typical ILS instruments are those linked to property losses due to natural catastrophes. The issue of ILS requires the transfer and securitisation of risk via special purpose vehicles that may be set up under the Act.

Reinsurance Special Purpose Vehicle (RSPV) Regulations published at the beginning of 2014 enabled the MFSA to regulate this type of activity. They were the first legislation of its kind in the EU and had the added advantage of being aligned with the Solvency II draft implementing measures. The Regulations are therefore already in line with the corresponding Solvency II regime allowing operators to position themselves in this market at an early stage.

The ability to purchase a securitised risk instrument (in the form of bonds, notes or other securities) issued by an authorised RSPV helps institutional and professional investors diversify their investment portfolios. It is also possible to structure the product in different tranches based on proximity to the underlying risk thus providing investors with even more choice. 

The next logical step in the development agenda was to introduce the cell concept in the area of securitisation. Protected cell companies were already very well established in the Maltese financial sector when the Securitisation Cell Company Regulations came into effect at the end of 2014. The introduction of Securitisation Cell Company (SCC) was founded on well-trodden ground. 

The cell structure allows securitisation vehicles making use of multiple compartments to establish these within a legally entrenched framework that recognises and protects different sets of assets or risks placed in separate cells of the same company. Thus, investors in instruments issued through one cell of an SCC are protected from any claims arising from other creditors of the same SCC. 

In essence, cell legislation provides a ring fence around contractual arrangements placed within a securitisation cell of a securitisation company. This may be replicated in other cells of the same company allowing unlimited scaling up of securitisation activity within a single special purpose vehicle. This makes the SCC an excellent vehicle for the launching of asset backed securities and similar types of instrument. It is also possible to structure a Reinsurance Special Purpose Vehicle as an SCC.

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