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 (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

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 Swap Counterparty Korean SPV Swap Foreign Currency Bond + Security Pledge $ Offshore SPV Notes $ Investors

7. Standard double SPV Structure (cont’d) • Revolving Pool Seller Settlement of Assets KRW + Seller and Subordinated Certificates Trustee $ KRW Investor Certificate Swap Counterparty Korean SPV 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 (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

11. Application of ABS Act (cont’d)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 (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

14. 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

15. FASL - Features of SPT and SPC

16. Cross Border Issuance Seller NT$ Seller Certificate Subordinate Certificate Assets Swap Counterparty Onshore Trustee Swap Investor Certificate NT$ Swap Offshore Notes $ Investors

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

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

19. Regulatory - What Approvals and which Authorities? (cont’d)

20. Regulatory - What Approvals and which Authorities? (cont’d)

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 (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

23. 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

24. 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)

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

26. 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 (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.

30. 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.

31. Typical securitisation structure • Static Pool Originator Assets $ Swap Counterparty Offshore SPV NT$ $ Investors

32. Typical securitisation structure (cont’d) • 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

34. 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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