Asset Securitization And Its Legal Problems

Asset Securitization refers to such activities that one puts assets with foreseeablecash flow into a package and distributes the same in the financial market as securities.Such securities are called Asset Backed Securities (ABS). Different from shares andbonds, the holder of such securities may claim interest deriving from the cash flow ofcertain asset pool or its remaining values rather than those from a business entity.From the legal perspective, the asset pool is represented by a Special Purpose Vehicle(SPV) which may take the form of trust, company or others. Asset Securitizationhas been one of the most important financial innovations in the international financialfields since 1970s. As an instrument for raising money, asset securitization has seenan astonishing development and is blooming over the world. In China, the practiceof asset securitization emerges earlier than the theory. However, because of the lackof market and legal environment, people having been feeling their way for the assetsecuritization since 1992 when the municipal government of San Ya publicly issuedthe real estate investment instruments, until the pilot of credit assets securitization andhousing loan securitization initialed by China Development Bank and ChinaConstruction Bank is formally approved by the People's Bank of China in March,2005. After that, series of policies and regulations were promulgated by the relevantauthorities, which became the symbol of the standardization and legalization of theasset securitization in China. If discuss from the micro-level, the asset securitizationmay help the relevant market players disperse or divert the credit risks, increase thefluidity of their assets, expand channels for raising money and improve theirasset-liabilities structure. It provides various investment instruments for thefinancial market. If discuss from the macro-level, such practice not only introducesnew financial business and products into China, but also contributes to the reforms ofthe relevant legal system and other mechanism, which will finally have greatinfluence in the reform, innovation and development of the market economy of China. China's asset securitization is still on the elementary stage and has a lot of legal obstacles. Therefore, it is very important to borrowing in the successful experience of the leading countries in asset securitization. By introducing such successful experience and with an deep analysis into the legal environment of asset securitization in China, this article makes a preliminary discussion on the improvement and perfection of China's legal system of asset securitization with the current situation of China in mind.This article could be generally divided into three parts:Part I is a summary of asset securitization, in which the meaning, origins and history of asset securitization are mainly discussed, and the features and operation process of asset securitization will also be introduced, together with an analysis on the legal relationship of asset securitization. The process of asset securitization is constituted by a series of legal activities, most of which are negotiating and making contracts. Such process itself is a composition of complicated legal relationships. Therefore, this article starts the analysis from the subject, object and content of the legal relationship of asset securitization. This Part also gives a brief introduction of the practice and the relevant legal environment of asset securitization in other countries, with our comments followed.Starting with the functions and benefits of asset securitization, Part II explains the necessity for promoting asset securitization in China, and introduces the development status of asset securitization in China and the formation of the relevant legal environment of credit assets securitization through several cases of successful asset securitization made during China's exploration. Take the above as a basis and considering the legal environment of asset securitization and the actual situation of China, the article continues to analyze the relevant legal issues encountered during the current asset securitization in China, for instance, the confliction between the Trust Law and the Bankruptcy Law with respect to risk isolation, its inconformity with the current rules on fund raising; the difficulties in complying with the rules onnotification required for transfer of debt or mortgage. Furthermore, the article also takes a look at the relevant legal issues such as the issuance and trading of ABS, credit enhancement, credit grading and tax, etc.Part III puts forward some suggestions on the future legislation of asset securitization in China based on the legal issues raised in Part II. Firstly, by comparing the legislation models for asset securitization in other countries, that is, the decentralized regulatory model of Anglo-Saxon system and the comprehensive regulatory model of the Continental system, the article brings out our own choice of the legislation model for asset securitization, i.e. the separate legislation model. Based on such model, the article lists out the relevant suggestions for the separate legislation of asset securitization in China, which may finally improve the current legal system of China.