Legal and Regulatory Securitisation Framework in Asia

1
Legal and Regulatory Securitisation Framework in
Asia

• A comparative study Hong Kong, South Korea,
  Taiwan and China
• Paul Kruger
• 8 November 2005

2
Introduction

• Many Asian corporates and financial institutions
  have adopted securitisation as part of the core
  funding strategy to tap into the domestic and the
  international capital markets.
• Economics is the main driver of the development
  of each securitisation market. The legal and
  regulatory environment dictates whether a
  transaction is feasible and influences the
  ultimate funding structure.

3
Introduction (contd)

• Two models
• General Law - Hong Kong
• Specific Enactment - South Korea, Taiwan and
  China
•  
• Discussion
• the typical securitisation structure used
• the regulatory requirements for securitisation
  transactions
• the legal and practical execution issues

4
South Korea

• The enactment of the ABS Act in 1998 provided the
  foundation for the growth of the Korean
  securitisation market
• a Korean SPV may be established with minimum
  capital of Won 10million
• upon registration of the transfer of assets with
  FSC, the transfer is perfected against third
  parties (but not the obligors) under the Korean
  law
• clearly stipulates the conditions which are
  required for a transfer to be deemed as true sale
  
• Today, Korea is the largest securitisation market
  in non-Japan Asia.

5
ABS Act

• However, the ABS Act did not address certain
  issues
• Taxation issues withholding tax, stamp duty and
  income tax
• Secured Bond Trust Act the result is unsecured
  securities for the domestic market and double SPV
  structure for the international market

6
Standard double SPV Structure
Static Pool
Seller
KRW Purchaser Junior Note
Sale of Assets
Korean SPV
Swap Counterparty
Swap
Foreign Currency Bond Security
Pledge

Offshore SPV
Notes

Investors
7
Standard double SPV Structure (contd)
Revolving Pool
Seller
Settlement of Assets
KRW Seller and Subordinated Certificates
Trustee

KRW Investor Certificate
Korean SPV
Swap Counterparty
Onshore
Swap
Foreign Currency Bond

Offshore
Offshore SPV
Notes

Investors
8
FSC Approval Process

• All securitisation transactions executed under
  the ABS Act regime must comply with the
  registration requirements
• Filing of Securitisation Plan with FSC.
• Registration of the transfer of securitised asset
  with the FSC

9
Application of ABS Act

• If the securitisation transaction involves short
  term assets, each sale of assets during the
  revolving period must be registered with FSS.
• The ABS Act only allows for the registration of
  one securitisation plan for one SPV
• no use of master trust structure
• higher transaction costs for repeat issuer (less
  efficient funding tool)

10
Application of ABS Act (contd)

• Structure CMBS
• Asset class Keun mortgages, RMBS
• Required by law for the secured amount to be
  fixed prior to a transfer
• Under ABS Act, the secured amount is deemed fixed
  on the day immediately following the date on
  which notice is set
• Impractical timeline and higher cost of
  transaction - notification process in conjunction
  with registration process

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Application of ABS Act (contd) RMBS Filing and
Keun Notification Timeline
(1)
(2)
(1A)
(3)
(4)
(5)
14 - 18 days
10 Business days
Asset Transfer
Notices to Borrowers
Closing
Cut-off Date
Amendment Plan
Filing of Securitisation Plan
Returned Notices and Final Pool Count
12
Taiwan

• Securitisation market in Taiwan developed after
  the enactment of the Financial Asset
  Securitisation Law (FASL) in June 2002

13
Taiwan (contd) FASL

• FASL is designed to set up the framework for
  financial assets securitisation by providing for
• sale of specific types of financial assets by
  specified classes of originator to an SPT or SPC
• upon publication of the transfer notice, the
  transfer of assets is perfected against third
  parties and, if the Originator is the Servicer,
  the underlying debtors

14
Taiwan (contd)

• concessionary withholding tax for ABS, exempts
  business tax, stamp duty, deed tax and
  registration fee
• issue of either trust certificates or debt
  securities

15
FASL - Features of SPT and SPC
16
Cross Border Issuance
Seller
NT Seller Certificate Subordinate Certificate
Assets
Onshore Trustee
Swap Counterparty
Swap
Investor Certificate
NT
Swap
Offshore
Notes

Investors
17
Domestic Issuance
Seller
NT, Seller Certificate Subordinate Certificate
Assets
Onshore Trustee
Swap Counterparty
Swap
Investor Certificates
NT
Investors
18

• Regulatory - What Approvals and which
  Authorities?
• All securitisation transactions executed under
  FASL regime are required to comply with the
  approval requirements.

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Regulatory - What Approvals and which
Authorities? (contd)
20
Regulatory - What Approvals and which
Authorities? (contd)
21
Limitation of FASL

• Tax
• payment of expenses as part of investor yield -
  6 or 20?
• stamp duty on servicing agreements and
  registration fees with respect to transfer of
  mortgages
• gains on swap

22
Limitation of FASL (contd)Mortgages

• after transfer date, each mortgage is required to
  be registered at the relevant land registry (no
  bulk registration process)
• uncertain time frame for enforcement of mortgages

23
Limitation of FASL (contd)Trustee Liability

• Servicer of last resort
• the preference for the trust structure means that
  the Trustee is responsible for the content of the
  Information Memorandum.
• Trustee becomes owner of real property and liable
  for any damages caused by defects in the real
  property

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Limitation of FASL (contd)Restricted scope

• does not set out requirements for true sale
• originators FASL may only be used by financial
  institutions (i.e. corporations need special
  approval from Ministry of Finance)
• asset class chattel secured loans, loans secured
  by real estates, monetary rights (such as credit
  card receivables)

25
China

• Earlier this year, the PBOC and CBRC jointly
  issued the Administration Measures for
  Securitisation of Credit Assets on a Pilot Basis
  (the Measures).
• Main barriers for entering into a securitisation
  prior to the issuance of the Measures
• Lack of issuing vehicle under Chinese law
• Marketability of trust certificates
• Bankruptcy remoteness

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The Measures

• The Measures provide the legal framework for the
  execution of a securitisation transaction
• trustee as the issuing vehicle
• the issuance of asset backed securities (and not
  trust securities) with limited recourse to trust
  assets
• perfection requirements

27
Proposed structure
Seller
Loan Servicer
Credit Assets

Fund Custodian
Onshore Trustee
Asset Backed Securities
Registrar and Custodian

Investors
28
Limitation of the Measures

• originators only financial institutions
  regulated by CBRC
• derivatives no hedging for the securitisation
  transaction
• registration does not provide for registration
  of real estate
• tax does not address tax issues
• Improved but limited investor base

29
Limitation of the Measures (contd) Approval
Process

• Filing documents rating reports, legal opinions,
  accounting opinions, information memorandum,
  application report, articles of originator and
  draft agreements
• Within 5 business days, PBOC confirms whether the
  application will be processed
• If application is accepted, PBOC is required to
  confirm in writing whether the application is
  accepted or rejected within 20 business days.

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Hong Kong

• Securitisation has been employed as a funding
  technique in Hong Kong for more than 15 years.
• There is no specific legislation enacted to
  promote the development of securitisation market.
• The establishment of the Hong Kong Mortgage
  Corporation in 1997 enhances the liquidity of
  residential mortgages.
• In 2004, the Hong Kong Government securitised the
  future toll income to be received from tunnels
  and bridges.

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Typical securitisation structure

• Static Pool

Originator
Assets

Swap Counterparty
Offshore SPV
NT

Investors
32
Typical securitisation structure (contd)

• Revolving Pool

Originator
Seller Certificate
Assets
Trustee
Investor Certificate

Swap Counterparty
OffshoreSPV
Notes

Investors
33
The Legal Framework

• Legal system based on English law with a
  developed body of case law.
• Sale legal and equitable assignment. Notice to
  underlying obligor is required to perfect the
  assignment.
• True Sale and recharacterisation risk - the
  starting point is to have clear sale language to
  express the intention of the parties.
• Insolvency and claw-back risk- unfair
  preference and fraudulent disposition
• Tax
• Tax ruling available
• Stamp Duty
• Withholding tax

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Conclusion

• Specific legislation for securitisation
• Advantage - provides the legal framework for the
  transfer and perfection of assets
• Disadvantage - inflexibility may limit market
  development
• Future developments
• Questions

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• A05577033