Legal Thinking, The Spv Issues Asset-backed Securities

In the United States where the securitization derives, the mechanism of risk remote ("Risk Mechanism") is a key area attractive for scholars to research, which shows a core role of such mechanism in a securitization. The Risk Mechanism, being a substantial principle and critical step of a securitization, safeguards the security and stability of the securitized assets and further secures the benefits and interests of the securities holders by prohibiting the originator's creditors from raising any claims against the securitized assets in case of a bankruptcy of the originator.A special purpose vehicle ("SPV") as a financial and core vehicle for the transaction is the substance performing the function of risk remote. The SPV draws a board line between the securitized assets assigned from the originator to an SPV entity and other assets still owned by the originator so as to isolate the risks arising from any bankruptcy of the originator. Currently, the organizational forms for an SPV in different countries can be either trust-based (i.e. special purpose trust ("SPT")) or corporation-structured (i.e. special purpose corporation ("SPC")).Since 2005, with respect to credit assets, China has sweepingly started an attempt of securitization in the form of SPT. Adopting SPT form is mainly due to the Chinese trust system per se and other factual significance to the Chinese current legal system. With the development of such securitization attempt and the whole securitization market, applying the only form for an SPV gradually appears insufficiency, and the Risk Mechanism is necessary to be improved.Some developed countries who already practiced securitization for several decades have established more systematic transaction structures and principles, which provides sophisticated experience to Chinese securitization. In this research paper, the author will respectively comment and analyze on the securitization of the United States and China and will propose her own viewpoints based on comparison, from a historical perspective and by means of legal hermeneutics. Due to a long history of corporate system with comprehensive established legal regulations in China, an SPV in the form of SPC, not only SPT, to issue asset-backed securities ("ABS") is also practical. The author further views that the Risk Mechanism is one of the goals of securitization, as well as a protection for the transaction. Transplanting SPC form to China needs to first improve the Risk Mechanism under the current legal frame of China so as to build a firewall for the issuance of ABS by an SPV entity. In sum, in terms of the Risk Mechanism, the analysis under this paper over the legal issues regarding the ABS issued by an SPV entity will be divided into six sections.In the first section, basic concepts of securitization and ABS, and legal meanings of the Risk Mechanism will be described, with the further elaboration of some core issues and decisive functions of the Risk Mechanism in course of securitization. It will also been pointed out that establishment of an SPV entity and true sale of the to-be-securitized assets are two critical steps.Researches on general issues of securitization will be expanded in the second section. Focusing on the value of an SPV for risk remote, the author will clarify the legal functions and characters of the SPV, and the major forms adopted by the SPV in different countries with their special features. Subsequently, from perspectives of other values, taxation and accounting, the structure of single tier SPV and the double tier SPV will be discussed.The third section is centered on the research of the Risk Mechanism for an SPV. Such Risk Mechanism includes the risk of bankruptcy remote of an SPV itself and other external organizations. It will also be analyzed that emphasis on the corporate governance, design of decision-making procedures and arrangement of terms of the establishment documents, e.g. the articles of association, has great significance to an SPV's bankruptcy remote. When an SPV tackle its relationship with the originator, establishing party, service agency and other external organizations, it shall take a diversity of measures to prevent the securitized assets from mixing with other assets owned by the external organizations by means of true sale, independence of the SPV from its establishing party, and specialized management of the cash flow.Based on the analysis in the previous chapters, in the fourth section, rules under the US bankruptcy laws, such as revocable rights, preference transfer, fraudulent transfer, substantive consolidation and etc will be introduced. In particular, issues of true sale in constructing the Risk Mechanism, involving the accountant standard, legal standard and redefinition of a true sale, will be discussed. This section covers not only the traditional standards of a true sale but also the consideration of impact of bankruptcy laws to such true sale.In the fifth section, the author will discuss the forms available for an SPV to issue ABS in China. Based on commenting the essential legal features of the trust system, it will be testified that SPT is the most practical form for an SPV in China currently, which, however, still exists some defects while applied. The author will then put forward her own propositions with reference to the securitization practice in foreign countries.In the sixth section, with respect to the Risk Mechanism, the author will raise her own suggestions for establishment of an SPV in the form of SPC by comparison with the securitization in the United States and other countries and areas. Finally, a conclusion will be reached that in case of introduction of SPC form in future, improving the Risk Mechanism shall rely on a good legal system, including but not limited to, entrenching legal standards for a true sale, applying rules of a fraudulent transfer, delaying transplanting the rules of substantive consolidation, perfecting legal procedures for assets transfer, and isolating bankruptcy of the SPV entity and so on.