1. Development of Russian Securitization Regulation Presentation for : Frankfurt June 21-22, 2007 RuMAC International Conference Asset Securitization in Russia and CIS

2. 2 Lets start with basics Law & Economics “…Economics…is a real basis, on top of which lays legislative and political superstructure…” (K. Marx, 1859, A Contribution to the Critique of Political Economy) …Russian regulators should have known that. Contents: – What is to be regulated? – Levels of regulation: from general to specific – Advantages of Russian law with regard to securitization – Demand for competitive regulation RuMAC

3. 3 Scope of regulation Securitization is the sale of equity or debt instruments, representing ownership interest in, or secured by, a segregated, income producing asset or pool of assets, in a transaction structured to reduce or reallocate certain risk inherent in owning or lending against the underlying assets and to ensure that such interests are more readily marketable and, thus, more liquid than ownership interests in and loans against the underlying assets. RuMAC

4. 4 Sample Securitization Structure Bank Seller/Servicer/ Asset Manager Assigns portfolio of loans to the Issuer of rated securities, monitors portfolio performance, and performs credit evaluation, loan servicing, and collections Trustee Protects investor’s security interests in the collateral, maintain cash reserve accounts, and perform other duties Issuer (Trust) SPV Purchases loans and issues ABS, using loan as collateral Investor Swap Counterparty Provides swap to hedge against currency and/or interest-related risk Assignment Agreements Bank loan portfolio proceeds ABS procee ds Interest and principal RuMAC

5. 5 Types of Securitizable Assets Essentially any assets or pools of similar assets producing more or less predictable stream of cash flows Example: - Any type of consumer loans (car loans, credit card loans, mortgages, student loans) - Lease Payments - Commercial loans (SMI loans, commercial mortgages ) - Royalty Stream ( David Bowie Bond) RuMAC

6. 6 Problems with Securitization ABS is a STRUCTURED finance transaction. The core of ABS is a negotiable instrument (security) So… Securitization is a market for BIG GUYS BIG GUYS are sensitive to regulations There IS a COMPETITION of JURISDICTIONS Regulators should fight for a piece of ABS market RuMAC

7. 7 Law & Securitization General Reg. Directly Related reg. Specific reg. RuMAC

8. 8 Specific regulation: bad , but getting better total overregulation total deregulation Specific regulation Russia Mortgage assets EU US Russia Other assets RuMAC

9. 9 Specific regulation: What we have now Federal law “On Security Market” (covered bonds) Federal law “On Investment Funds” (quasi- ABS) Federal law “On Mortgage-Backed Securities” (MBS) Regulations of Federal Financial Market Service RuMAC

10. 10 One example 2006 – Gazprombank and Sovfintrade closed the first ever Russian MBS. We faced: 6 boxes of transaction documents, or otherwise More than 15 000 pages of transaction documents, or otherwise Over 100 kilos of paper WHO IS GOING TO READ ALL THIS? RuMAC

11. 11 What we expect Federal law “On Asset-Baked Securitization” With regard to specific ABS regulation it leaves much to be desired RuMAC

12. 12 Related regulation OK  and improving Federal law “On Mortgages” Federal Housing Code Federal law “On State Registration of Real Estate Properties” Some amendments are currently being drafted RuMAC

13. 13 General regulation: good and becoming adopted with case practice Federal Civil Code Federal Tax Code Federal law “On bankruptcy” RuMAC

14. 14 Another example 2005 – Bank of Housing Finance closed the first ever Russian covered bond issue (on- balance sheet securitization of apartment presales). Collaterization was fully based on Federal Civil Code provisions. No specific regulation applied. RuMAC

15. 15 Some advantages of Russian general regulations 1. Russian FUND vs. Dutch STITCHING Remedy against trustee is based on Fund’s charter which is public. Any noteholder shall have a standing. based on contract with trustee, which is private. Shall the noteholder have a standing? 2. True sale Russia vs. US Possibility of requalification is a very limited possibility. No Doctrine of consolidation. Sophisticated doctrine of consolidation stimulates the court to requalify the deals. Some negative case law. RuMAC

16. 16 Russia desperately needs competitive specific regulation Accumulation of amortizing assets on Russian banks’ balance sheet is a ticking bomb waiting to explode……………… RuMAC Financial engineering tools available through securitization can re-distribute the prepayment and credit risks through the financial system

17. 17 Why? Look around! Historical Federal Reserve Funds Rate Month1984198319821981198019791978197719761975 January9.568.6813.2219.0813.8210.076.74.614.877.13 February9.598.5114.7815.9314.1310.066.786.854.776.24 March9.918.7714.6814.717.1910.096.79 4.69 4.845.54 April10.298.814.9415.7217.6110.016.894.734.825.49 May10.328.6314.4518.5210.9810.247.365.355.295.22 June11.068.9814.1519.19.4710.297.65.395.485.55 July11.239.3712.59 19.04 9.0310.477.815.425.316.1 August11.649.5610.1217.829.6110.948.045.95.296.14 September11.39.4510.3115.8710.8711.438.456.145.256.24 October9.999.489.7115.0812.8113.778.966.475.025.82 November9.439.349.213.3115.8513.189.766.514.955.22 December8.389.478.9512.3718.913.7810.036.564.655.2 Source: Federal Reserve RuMAC

18. 18 Historical 30 year Fixed-Rate Mortgage Rates 19821981198019791978197719761975 Rate January17.4814.912.8810.399.018.729.029.43 February17.615.1313.0410.419.148.678.819.1 March17.1615.415.2810.439.28.698.768.89 April16.8915.5816.3210.59.358.758.738.82 May16.6816.414.2610.699.578.838.768.91 June16.7 12.7111.049.718.868.858.89 July16.8216.8312.1911.099.748.948.938.89 August16.2717.2812.5611.099.788.949 September15.4318.1613.211.39.768.98.989.12 October14.6118.4513.7911.649.868.92 9.22 November13.8217.8214.2112.8310.118.928.819.15 December13.6216.9514.7912.910.358.968.799.1 Annual Average 16.0416.6313.7411.29.648.858.879.05 Source: Freddie Mac RuMAC

19. 19 The Result… The ultimate cost of the crisis was estimated to total around USD$150 billion, about $125 billion of which was consequently and directly subsidized by the U.S. government, which contributed to the large budget deficits of the early 1990s.budget deficits1990s Over 1000 S&L Institutions failed! RuMAC

20. 20 In Russia We are leaving in a magic universe of constantly declining interest rates and rising real estate prices… If real estate market conditions change when the interest rates shall start rising? RuMAC

21. 21 Lets finish with basics: Regulator does not have time to waste… Regulator must realize that there are another jurisdictions If necessary Marx is still available in any Russian public library RuMAC

22. 22 This is who we are.. Prof. Vladimir Ponomarev, CEO – prior to joining RuMAC was deputy head of Russian Builders Association. Originally trained as a mathematitian and physicist he is the author of over 140 scientific publications and books as well as holder of several patents. Along his academic carrier Prof. Ponomarev spent years in the administrative positions, among others as a Deputy Minister of Construction ( Gosstroy). Prof. Ponomarev holds MA in Mathematical Physics from University of Warsaw, PhD in Mathematical Physics from Moscow State University and MA in Economics from Moscow State University Alexander Kazakov, Chief Legal Counsel – prior to joining RuMAC was a senior lawyer at Moscow based law firm Linia Prava and prior to this a Chief Legal Councilor at AIJK. Alex is a member of the group of experts on Mortgage Law and Securitization Law at the Russian Parliament. He brings over 8 years of legal experience practicing Russian corporate and securitization law. One of his most recent achievements was the first on-balance sheet Rubble MBS issue for the Bank of Housing Finance in Moscow. Alex holds a Law Degree from Moscow Institute of International Relations as well as an LLM from University of Leiden, Holland Dmitri Dorofeev, CFO – prior to joining RuMAC worked at Greenwich Financial Services, L.L.C. covering institutional clients as well as working on two pioneering transactions that GFS brought to market – the first rue sale pass-through securitization in Russia for Bank “Soyuz” and pass-through Mortgage Loan securitization for CityMortgage Bank. Dmitri brings over 12 years of experience trading and selling fixed income securities and equity derivatives for Dresdner Bank, Goldman Sachs and Salomon Smith Barney. Dmitri holds an MA in International Economics from Voznesensky Academy of Finance and Economics, St. Petersburg and MBA in Analytic Finance from the University of Chicago Sergei Kaduk – Head of Research. Prior to joining RuMAC, Sergei was a Senior Associate with the KPMG Structured Finance Group in McLean, VA. Sergei has modelled and provided due diligence on numerous MBS, ABS, CDO and NIM transactions, with specialization in whole loan MBS. One of his last assignments at KPMG was advising on the CityMortgage securitization. Sergei holds an M.S. in Mathematics and Applied Mathematics and a B.A. in Economics from Moscow State University as well as an MBA from the University of Virginia Darden School of Business, with a concentration in Finance. Russell Mueller – prior to joining RuMAC worked at Greenwich Financial Services, L.L.C. covering a wide range of major institutional clients in US and UK. Russell’s experience on the US Mortgage Market started with it inception in the late 80s. During his almost 10 years carrier as an MBS trader at Morgan Stanley in New York he traded a wide range of mortgage instruments and their derivatives. In his later years at the firm Russ was running the CMO desk. RuMAC

23. 23 Contact Information: aak@rumac.net www.rumac.net Tel.: +7 (495) 787-1177 RuMAC