Malta, which is seeking to become a domicile for the insurance-linked securities (ILS), catastrophe bond and reinsurance convergence sector, has launched a proposal which aims to bring together the special purpose reinsurer concept with protected cells.
The southern European country launched its ambitions to become a domicile for the ILS and cat bond sector in 2013, before finalising and bringing into law its regulations governing the formation and domicile of Reinsurance Special Purpose Vehicles (RSPV) at the start of 2014.
As we wrote at the time, gaining a foothold in the ILS and cat bond space against established domiciles such as Bermuda, the Cayman Islands, Guernsey and Dublin, is always going to be a challenge for newcomers like Malta. Malta is not the only new domicile targeting the space either, Gibraltar, the Isle of Man and Puerto Rico are also actively targeting the sector.
As its next step to target the ILS space, the Malta Financial Services Authority (the MFSA) has put forward for consultation a proposed set of regulations for what it is calling ‘Securitisation Cell Companies.’ Once adopted Malta would become the first European Union member state to legislate for the use of protected cells companies as securitisation vehicles.
Cell companies have been a feature of Maltese financial law since 2004 and have been used by companies carrying on the business of insurance and reinsurance. These new draft regulations, the Securitisation Cell Companies Regulations 2014, aim to build on the protected cell company concept by adapting and extending the structure to allow protected cells to cater for securitisations and to take advantage of Malta’s existing securitisation regulations.
These proposed regulations aim to set out a framework for Securitisation Cell Company’s in Malta, providing a legal framework for the segregation of assets and risks within a single special purpose vehicle. The MFSA says that this would allow for the issuance of multiple insurance-linked securities (ILS) without incurring any risk of cross-contamination between the different sets of creditors or investors. The regulation would also allow for other types of asset backed securities outside of risk-linked or ILS.
Two types of securitisation cell companies are proposed, one for typical asset backed securities issues and the other carrying on the business of a reinsurance special purpose vehicle. Each cell within an SCC would be protected by the legal provisions for ring-fencing of assets within the regulations.
The MFSA explains the benefits of the proposed regulations as follows:
The proposed framework for securitisation cell companies retains all the benefits introduced by the Securitisation Act while providing increased flexibility, enhanced investor protection and economies of scale.
Securitisation vehicles formed as securitisation cell companies are ideal for clients with different business strategies. Issues of securities that are funded by assets ring-fenced in a particular cell and supported by specified collateral arrangements may thus be tailored to satisfy the different investor demands. This enables issuers to target investor segments with different risk/reward appetites. The securitisation cell company structure prevents creditors of one cell from having recourse to the assets of another cell thereby providing enhanced protection to investors in relation to specific sets of assets. Furthermore, in case of insolvency, the insolvency of one cell has no effect on the solvency of the other cells.
The administrative benefits of a cell company are significant. Once a cell company structure is in place, repeat transactions can be established in a much reduced timescale. This is particularly attractive in securitisations, where negotiating transaction documents can be a complex and lengthy process, and where a successful initial structure will often lead to a demand for further similar structures using common service providers. The structuring of securitisation transactions through a securitisation cell company allows for reduced costs and timeframes. There is only one entity being incorporated that undertakes distinct business strategies through its individual cells resulting in an advantageous cost to benefit ratio.
As an EU member state with the existing Maltese Securitisation Act already in place, Malta is in a position to try to capitalise on its European Union ties and proximity to issues such as Solvency II, as well as the existing securitisation laws around bankruptcy remoteness that it already has in place.
The draft laws for SCC’s have been created with Solvency II in mind and will account for the Solvency II requirements for SPV’s when they are structured as cell companies. Malta feels well positioned to target European ILS issuers, arrangers and institutions as a result.
You can read the MFSA’s consultation document and draft regulations for SCC’s here. Feedback on the proposed regulations is due by September 24th.