Legal and Regulatory Securitisation Framework in Asia
A comparative study: Hong Kong, South Korea, Taiwan and China
Paul Kruger
8 November 2005
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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.
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Introduction (cont’d)
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
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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.
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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
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Standard double SPV StructureStatic Pool
Seller
Korean SPV
Offshore SPV
Investors
Swap Counterparty
Sale of Assets
Foreign Currency Bond + Security Pledge
Notes
KRW + Purchaser Junior Note
Swap
$
$
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Standard double SPV Structure (cont’d)Revolving Pool
Seller
Trustee
Korean SPV
Offshore SPV
Swap Counterparty
Settlement of Assets
KRW Investor Certificate
Notes
KRW + Seller and Subordinated Certificates
Investors
Swap
Foreign Currency Bond
Onshore
Offshore
$
$
$
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FSC Approval ProcessAll 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
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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)
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Application of ABS Act (cont’d)
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 (cont’d)
RMBS Filing and Keun Notification Timeline
(1) (2) (1A) (3) (4) (5)
Cut-off Date
Filing of Securitisation
Plan
Notices to Borrowers
Amendment Plan
Returned Notices and Final Pool
Count
Asset Transfer
Closing
14 - 18 days
10 Business days
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Taiwan
Securitisation market in Taiwan developed after the enactment of the Financial Asset Securitisation Law (“FASL”) in June 2002
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Taiwan (cont’d)
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
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Taiwan (cont’d)
– concessionary withholding tax for ABS, exempts business tax, stamp duty, deed tax and registration fee
– issue of either trust certificates or debt securities
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FASL - Features of SPT and SPCSPT SPC
Nature ● Trustee must be established under Taiwan’s Trust Law
● Cannot be an affiliated enterprise of the Originator
● Established under Company Law this approval from MOF● Single shareholder company formed by financial institution not affiliated with the Originator● Lower minimum capitalisation under FASL (NT$100,000)
Ownership ● Trustee holds the legal ownership of assets● Some legal uncertainty with limited recourse provisions
● SPC holds the legal ownership of the assets issues securities “backed” by the assets purchased from the originator
Tax ● Trusts are treated as a “pass through” entities under Taiwanese law and will not be subject to any income, profits or registration taxes other than Gross Business Receipt Tax
● Tax position of a SPC is less clear● Tax neutrality may be difficult to achieve
Issuance ● Beneficiary Securities ● Asset Backed Securities
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Cross Border Issuance
Seller
Onshore Trustee
Offshore
Investors
Swap Counterparty
Assets
Investor Certificate
Notes
NT$ Seller Certificate Subordinate Certificate
Swap
SwapNT$
$
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Domestic Issuance
Seller
Onshore Trustee
Investors
Swap Counterparty
Assets
Investor Certificates
NT$, Seller Certificate Subordinate Certificate
Swap
NT$
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Regulatory - What Approvals and which Authorities?
All securitisation transactions executed under FASL regime are required to comply with the approval requirements.Action Authority Timing & Other
IssuesDocuments
All securitisations under FASL
Approved from the appropriate sections of Bureau of Monetary Affairs (BOMA), MOF
● At least 4 weeks● At closing, opinions from CPA and legal counsel are required to be filed with BOMA
● Trust, servicing and offering documents in “finalised” form● Securitisation Plan● Originator’s and Trustee’s board resolution● True sale opinion from counsel● Fair value opinion from CPA● Rating letter
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Regulatory - What Approvals and which Authorities? (cont’d)
Action Authority Timing & Other Issues
Documents
● Entry into a swap with a non-resident● Overseas issuance of Beneficiary Securities
Consent from Central Bank of China
● Approximately two weeks● Must be obtained before BOMA approval
● Hedging plan ● Confirmation under ISDA Master Agreement
Public Offering of Beneficiary Securities or Asset Backed Securities
Registration with the Securities and Future CommissionTaiwan
Stock Exchange or OTC Securities Exchange
● 12th business day from the date of submission (SFC)● 10th - 11th business days (TSE or OTCSE)● An underwriter (not affiliated with the Originator) must be mandated● Must first obtain BOMA approval
● Application form● Securitisation Plan ● Other documents supporting BOMA application● “Credit enhancement” contract
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Regulatory - What Approvals and which Authorities? (cont’d)
Action Authority Timing & Other Issues
Documents
Clarifications on Tax Issues
Ruling from Department of Taxation of MOF
● No legislative timeframe
● Ruling application prepared by CPA
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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
Limitation of FASL
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Limitation of FASL (cont’d)
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
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Limitation of FASL (cont’d)
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 (cont’d)
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)
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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
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Proposed structure
Seller
Onshore Trustee
Investors$
$
Credit Assets
Asset Backed Securities
Loan Servicer
Fund Custodian
Registrar and Custodian
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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
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Limitation of the Measures (cont’d)
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 structureStatic Pool
Originator
Offshore SPV
Investors
Swap Counterparty
Assets$
$ NT$
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Typical securitisation structure (cont’d)Revolving Pool
Originator
Trustee
OffshoreSPV
Investors
Swap Counterparty
Assets
Investor Certificate
Notes
Seller Certificate
$
$
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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
The Legal Framework
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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