Viewpoint... An analysis of the legal impact of asset securitization and China's relevant legal system.
Published:
2024-03-27
The legal impact of asset securitization and the relevant legal system of our country are analyzed.
Asset securitization first appeared in the U.S. financial market in the 1970 s, and was subsequently accepted and adopted by many mature market economies. In recent years, it has been implemented in most emerging market countries. Asset securitization refers to the process of transforming assets that lack liquidity but can generate predictable and stable cash flows into securities that can be sold and circulated in financial markets through certain structured arrangements. The essence of asset securitization is to transform illiquid non-standardized assets into highly liquid standardized assets through structured arrangements, allowing them to be used as collateral or collateral to support other financing. Asset securitization is based on a wide variety of assets, including but not limited to various types of loans, accounts receivable, commercial paper, royalty income, lease fees, utility charges, etc. These assets are converted into securities with stable cash flows, predictable risks and liquidity in financial markets by means of portfolio, cutting, credit enhancement, etc.
The innovation of asset securitization in the legal system lies in the separation of the interests of securitized investors from the credit status of the promoter by isolating the securitized assets from the "bankruptcy" of the promoter, thus avoiding the impact of the promoter's bankruptcy on the holding of securities in order to protect the rights and interests of investors.
Bankruptcy segregation is one of the characteristics of securitization transactions and one of the main factors affecting the success of the transaction. It requires that when the original equity owner goes bankrupt and liquidates, the interest in the securitized asset is not treated as liquidation property, and the income cash flow generated by the securitized asset can still be paid to the investor in accordance with the terms of the transaction contract, thus achieving the purpose of protecting the investor. In order to avoid the adverse effects that insolvency may have on securitized assets, the original equity owner needs to sell the securitized assets in a true sale to a company specially established for securitization transactions. The main criterion for determining a true sale is that the assets sold do not participate in liquidation as legal property in the event of the bankruptcy of the original owner. This depends on the interpretation of national legislation and the jurisprudence of the courts. If the transfer cannot be legally established as a true sale, but is a mortgage financing, it will be difficult for the specific purpose entity to use the cash proceeds generated by the securitized assets to pay the investor's principal and interest in a timely manner, resulting in the investor's claim to the securitized assets being affected by the bankruptcy of the promoter.
China's current laws and regulations on asset securitization mainly include the Measures for the Supervision and Administration of the Pilot Securitization of Credit Assets of Financial Institutions (promulgated by the China Banking Regulatory Commission Decree No. 3 of 2005 on November 7, 2005, effective from December 1, 2005), the Measures for the Administration of the Pilot Securitization of Credit Assets and the Measures for the Implementation of Administrative Licensing Matters for Non-Bank Financial Institutions of the China Banking and Insurance Regulatory Commission (March 23, 2020, China Banking and Insurance Regulatory Commission Order 2020 No. 6 promulgated and implemented on March 23, 2020), etc., are mainly applicable to the securitization of credit assets.
China's law defines the securitization of credit assets, in simple terms, is the sale of credit assets in the form of securities of structured financing activities. The People's Bank of China and the China Banking Regulatory Commission are directly responsible for supervising the securitization of credit assets. The People's Bank of China shall, in accordance with the the People's Republic of China Law of the People's Bank of China, supervise and manage the issuance and trading of asset-backed securities in the national inter-bank bond market in accordance with the law; the China Banking Regulatory Commission shall, in accordance with the the People's Republic of China Law on Banking Supervision and Administration, supervise and manage the credit asset securitization business activities of relevant institutions in accordance with the law. The main principles of supervision and management are as follows:
First, it is only issued and traded in the national inter-bank bond market, and investors are institutional investors with strong risk identification, management and tolerance; second, it emphasizes the special nature of asset-backed securities and prompts investment institutions to pay attention to risks; third, it specifies information disclosure requirements in detail; fourth, it adopts various methods for credit enhancement to meet the risk preferences of different investment institutions; fifth, establish a decision-making mechanism for asset-backed securities holders; sixth, prevent relevant institutions from using special status to exercise control over trust property, so that investment institutions can effectively enjoy trust benefits; seventh, establish a loan redemption or replacement mechanism to prevent banks from selling high-risk loans; eighth, establish a replacement mechanism for relevant institutions to encourage them to perform their duties; ninth, require loan service institutions to set up separate accounts, separate management of credit assets as trust property to reduce operational risk.
The development of credit asset securitization has many practical significance for my country's development of financial markets and maintenance of financial stability: first, it helps to improve the mismatch of banking credit structure, increase the liquidity of bank assets, and accelerate the turnover of credit funds; second, it helps Provide commercial banks' capital adequacy ratio; third, it helps to diversify credit risks; fourth, it helps to develop the capital market; fifth, it helps to adapt to financial opening to the outside world.
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