ASIFMA Securitisation in Asia 2018 Table of Contents I. EXECUTIVE SUMMARY (ASIFMA) ........................................................................................... 5 II. WHAT IS SECURITISATION (CLIFFORD CHANCE) ...................................................................... 6 1. BACK-TO-BASICS .............................................................................................................................. 6 2. THE OLD AXIOMS OF SECURITISATION AND THE GLOBAL FINANCIAL CRISIS ................................................ 8 3. HOW SECURITISATION CAN BE USED TO BENEFIT THE ECONOMY AND STRENGTHEN THE FINANCIAL SYSTEM .. 9 4. RATINGS IN SECURITISATIONS .......................................................................................................... 12 III. STATE OF SECURITISATION IN CHINA (KING & WOOD MALLESONS) ...................................... 16 1. OVERVIEW – SECURITISATION IN THE PRC ......................................................................................... 16 2. THE PRC REGULATORY LANDSCAPE .................................................................................................. 17 2.1. History overview ................................................................................................................ 17 2.2. The CBIRC SPT structure .................................................................................................... 18 2.3. The CSRC ABSP structure ................................................................................................... 21 2.4. NAFMII ABN Structure ....................................................................................................... 23 2.5. Main differences ............................................................................................................... 26 2.6. China CMBS and Quasi-REITs ............................................................................................ 28 2.7. Cross-border structures ..................................................................................................... 33 3. RECENT MARKET TRENDS ............................................................................................................... 35 3.1. Asset types ........................................................................................................................ 35 3.2. Key structural features in recent PRC securitisations ........................................................ 36 3.3. Rating ................................................................................................................................ 36 3.4. Recent deal list .................................................................................................................. 37 4. PARTICIPATION IN THE PRC SECURITISATION MARKET ......................................................................... 41 4.1. Offshore financial institutions ........................................................................................... 41 4.2. Offshore investors ............................................................................................................. 42 4.3. Bond Connect .................................................................................................................... 43 4.4. NPLs ................................................................................................................................... 43 5. LEGAL ISSUES IN PRC SECURITISATIONS ............................................................................................. 46 5.1. Legal true sale ................................................................................................................... 46 5.2. Bankruptcy remoteness..................................................................................................... 48 5.3. Perfection requirements for a transfer of receivables ...................................................... 49 5.4. Transfer of security interest connected to a receivable .................................................... 50 5.5. Commingling risk ............................................................................................................... 51 6. CONSIDERATIONS FOR FUTURE REFORM ............................................................................................ 51 6.1. Single securitisation framework ........................................................................................ 52 6.2. Tax treatment ................................................................................................................... 52 6.3. Direct foreign investment .................................................................................................. 52 IV. STATE OF SECURITISATION UK, US AND REST OF ASIA (ASIFMA AND MUFG) .................... 53 1. US AND EUROPE ........................................................................................................................... 53 2. REST OF ASIA ................................................................................................................................ 56 Page 2 of 130 2.1. South Korea ....................................................................................................................... 56 2.2. Singapore .......................................................................................................................... 61 2.3. India .................................................................................................................................. 63 V. INTERNATIONAL REGULATION AND DISCLOSURE (CLIFFORD CHANCE) ................................. 70 1. REGULATORY CONSIDERATIONS – EUROPE ......................................................................................... 70 2. TERRITORIAL CONSIDERATIONS – US ................................................................................................ 71 3. DISCLOSURE REQUIREMENTS ........................................................................................................... 72 4. LIABILITY COMPARISON TABLE ......................................................................................................... 74 VI. COVERED BONDS (FITCH RATINGS) .................................................................................. 75 1. WHAT IS A COVERED BOND? ........................................................................................................... 75 2. DEVELOPMENT OF ASIAN COVERED BONDS ....................................................................................... 75 2.1. Development Timeline of Covered Bonds in Asia .............................................................. 76 2.2. Other Countries and Challenges ........................................................................................ 78 2.3. Regulatory Recognition of Asia-Pacific (APAC) Covered Bonds ........................................ 79 3. STRUCTURAL FEATURES AND RISKS OF COVERED BONDS ...................................................................... 80 3.1. Covered Bond Structures and Frameworks ....................................................................... 80 3.2. Resolution and Risk of Bail-In ............................................................................................ 82 3.3. Cover Pool Asset Segregation ........................................................................................... 82 3.4. Cover Pool Asset Types ...................................................................................................... 83 3.5. Privileged Swaps ............................................................................................................... 84 3.6. Over-Collateralisation and Asset Valuation ...................................................................... 85 3.7. Demand Loan/Note Funding Excess OC ............................................................................ 85 3.8. Liquidity Protection Mitigating Mismatches ..................................................................... 86 3.9. Ongoing Supervision and Administration ......................................................................... 87 VII. THE RATINGS FRAMEWORK FOR SECURITISATION (MOODY’S) ......................................... 88 1. LEGAL AND REGULATORY SITUATION INFLUENCES CREDIT RISK .............................................................. 88 2. UNDERLYING ASSETS ARE KEY DRIVERS OF CREDIT RISKS ...................................................................... 90 3. OPERATIONAL AND COUNTERPARTY RISK INFLUENCE CREDIT QUALITY ................................................... 90 4. STRUCTURE AND CREDIT ENHANCEMENT AFFECT RISK ......................................................................... 91 5. CURRENCY AND INTEREST RATE RISKS APPLY TO SECURITISATION TRANSACTIONS .................................... 92 6. POLITICAL AND ECONOMIC FACTORS MAY POSE CREDIT RISKS .............................................................. 92 VIII. TAXATION ISSUES IN SECURITISATION (ERNST & YOUNG) ................................................ 94 1. TAXATION OF SECURITISATION ARRANGEMENTS ................................................................................. 94 2. TAX POLICY OBJECTIVES (NEUTRALITY AND CERTAINTY) ....................................................................... 94 3. THE ORIGINATION OF THE SECURITISATION TRANSACTION .................................................................... 95 4. THE LIFE OF THE SECURITISATION TRANSACTION