The Risk-remote Institution Of Securitization

Asset securitization is reputed to be by far the most rapidly growing segment of the U.S. credit markets, and its use is rapidly expanding worldwide. The first chapter is generally about asset securitization .Asset securitization is a new financing technique. In a typical transaction, the originator transfers rights to payment from income-producing assets such as accounts receivable, loans, or lease rentals– or frequently undivided interests in such rights– to a special purpose vehicle, or"SPV."The SPV, in turn, issues securities to capital market investors and uses the proceeds of the issuance to pay for the receivables. The investors, who are repaid from collections of the receivables, buy the securities based on their assessments of the value of the receivables. This article tries to explain the risk-remote institution of Securitization. Then, the article introduced the relationship between securitization and the risk-remote institution, including the importance of the risk-remote institution and the meaning of the risk-remote institution.Then the second chapter is about the legal matter of the risk-remote institution, including issues of special purpose vehicles, true sale, bankruptcy-remote theory and substantive consolidation. Given that the U.S. has the most sophisticated ABS market in the world, this article draws on the experience in America. Special purpose vehicles (SPVs) should be simple to establish and operate. The fundamental concept of an asset securitization transaction is that by setting up a bankruptcy-remote SPV, certain financial assets of the originating entity will be isolated and investors will look to the isolated assets to evaluate the investment risks and returns. Perhaps the most critical issue in a securitization is whether the investors will continue to be repaid in the event of the originator's bankruptcy. If the SPV owns the receivables, its investors will continue to be repaid; if not, their right to be repaid will be suspended and subject to possible impairment. The SPV will own the receivables only if the transfer of those receivables from the originator to the SPV constitutes a sale under applicable bankruptcy law, which usually referred to as a"true sale."whether a transfer is a true sale or secured loan should be clarified. The transfer from the originator to the SPV should be a so-called true sale. A true sale means a transfer of assets where the transferor no longer has any legal or equitable interest in the assets. It is necessary to distinguish a true sale from a secured loan. The bankruptcy remote status of an SPV is critical to the overall structure of an asset securitization transaction. The concept of substantive consolidation refers to a bankruptcy court's power to consolidate ostensibly separate but related entities and treat the assets and liabilities of the entities as if they belong to a single entity. In the U.S., an SPV is typically a newly created entity in the form of a limited liability company, a business trust or a corporation under state corporate laws.The American corporate laws for creating a business entity to engage in specified activities are flexible. As long as minimum formalities are observed, there are no restrictions on capital structure or ability to issue debts. In comparison, Chinese laws impose significant legal impediments on establishing a separate and independent SPV.Chinese bankruptcy law should set forth criteria for a substantive consolidation analysis To adequately isolate assets transferred from an originator to an SPV, the structure of an asset securitization transaction must minimize the risk of a substantive consolidation in event of the originator's bankruptcy.The third chapter introduced the risk-remote institution in China. China's financial system has been undergoing a fundamental transformation since the country joined the World Trade Organization in November 2001. Under the WTO agreement, China must open its financial market to foreign competition by 2006. To strengthen its financial system and prepare for the anticipated fierce competition from foreign banks, China has taken numerous measures to bolster its banks. China is also striving to modernize its capital market and one of the initiatives is to create an asset backed securities (ABS) market. A mature ABS market would offer Chinese banks the opportunities to diversify risks, increase liquidity and raise capital more efficiently. The potential for an ABS market in China is also enormous.To establish a comprehensive legal framework for asset securitization, Chinese laws should be more liberal and flexible for corporate entities to create a SPV and issue debt securities. Chinese trust law and related regulations are similarly restrictive for issuing debt securities. The restrictions for issuing corporate bonds under Chinese law render the establishment of an SPV prohibitively expensive.Under the ABS Regulation, the People's Bank of China has authorizes the establishment of a special purpose trust for the specific purpose of facilitating an asset securitization under the pilot program. But the restrictions on issuing debt securities under Chinese laws remain in effect. The Regulation guarantees the bankruptcy remote status of the special purpose trust by providing that in the case of the originator or the trust's bankruptcy, liquidation or reorganization, the trust assets are not properties of the bankruptcy estate. The legal relationship between the originating bank and the special purpose trust would be governed by a trust agreement that would specify the rights and obligations of parties, servicing and management of the assets, asset portfolio and termination events.