The China Securities Regulatory Commission (the “CSRC”), aiming to expand its asset securitization program and boost liquidity, recently published Provisions on the Administration of Securities Companies’ Asset Securitization Businesses (the “New Regulation”). The New Regulation became effective on March 15, 2013. Prior to launching the New Regulation, the CSRC issued and sought public feedback on a draft version of the regulation on February 26, 2013 (the “Draft Regulation”), a summary of which can be found in our recent alert on the Draft Regulation. The New Regulation reflects certain comments received by the CSRC from the public. This alert summarizes the major differences between the Draft Regulation and the New Regulation and highlights some of the other provisions of the New Regulation.
As noted in our previous Alert on the Draft Regulation, China launched a pilot program for securities companies’ asset securitization business in 2005. Since then, the CSRC had suspended the program during the subprime mortgage crisis and the resulting global financial crisis. China re-launched its asset securitization program in 2012. Fewer than 20 corporate asset securitization projects have been approved by the CSRC to date, and the liquidity of asset-backed securities remains low. The New Regulation allows asset-backed securities to be created based on a wider array of assets, lowers the threshold for a securities company to engage in such business, and provides guidance for the asset securitization industry.
2. Major Differences Between the Draft Regulation and the New Regulation
Under the Draft Regulation, an asset-backed security could be offered through either a public offering or a private offering. However, the option to offer to the retail public has been removed. Under the New Regulation, asset-backed securities may be offered only to “qualified investors” in a private offering, subject to a limitation of no more than 200 offerees. The New Regulation does not define the term “qualified investors” and instead gave the power to the Securities Association of China (“SAC”) to establish the eligibility criteria. Although asset-backed securities may be traded on permitted trading venues where, in some cases, the retail public may trade securities (including recognized stock exchanges in the PRC, the inter-dealer quotation and transfer system of the SAC, the OTC trading markets for securities companies, and other exchange venues approved by the CSRC), they may only be transferred to qualified investors and held by no more than 200 qualified investors at any given time.
Under the Draft Regulation, assets that could be securitized include (i) property rights, including accounts receivable, credit assets, beneficial interests in a trust, and infrastructure income rights, (ii) real property, including commercial properties, and (iii) securities, including commercial paper, bonds, stocks and related derivative instruments. However, securities as an asset class have been removed and do not appear in the New Regulation. Instead, the New Regulation gives the power to the CSRC to approve other types of assets or rights (including securities) that may be securitized. The change is evidently not intended to narrow the types of assets that can be securitized, but is intended to enable the CSRC to better control risks involved.
Certain types of relationships between the originator and the securities company in a securitization transaction that may create a conflict of interest are required to be disclosed to investors. Under the Draft Regulation, such relationships include the ownership of more than 5% of the originator’s shares by the securities company, or vice versa, any provision of underwriting and financial advisory services in the past three years, and any other mutually beneficial relationship that would be considered material between the originator and the securities company. The New Regulation further provides that disclosable relationships include circumstances where the originator or the security company contributes to more than 5% of the securities company’s or the originator’s capital, respectively. In addition, where any such relationship is present, the manager and the originator are required to implement a mechanism to deal with the conflicts of interests and disclose such mechanism, as well as the relevant risks involved, in the offering materials.
Other provisions that have been included in the New Regulation but did not appear in the Draft Regulation include the timeframe (being two months) within which CSRC will decide whether to approve or reject an application, and the prohibition on any early redemption of asset-backed securities by investors at their discretion or on the winding up an SPV at investors’ sole discretion.
3. Asset Securitization Business Under the New Regulation
The New Regulation applies when a securities company establishes a special-purpose vehicle (“SPV”) that obtains assets from an originator and issues asset-backed securities whose returns are derived from cash flows generated from the transferred assets. The SPV may use various forms of credit enhancement to support the payment obligation with respect to all or a portion of the asset-backed securities issued by the SPV. The custodian must be a commercial bank that is licensed to serve as a custodian, the China Securities Depository and Clearing Company Limited, a securities company that is licensed to serve as a custodian, or a custodian approved by the CSRC.
Under the New Regulation, cash generated from the pool of securitized assets may be used to purchase new assets that are of the same type or types as the securitized assets constituting the pool, and the new assets can be added to the pool of securitized assets. The securitized assets must be free from any encumbrances (e.g., mortgage or pledge) or any form of limitation on the originator’s rights to transfer the assets to the SPV, subject to minor exceptions. The SPV may issue different classes of securities, but securities within the same class are required to have the same rights and subject to the same risks.
Compared to previous regulations, the New Regulation lowers the threshold for a securities company to conduct an asset securitization business by, among other things, removing the minimum required net capital size and classified ratings issued pursuant to Provisions on the Classified Supervision and Administration of Securities Companies, thus allowing more securities companies to be eligible to participate in the securitization market. A securities company is eligible to apply to the CSRC to manage a securitization vehicle if it has a securities asset management business license, is not subject to administrative penalties as a result of material violations of laws and regulations in the past year, and has the capacity to control risks effectively.
The securities company has the discretion to invest in the SPV its own assets or the assets of any collective investment scheme, segregated accounts, or securities investment fund that it manages. The New Regulation does not limit the amount of a securities company’s investment in the SPV or the ratio of that investment to the SPV’s total capitalization.
4. Approval Process
A securities company is required under the New Regulation to seek approval from the CSRC before issuing asset-backed securities, and compared to prior regulations, the New Regulation simplifies the review and approval process. A securities company may apply directly to the CSRC without obtaining the prior consent from any relevant stock exchanges.
The New Regulation specifies the respective responsibilities of the CSRC’s agencies, stock exchanges, registration and settlement institutions, and relevant self-regulatory organizations with regard to the asset securitization business. The CSRC will decide whether to approve or reject an application within two months from the time it receives the application. The New Regulation is expected to further develop China’s asset securitization market, boost liquidity in asset-backed securities in general and facilitate capital formation.
Bingham’s securitization practice is widely recognized for its global market leadership. Our presence spans across the U.S., Europe and Asia. Members of our team have regularly been ranked as leaders in the practice area by Chambers Global, Chambers Asia, Chambers USA and IFLR 1000. We have been named 2013 Securitization and Structured Finance Law Firm of the Year by U.S. News & World Report and Best Lawyers and have represented issuers and underwriters on more securitizations than any other law firm in the U.S. in the past five years, according to Asset-Backed Alert and Thomson Financial. Our Capital Markets team enjoys Band 1 ranking in Chambers USA: America’s Leading Lawyers for Business and is the only Band 1 law firm recommended for both client service and commercial awareness.
斌瀚律师事务所的证券化业务被公认为在全球市场上占有领先地位，我们的业务足迹遍及美国、欧洲和亚洲等市场。我们团队的成员多次被《钱伯斯全球》（Chambers Global）、《钱伯斯亚洲》（Chambers Asia）、《钱伯斯美国》（Chambers USA）和《国际金融法律评论1000》（IFLR 1000）评为证券化业务的领军者。我们被《美国新闻与世界报导》（U.S. News & World Report）和《最佳律师》（Best Lawyers）评为2013年“年度最佳证券化和结构性融资律师事务所”。根据《资产支持简报》（Asset-Backed Alert）和《汤姆森金融》（Thomson Financial）的统计，过去五年，我们代表发行人和承销商负责的证券化项目数量超过美国其他任何一家律师事务所。我们的资本市场团队荣居《钱伯斯美国》（Chambers USA）“美国最佳商业律师”第一梯队之列，并且是第一梯队律师事务所中唯一一家同时以优质客户服务和商业意识而获推荐的律师事务所。
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This article was originally published by Bingham McCutchen LLP.