On February 26, 2013, the China Securities Regulatory Commission (the “CSRC”), aiming to expand its asset securitization program and boost liquidity, published Provisions on the Administration of Securities Companies’ Asset Securitization Businesses (Consultation Draft) (the “Draft Regulation”) and sought public feedback on the Draft Regulation. The Draft Regulation would allow asset-backed securities to be created based on a wide array of assets and would lower the threshold for a securities company to engage in such business.
China launched a pilot program for securities companies’ asset securitization businesses in 2005. Since then, the CSRC had suspended the program during the subprime mortgage meltdown 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 Draft Regulation would lift certain restraints from prior regulations and provides guidance for the asset securitization industry.
A summary of the Draft Regulation follows:
1. Asset Securitization Business Under the Draft Regulation
The Draft Regulation would apply when a securities company, acting as manager of a special-purpose vehicle (“SPV”), obtains assets from an originator through a transfer or other means (e.g., setting up a trust) and issues securities that are paid from cash flows generated from the transferred assets. Under the Draft Regulation, in the event of a bankruptcy of the originator, the manager (i.e., the securities company), the custodian, investors in the SPV, or any other party involved, the SPV’s assets would not form part of the bankruptcy estate of any such person. The custodian would have to be a commercial bank, 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.
The Draft Regulation would expand the assets that can be securitized to include (i) property rights, including accounts receivable, credit assets, beneficial interests in a trust, and infrastructure income rights, (ii) securities, including commercial paper, bonds, credit derivatives, stocks, and equity derivatives, and (iii) real property, including commercial properties. In addition, cash generated from the securitized assets could be used to purchase new assets, which can be added to the pool of securitized assets. According to the Draft Regulation, the securitized assets could not be subject to any encumbrance (e.g., mortgage or pledge) or any form of limitation on the originator’s rights subject to minor exceptions.
To ensure the payment of all or a portion of the asset-backed securities issued by the SPV, the SPV could use various forms of credit enhancement. The SPV could issue different classes of securities, but all securities in the same class would be required to have the same rights and subject to the same risks.
2. Threshold Lowered and Further Restraints Lifted
The Draft Regulation would lower 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. Under the Draft Regulation, a securities company would be eligible to apply to conduct an asset securitization business 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 would have the discretion to invest its assets or the assets of any collective investment scheme or fund it manages in the SPV.
The fact that an originator and a securities company are related would not preclude the securities company from creating an SPV and serving as manager of the SPV, although the securities company would have strict information disclosure obligations. According to the Draft Regulation, the manager would be required to disclose certain types of material relationships with the originator, such as ownership of over 5 percent of the originator’s shares, or vice versa, or any provision of underwriting and financial advisory services in the past three years. When one of these relationships is present, the manager and the originator would be required to implement a mechanism to deal with the conflicts of interests. The Draft Regulation would not limit the amount of a securities company’s (i.e., a manager’s) investment in the SPV or the ratio of that investment to the SPV’s total capitalization.
3. Liquidity Increased
One of the main purposes of the Draft Regulation is to increase the liquidity of asset-backed securities in the PRC. An asset-backed security could be offered through a public offering or a private offering. It could be offered to the public if it satisfied the following requirements:
i). the originator complies with laws, administrative regulations, its bylaws, and applicable national industrial policies;
ii). the amount of the asset-backed securities issued is RMB50 million or more; and
iii). the asset-backed securities are rated AA or above by two credit rating agencies.
An asset-backed security could be privately offered to institutional investors and qualified individual investors, with a limitation of no more than 200 purchasers.
The Draft Regulation includes provisions that would allow asset-backed securities to be traded on the stock exchanges, the inter-dealer quotation and transfer system of the Securities Association of China, the OTC trading markets for securities companies, and other exchange venues approved by the CSRC. An asset-backed security that is publicly offered also could be listed and traded on the stock exchanges and used as collateral for a repurchase agreement. In addition, a securities company could act as a market maker that quotes both bid and ask prices in an asset-backed security.
4. Simplified Review and Approval Proceedings and Regulatory Arrangements
A securities company must seek approval from the CSRC before issuing asset-backed securities. Compared to prior regulations, the Draft Regulation would simplify these review and approval proceedings. Under the Draft Regulation, a securities company would apply directly to the CSRC to offer a privately offered asset securitization product, without obtaining prior opinions from the stock exchanges. For a publicly offered asset securitization product, the CSRC would hold an expert hearing to review its feasibility.
The Draft Regulation would specify the respective responsibilities of the CSRC’s agencies, stock exchanges, registration and settlement institutions, and relevant self-regulatory organizations with regards to the asset securitization business.
If implemented, the Draft Regulation should help to boost China’s asset securitization business 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《美国新闻与世界报道》（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.