ASEAN 100

1
Workshop on the Rise of Securitization in East
Asia
7 9 November 2005
Experience of Developing Economies in
Securitization Malaysia - A Regulators
Perspective
Wong Sau Ngan SECURITIES COMMISSION,
MALAYSIA Shanghai 8 November 2005
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• Agenda

• Overview of the Malaysian ABS Market

• Development Initiatives

• Issues and Challenges

• The Way Forward

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Efforts to develop securitization market in
Malaysia accelerated after 1997 financial crisis

• Prior to 2001, ABS market was non-existent due to
  a wide range of legal, regulatory, tax
  accounting impediments
• ABS issuance increased by 139 between 2001 and
  2004.
• As at end-September 2005, the value of
  outstanding ABS is RM 14.08billion (USD
  3.75billion equivalent)

Source Bank Negara Malaysia
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Types of ABS issues in Malaysia thus far

• CDOs are the most common type of asset
  securitised, comprising 37 of total ABS
  outstanding
• Commercial properties are the second most popular
  underlying assets, at 18
• July 2005 saw the first Islamic ABS issue in
  Malaysia, which was based on Musyarakah principles

Collateralised Debt Obligations (37)
ResidentialMortgage (16)
Contract Receivables (17)
Auto Loans (12)
Charge Card Receivables (1)
Commercial Properties (18)
As at August 24, 2005
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• Agenda

• Overview of the Malaysian ABS Market

• Development Initiatives

• Issues and Challenges

• The Way Forward

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What are the benefits of developing ABS market in
Malaysia?



Originator Investor Economy
Lower funding cost due to rating pick-up Obtains liquidity from future cash flows Off balance sheet treatment Expands lending business without increasing capital base Source of fee income for servicer Higher quality securities Products tailored to meet investors specific risks and maturity needs Provides another asset class for investment Creates tradable instruments from illiquid asset (cash flows) Diversifies risk from banking system Enhances depth and breadth of bond market
Lower funding cost
Higher quality
Creates tradable






-
up

securities

instruments from
due to rating pick
illiquid asset (cash
flows)

Obtains liquidity from
Products tailored to
Diversifies risk






future cash flows

meet investors
from banking system

specific risk and
maturity needs

Off balance sheet
New class of security
Reduces reliance on






treatment

to provide greater
banking system

investment
diversity


Expands lending

Adds to depth




business without
breadth of bond
increasing capital
market

base

Source of fee income







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Building Blocks of the Malaysian ABS Market
National Bond Market Committee

• Infrastructure
• Legal Regulatory
• Tax Accounting standards

• Issuer
• Issuance of ABS into market

SC as regulator and facilitator

• Intermediaries
• Facilitate issuance of ABS into market

Asset Securitization Consultative Committee

• Investors
• Provide liquidity

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Steps taken by the SC to develop ABS market in
Malaysia
Establishment of Asset Securitization
Consultative Committee (ASCC)
March 2000

• Made up of industry experts regulators
• Undertake analysis into broader regulatory issues
  that impede securitization in Malaysia
• Report findings provide support in
  implementation efforts

April 2001
Release of ABS Guidelines

• Setting out comprehensive transparent
  regulatory requirements

Nov 2002
Endorsement of ABS Report by NBMC

• Recommendations on legal, regulatory, tax and
  accounting reforms necessary to provide a
  conducive environment for securitization

April 2003
Refinement of ABS Guidelines
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ABS Guidelines Broad guiding principles

• Applicable to all ABS transactions (assets of FIs
  non FIs)
• Efficient approval process within 28 days,
  provided full compliance
• Obtain all other regulatory approvals before
  submission to SC
• One submission for consideration under both PDS
  ABS Guidelines
• To facilitate efficient approval, SC engages
  actively with advisers to clarify on ABS
  Guidelines

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ABS Guidelines Facilitating Issuance
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Custodian of securitized assets Impose prudential
standards on SPV
Facilitate submission for SC approval Provide
transparent requirements (ABS Guidelines)
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Only good assets to be securitized at initial
stage Impose criteria for securitizable assets
Protect assets from originators creditors Impose
criteria to ring-fence assets within SPV
Investor awareness informed decision making
Impose additional disclosure requirements
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• Agenda

• Overview of the Malaysian ABS Market

• Development Initiatives

• Issues and Challenges

• The Way Forward

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Have the benefits been realized?
Remarks
Benefits
Higher credit rating than originator ? Ring-fencing credit enhancement
Conversion of existing or future cash in-flows into tradable securities ? Originator recoups cash flows upfront
New class of assets for investors ? Provides greater risk diversification
Surge in ABS issuances cheaper funding costs X Lack of investor appetite Lack of investor understanding Lack of liquidity legal risk priced in
Remove securitized assets (receivables) from originators balance sheet X Uncertainty of IAS 39 interpretation of true sale from accounting perspective
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Size of ABS market is still small
Size of ABS market vs MGS and PDS

• ABS merely makes up a small segment (about 2) of
  total bond market
• Investors prefer MGS and PDS to ABS
• Denotes huge potential for growth
• More initiatives required to further boost the
  ABS market

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AAA yield differentials between ABS PDS

• All approved ABS involved AAA rated senior
  tranche
• However, ABS are priced at higher yields in
  comparison with yields of comparable AAA PDS of
  similar maturity, largely due to
• Market novelty
• Preference for plain vanilla straight PDS
• Perceived higher risk due to complex structures
• Illiquid nature legal uncertainty priced in

ABS yields
PDS yields
Source SC
What needs to be done to narrow this yield
divergence?
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Initiatives undertaken to address issues
challenges in development of ABS market
LEGAL REGULATORY

• (a) Rationalise approval process
• Previously BNM, SC FIC
• 1 July 2000 SC as sole regulator
• (b) Facilitating Financial Institutions (FIs) as
  Originators
• Blanket approval for FIs to dispose assets for a
  securitization transaction
• Exemption from banking secrecy for FIs to
  disclose info on obligors
• (c) Prudential standards for FIs as Originators
• BNMs Prudential Standards on Asset-Backed
  Securitization
• (d) Transparent regulatory requirements for all
  Originators
• SCs Guidelines on the Offering of Asset-Backed
  Securities

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Initiatives undertaken to address issues
challenges in development of ABS market (cont)
TAX

• Tax Neutral Framework for Originators SPV
• Tax position of originator and Government is not
  changed before and after securitization
• SPV not to be over-burdened by additional tax
• Income treatment of Originator, SPV and Servicer
  clarified

• Originator SPV issuer
• Stamp duty real property gains tax exemptions
• Tax deductibility for issuance expenses incurred
• Investor
• Removal of withholding tax for non-residents
• Exemption on interest income for unit trust funds
  and individuals

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• Outline

• Overview of the Malaysian ABS Market

• Development Initiatives

• Issues and Challenges

• The Way Forward

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Ongoing efforts in addressing issues challenges
in development of ABS market
Director General of Insolvency

• Amendments to Bankruptcy Act 1967
• section 53 - to limit the broad application of
  its deeming provision in relation to preferences
  in securitization transactions
• section 53A - to include book debts that have
  grown due at the date of assignment

Accounting standards

• SC in discussions with industry bodies the
  Malaysian Accounting Standards Board to provide
  greater certainty on interpretation application
  of IAS39 (e.g clarification on de-recognition of
  asset)
• Balance between the extent to which risks,
  rewards control over securitized assets have
  been transferred resulting in a transaction being
  deemed as off-balance-sheet vs. on-balance-sheet

Director General of Insurance

• Secured credit facility status to ABS to provide
  greater investment flexibility to the insurance
  companies

Financial Guarantee Insurance

• Promotion of highly rated monoline insurers to
  provide credit enhancement

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Taking the ABS Agenda Forward A Snapshot
Widen Asset Classes
ABS Benchmark
Reduce Time to Market
Credit Enhancement
Investment Status
Secondary Market Liquidity Price Discovery
Bond Pricing Agency
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Key Reminders

• Diagnostic Process
• All impediments must be identified and must be
  addressed simultaneously
• Inter-agency cooperation is crucial

• Issuer Convenience vs Investor Protection
• Too much of one will affect the other
• These 2 factors must be balanced

• Government Support
• Government support is crucial to success
• Tax framework
• Securitization of government assets/by government
  agencies may provide benchmark for corporate ABS

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Thank you