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On 20 June 2002, the Legislative Yuan gave its third and final reading to the Financial Assets Securitization Statute (the "Statute"). “Financial asset securitization” refers to an arrangement whereby a financial institution (the originator) either places its financial assets in trust with a trustee, or sells them to a special-purpose com-pany. The trustee or the special-purpose com-pany then issues securities based on these assets, and uses the cash flow from the underlying assets to pay investors the interest and principal due to them. The purpose of this mechanism is to help financial institutions convert financial assets that are sound but of low liquidity, such as mortgages and credit card loans, into funds that can be used more freely.
The Statute comprises 119 articles. The main points are as follows:
Within the framework provided for by the Statute, originators are in principle limited to banks, credit card institutions, bills finance companies, insurance companies, securities companies, and other financial institutions approved by the competent authority (i.e. the Ministry of Finance, MOF). An enterprise other than a financial institution must obtain prior authorization from the MOF before it may securitize its financial assets under the Statute. Securitizable assets include creditors’ rights in, for example, car loans, mortgage secured loans, credit card loans, account re-ceivables, etc. Eligible trustees are trust en-terprises that meet a minimum credit rating requirement. "Special-purpose company" means a company limited by shares, which is set up with government permission and the sole aim of conducting financial asset securi-tization business. Originators may choose between two vehicles for asset securitization: a special-purpose trust ("SPT"), and a spe-cial-purpose company ("SPC").
Special-purpose trusts: After grouping to-gether financial assets that have similar char-acteristics into an asset pool, the originator entrusts the asset pool to a trustee. The trustee in turn sets up an SPT and raises funds by is-suing and offering beneficiary certificates to the investing public or through private placement. The trustee may itself be the ad-ministrator of the trust property, the raised funds and collection of loan interest and prin-cipal from debtors, or engage a servicer to carry out these functions. The originator may act as the servicer. The cash flow generated from the financial assets, after deduction of administration fees, trustee’s remuneration, credit enhancement fees, and hedging trans-action costs, will be used to pay out principal, interest, or other benefits to beneficiary cer-tificate holders.
Although an SPT has the nature of a trust, certain provisions of the Trust Law do not satisfy the needs of asset securitization. In view of the distinctiveness of an SPT, the Statute modifies the legal relations of super-vision/administration of the trust, and the rights of parties to the trust. For instance, the Statute enhances the functions of trust super-visors, and suspends the application of Article 6 Paragraph 3 of the Trust Law, which pro-vides that if an trustor is declared bankrupt within six months after the establishment of the trust, such entrustment is assumed to be detrimental to interests of trustor's creditors. The Statute also excludes certain provisions of the Trust Law that allow the trustor to file a petition to the court to change the administra-tion method of a trust or to dismiss the trustee.
Special-purpose companies: The Statute pro-vides that an SPC must be set up by a financial institution other than the originator, and must have only one single shareholder. The origi-nator transfers its financial assets to the SPC, which raises funds by issuing and offering asset-backed securities to investors. Regard-ing the administration of the transferred assets, as a principle, the Statute forbids an SPC to pledge, transfer, barter, provide as collateral, or otherwise dispose of them. It also requires the SPC to engage a servicer to act as the ad-ministrator of the assets, or to place the assets in trust with the servicer. The originator may act as the servicer.
An SPC is established to exclusively conduct asset securitization business. Therefore, the Statute closely restricts SPCs' business activi-ties, in order to prevent attachment or seizure of such financial assets by SPC's creditors due to its non-performance arising out of other business activities. An SPC may not act as a guarantor or an endorser, and may not engage in any business other than asset securitization business. Considering the special nature of an SPC, the Statute exempts it from many provi-sions of the Company Law. Also, because an SPC has only one shareholder, a shareholders’ meetings is not necessary, and Company Law’s provisions concerning shareholders’ meetings, therefore, do not apply. However, an SPC must still have one to three directors and one to three supervisors, while these po-sitions may not be occupied by the originator, servicer, or monitor, or their responsible per-sons.
Because issuance and offering of securities involves matters covered by the financial regulatory system, when a trustee issues beneficiary certificates, or an SPC issues as-set-backed securities, it must apply to the MOF for an approval, or register such issu-ance with the MOF. Beneficiary certificates or asset-backed securities may be offered to the public, or to specific individuals through pri-vate placement. Either way, credit of such securities in the trading market may be en-hanced by way of credit enhancement (such as a guarantee provided by the originator, or by a financial institution as defined by the Statute). If a trustee or SPC opts to make a public of-fering, such securities must also be rated by a credit rating agency recognized by the MOF.
Financial asset securitization involves the en-trustment or transfer of creditors’ rights. To make such entrustment or transfer effective against the debtors, notification may be served by the originator, the trustee or the SPC, ac-cording to the Civil Code. The statute pro-vides, the following three additional alterna-tives for notification:
1.The originator makes a public announce-ment before the entrustment or transfer of assets, in the manner and with the content as required by Article 5 of the Statute, and sends documents evidencing such an-nouncement to the debtors;
2.Where the originator acts as the servicer, the originator collects from the debtors; or
3.Other specific agreement between the originator and the debtors.
As a principle, trustees and SPC are not al-lowed to run into debts, in order to maintain their financial soundness. But in consideration of the special needs of short-term cash flow a trustee or SPC may have, this restriction is relaxed on the condition that the purpose of such borrowing is to distribute or repay profits, interest or other benefits. If a trustee or SPC needs to borrow for the above purposes, such intention must be clearly stated in its asset trust securitization plan or the asset securiti-zation plan. In the case of an SPC, such bor-rowing requires the consent of all directors. If an SPT or SPC has idle funds, their use is subject to the restriction of the Statute.
Operational oversight: To oversee asset secu-ritization plans and their execution, the MOF may at any time inspect the operations or fi-nancial status of a trustee, SPC, originator, servicer or other related parties, or order them to provide financial reports, inventories of property, or other related information within a limited time. Additionally, the trustee or a meeting of beneficiaries of an SPT may ap-point a trust supervisor to monitor the opera-tion procedures of the asset securitization. Trust supervisors is obliged to attend benefi-ciaries’ meetings. To avoid conflicts of inter-est, a trust supervisor may not be an interested party, officer, or employee of the trustee, and may not be the originator. The Statute requires an SPC to appoint a bank or trust enterprise, other than the originator or servicer, as a monitor. The monitor may at any time inspect the asset securitization activities, financial status, and books of the SPC and servicer, and may request the SPC’s directors to make a report.
To prevent an originator from exercising im-proper influence over the operations of a trustee or SPC, and to make the assets held by the trustee or SPC “bankruptcy remote” from the originator, the Statute provides that the trustee, or the financial institution that sets up the SPC, must not be affiliated with the originator. This provision is intended to ensure that the trustee or SPC remains unaffected in the case of bankruptcy of the originator. By doing so it also indirectly protects investors' right to receive principal and interest pay-ments on time.
Tax concessions: Because beneficiary certifi-cates and asset-backed securities are similar in nature to bonds, the Statute provides that trading in them is in principle subject to secu-rities transaction tax at the same rate as for corporate bonds. It also provides for reduc-tions in and exemptions from stamp tax and deed tax arising out of the transfer of assets, and fees for the registration of changes in property rights. For holders of beneficiary certificates or asset-backed securities, income from the trust property is of the nature of in-terest income. Therefore in principle the withholding tax rate is currently left at 6%.
The credit standing of securities is crucial to their negotiability. Looking at the asset securitization systems of other countries, most of the success-ful ones have the following two characteristics, both of which need urgently to be addressed in Taiwan's asset securitization system.
The first is the establishment of criteria for de-termining that a “true sale” has taken place. “True sale” means that when an originator transfers ownership of assets to a trustee or SPC, the rights to administrate, use, and benefit from the assets in question are all transferred together with ownership. If a true sale has taken place, the assets will be unaffected if the originator goes bankrupt, is restructured, or is pursued by its creditors. Effectively insulating the assets from the risk of bankruptcy of the originator in this way also improves the credit rating of the resultant securities.
Looking at the legal systems of other countries, the majority have, over time, developed a set of criteria for determining whether a true sale has taken place. But in Taiwan such criteria have yet to be established, so further effort is required.
The second characteristic is the introduction of a credit rating system. This not only allows a correct understanding of the credit standing of assets, but is also the basis of the credit standing of securities. Thus its importance for asset se-curitization is obvious. Chapter 4 of the Statute makes provisions concerning credit ratings and credit enhancement. The regulatory authority will need to strictly enforce these provisions, to ensure the smooth operation of the asset securi-tization system.
The Statute came into effect upon its promulga-tion by the President on 24 June 2002. The process of asset securitization allows investors to enjoy the economic benefit of the assets con-cerned, while their risk is borne by investors or credit enhancement providers. Asset securitiza-tion should also increase the scale of Taiwan’s financial and securities markets, and help en-hance her's competitiveness in international fi-nancial markets.
