United States: The Rising And Booming Chinese Securitization Market – A Comparison With The European Securitization Market

Last Updated: July 11 2019
Article by Dietmar Helms, Shengzhe Wang, LL.M. and Fugui Tan

Since 2005 the Chinese securitization market has been developing into one of the most vigorous securitization markets. China is now the second biggest securitization market in the world. Over the last fourteen years the Chinese securitization market has learned lessons and experiences from other developed markets, such as the US and EU market models. However, as an emerging market, the Chinese securitization market has developed particular features and has deviated significantly from the US and EU market models. Below we will mainly compare the Chinese securitization market and the European securitization market.

Segregated securitizations market

Following the implementation of the new EU Securitization Regulation (Regulation (EU) 2017/2402 ) (the EU Securitization Regulation) on January 1, 2019, there are now two kinds of securitizations in the EU, the so-called simple, transparent and standardized securitizations (STS) and other securitizations which do not fulfil the STS criteria.

The STS criteria include:

  • Simplicity requirements: the originator/ sponsor/original lender must ensure simplicity of the transaction structure and homogeneity of the securitized assets. "Homogeneous" for these purposes means being in the same asset type where the contractual, credit risk, prepayment and cash-flow related characteristics are sufficiently similar;
  • Transparency requirements: the originator/sponsor/original lender must ensure the availability of sufficient information on the securitized assets, transaction structure and parties involved in the transaction. These go beyond the general disclosure obligations and include disclosure of static and dynamic historical default and loss performance data, an external verification of a sample of the underlying exposures and a liability cash flow model;
  • Standardization requirements: the originator/sponsor/original lender must ensure that investors are able to understand and compare securitization transactions without relying on third party assessments. The standardization criteria include, among other matters, requirements for key provisions in documentation and servicer expertise.

The main benefit of a securitization complying with the "STS" criteria concerns only preferential regulatory capital treatment like the liquidity coverage ratio (LCR).

In comparison, China has four segregated securitization markets which comprise of different originators, provide different platforms for the issuance and trading of securitization products and are subject to separate regulatory regimes and different administrative authorities:

  • Credit asset-backed securitization (credit ABS) issued by banks and non-banking financial institutions through special purpose trusts on the China Interbank Bond Market (CIBM), including assets such as residential/commercial mortgage, auto loans, corporate SME loans, credit card receivables and customer loans;
  • Corporate assets-backed securitization (corporate ABS) issued by enterprises through special asset management plans (SAMP) mainly on stock exchanges, including assets such as consumer loans, trade receivables, factoring receivables, leasing receivables, trust beneficiaries, fee income and REITs;
  • Asset-backed medium-term notes (ABN) issued by non-financial enterprises through special purpose trusts or special purpose companies on CIBM, including assets such as leasing receivables, trade receivables, factoring receivables, notes receivables, commercial mortgage and fee income; and
  • Asset backed plans (ABPs) issued by insurance asset management companies on insurance exchanges (e.g. the Shanghai Insurance Exchange) (this market has a very small market share).

Form of the securitization special purpose vehicle

A securitization special purpose vehicle is an entity established for the purpose of carrying out securitizations. Its activities are limited to those appropriate to accomplishing that objective. This kind of transactional structure is intended to isolate the assets of the issuing entity from those of the originator. In Europe, the special purpose vehicle is usually in the form of a corporation like a section 110 company (an Irish tax resident company, which qualifies under Section 110 of the Irish Taxes Consolidation Act 1997 to help the International Financial Services Centre legal and accounting firms compete for the administration of global securitization deals, and by 2017 was the largest structured finance vehicle in EU securitization). As an independent entity, such special purpose vehicle can easily satisfy bankruptcy remoteness from the originator.

In China, the majority of securitization transactions use the form of a trust (for credit ABS and ABN) and the so-called special assets management plan (SAMP, for corporate ABS) as the special purpose vehicle. The form of passive company used in European securitization transactions is not permitted under the Chinese Company law pursuant to which a company that fails to commence business within six months after its establishment or which ceases to engage in business for a period of six months or more after commencing business should be liquidated. Under the Chinese Trust Law, trust and investment companies may hold credit assets in trusts and issue ABS notes as issuers. The assets entrusted to the trusts are separated from the assets of originators and the issuers in case of the bankruptcy of the relevant originator and issuer.

The SAMP structure for corporate ABS is actually only a contractual arrangement, which lacks legal clarification of its nature. Theoretically, the receivables which are transferred to the managers (usually securities firms or subsidiaries of fund management companies) are independent from all parties (originators, managers and custodians etc.) and should not be included in the bankruptcy property of the originator, the manager and/or the custodian in case any of such parties is liquidated due to dissolution, or declared insolvent in accordance with the Chinese laws

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