In order to develop secondary mortgage market in Mongolia and to attract funding to a mortgage financing, Mongolian Parliament /State Great Khural/ passed law on Asset backed securities on 23rd of April, 2010. Although Government resolution 116 of 2003 called for development of secondary mortgage market in Mongolia by approving “Concept and direction of developing Mortgage backed securities market in Mongolia”, there weren’t any real legal and practical demand of initiating and developing such market in Mongolia, due to prematureness of primary mortgage market in Mongolia and absence of adequate mortgage enforcement legislation.
However, following enactment of “Law on Non-judicial foreclosure of mortgage collateral” in 2005 and approval of preceding legislation named “Law on Mortgage” in 2009 resulted in establishing adequate legal framework for primary mortgage market. In addition to this, founding of “MIC” /Mongolian Mortgage Corporation/, the primary local player of secondary mortgage market influenced calling of approval of the “Law on Asset backed securities” in Mongolia. It should be also noted that the Parliament of Mongolia /State Great Khural/ has approved Action plan for overcoming economic crisis in 2008, obliging the Government of Mongolia to draft necessary legislations for primary and secondary mortgage market.
The Newly approved “Law on Asset backed securities” consists of 6 chapters and 45 articles.
The purpose of this law is to regulate relations regarding to issuance of asset /receivables from loan, leasing, rent, bond, credit card and other financial instruments which will generate monetary flow/ backed securities, supervision of such activities and protection of investor’s right.
The Financial regulatory authority is in charge of supervision of issuing asset backed securities in Mongolia.
Asset backed securities include guaranteed security /asset or mortgage backed security/ and collateral security /mortgage bond/. Guaranteed security shall be issued by SPV /shall be founded by commercial bank, non banking financial institution and Housing finance company/, while collateral security shall be issued by commercial banks and Housing finance company. According to this law, above mentioned issuers shall have license to issue.
Guaranteed security shall be a security proving that assets has been removed from balance sheet of originator, shareholder of issuer and seller; and recorded in the balance sheet of SPV. In addition it proves that originator, shareholder of issuer and seller has been freed from all obligations related to the assets transferred. Collateral security is a security backed by right to demand regarding to residential mortgage and other mortgages permitted by law on Asset backed securities and proving right to repayment of principal and interest within period referred in prospectus. When issuing collateral security, all assets shall be segregated within issuer’s balance sheet.
When issuing guaranteed security, assets backing security shall be pooled and such pool will be registered by the Financial regulatory commission. Upon registration, assets in the pool shall be deemed as pledged to the investors. Collateral security shall be issued by pooling right to demand regarding to residential mortgage, cash and treasury bonds.
Originator, SPV, servicer, trustee and investor shall participate in transaction in issuing guaranteed security, In issuing collateral security, main players will be the Housing finance company and Asset pool registration manager
If 2/3 of investors holding guaranteed securities demand to liquidate issuer on the basis that the issuer of guaranteed security defaults in paying out or fails to comply with prospectus, then receivership shall be appointed and necessary actions to protect investors’ right will be carried out, including enhancing repayment of the security. If bankruptcy case filed, or issuer is subject to liquidation or authorized body decided to reorganize issuer of a collateral security, it shall be deemed as special circumstances and all assets of issuer shall be segregated from balance sheet of issuer until all investors are repaid. In addition, as similar to the case of guaranteed security, receivership can be appointed in case of collateral security in order to protect investors right.
In addition, all activities of issuers shall be audited by Audit licensed from the Financial regulatory commission. Particularities of auditing and its requirement for licensing will be regulated by the Financial regulatory commission.
According to article 42 of the Law on Asset backed securities, originator, Housing finance company, the Government of Mongolia or Central bank /Mongolbank/ can provide additional guarantee when issuing collateral security.
The Law on Asset backed security will be in force from 1st of January, 2011, leaving some time for regulatory body to approve needed regulations and rules for the market.