Special Purpose Entities
In the event that the transfer of financial assets from an originator to a special purpose entity (SPE), as defined in 1.2 Special-Purpose Entities, constitutes a “true sale”, the assets will no longer be deemed to be the property of the originator, and are insulated from claims made by the creditors of the originator.
If the transfer fails to constitute a true sale, there is a risk that the asset would still be deemed to be the property of the originator. Hence, if the originator became insolvent, the creditors of the originator would be entitled to claim rights to the asset and may petition the court to prohibit the originator and SPEs from managing and disposing of the assets in an effort to collect debts from the originator.
When the issuer files its application with the regulatory authority for approval, the legal opinion submitted by the issuer should include whether the assets transfer would violate any law or the principle of bankruptcy remoteness. If the transfer is not a true sale, the authority might deny the application.
According to Article 54, paragraph 1; Article 73, paragraph 4; and Article 83 of the Financial Asset Securitisation Act (the Act), the elements that distinguish a true sale from a secured loan are as follows:
According to the Act, the transfer of assets has to meet the conditions of a true sale to achieve bankruptcy remoteness. A secured loan would not entail bankruptcy remoteness, since the insolvency administrator may void any provision of security for an existing debt if the provision of security occurred during the six-month period prior to the adjudication of the bankruptcy (which would mean that it would risk being deemed as the property of the originator if the transfer were to be made void in accordance with the bankruptcy law).
In the event that the assets are transferred as part of a true sale, the originator is not entitled to any rights to the assets, nor to retrieve the assets after a certain period. The SPE’s rights to the assets will not be affected by the originator’s bankruptcy.
Further to the above-mentioned elements distinguishing between true sale and secured loan, a transfer of assets that constitutes a true sale without the intent of infringing the rights of the originator’s creditors, and without any collusion of fictitious expression, would allow the SPE to attain the status of bankruptcy remoteness.
In the event of a transfer with characteristics that are inconsistent with those of a true sale, there are risks that the assets concerned may be deemed to be the originator’s property. The creditors of the originator are entitled to claim rights to the assets and may petition the court to prohibit the originator and the SPE from managing and disposing of the assets, in an effort to collect debts from the originator.
With respect to a secured loan, according to the Bankruptcy Law, the insolvency administrator may void any provision of security for an existing debt, if the provision of security occurs during the six-month period prior to the adjudication of the bankruptcy. Hence, if such a transfer of assets is a secured loan, there is a risk that the transfer might be void if it occurred during this period.
Special Purpose Trusts and Special Purpose Corporations
According to the Act, in the case of issuance of securities either through a special purpose trust (SPT) or through a special purpose corporation (SPC), the provision of counsel opinion is required along with the “asset trust securitisation plan” or “asset securitisation plan”. On the premise that the documents issued by the certified public accountant (CPA) are true and correct, the counsel would opine on whether the transfer in question meets the criteria for a true sale, and whether the status of bankruptcy remoteness has been attained.
In formulating its opinion, the counsel will refer to the CPA’s assessment report, the fair value assessment report and the accountant’s review opinion, and is required to review and examine and issue its opinion in respect of the following:
According to the Act, securities could be issued either by an SPC or by an SPT.
An SPC shall be a company limited by shares established by a sole shareholder, which shall be a financial institution (the originator), under the approval of the competent authority for the purpose of engaging in the business of asset securitisation by issuing asset-backed securities (a warrant or certificate issued by the SPC pursuant to an asset securitisation plan issued for securitisation of the assets, referred to henceforth as the “asset-backed securities”). Furthermore, the originator or its affiliated enterprise shall not act as the trustee (a licensed trust institution, hereinafter the “trustee”) to the SPT, and may be appointed by the SPC as the service institution (the “servicer”) to collect the rights from the debtor.
The SPC shall have at least one and no more than three directors. The directors have a fiduciary duty with respect to the SPC and shall perform their duties with due diligence and represent the SPC externally. When there are several directors, one of them shall be designated, in the articles of incorporation of the SPC, to represent the company externally. In addition, the shareholders shall not transfer their shares to other persons without the approval of the competent authority.
In consideration of the aforementioned requirements to set up an SPC, and the associated fees and taxes, the type of SPE that has been utilised to issue securities in Taiwan is an SPT rather than an SPC. In an SPT structure, the originator entrusts its assets to a trust established by a financial institution. The SPT shall be established and managed in accordance with the financial institution’s control mechanism and trust plan. The directorship requirements and obligations mentioned in the preceding paragraph do not apply in an SPT structure.
As mentioned in 1.1 Insolvency Laws, according to Article 54, paragraph 1 and Article 73, paragraph 4 of the Act, in order to prevent misallocation of an SPE’s assets as assets of the originator, neither the originator nor its affiliates can serve as the SPE.
The transfer of the assets would achieve bankruptcy remoteness provided that it meets the conditions mentioned in in 1.1 Insolvency Laws. As such, in Taiwan there is no risk of consolidation of the originator or its affiliates in insolvency proceedings that would end the bankruptcy remoteness of the SPE.
As mentioned in 1.1 Insolvency Laws, counsel opinion on the bankruptcy remoteness of the SPE is required.
Generally, under the Civil Code of Taiwan, other than provisions governing notifications to be conducted by the obligor, the law imposes no formalities to perfect a sale of assets, neither are any additional formalities imposed on subsequent good faith purchasers.
However, under the Act, instead of notifying the obligor, the transferor of the assets shall make announcements of the variety, quantity, and content of the major assets entrusted to the trustee or transferred to the SPC, in accordance with the provisions of the Act, for three consecutive days in the daily local newspapers circulated at the place of its principal office, or in other ways prescribed by the Financial Supervisory Commission (FSC) in Taiwan. To effectively transfer the assets, the originator shall post a certificate to the debtor proving that the above-mentioned announcement has been made, unless the originator is acting as a servicer in the securitisation case or other substitutes are agreed by the originator and the debtor in their agreement in accordance with the Act. Moreover, additional formalities are imposed depending on the type of assets being transferred.
A notice to the obligor is required when transferring a mortgage loan. Under the Civil Code, there are two types of mortgage loans: general mortgages and mortgages with a specified maximum amount to secure a creditor’s unspecified claim. When a secured loan is transferred, a general mortgage will be transferred to the purchaser simultaneously; such a mortgage may not be transferred by separating it from the claim that it secures. On the contrary, with respect to a mortgage with a specified maximum amount to secure a creditor’s unspecified claim, the mortgage will not be transferred along with the secured loan if the secured claim is transferred to another person prior to confirmation of the creditor’s claim.
Under the Civil Code, there are no additional or different requirements applicable to the sale and perfection or the sales of consumer loans. The requirements are the same as those for financial assets. However, if the seller is a financial institution in Taiwan, the seller shall comply with the regulations promulgated by the FSC with regard to the sale of consumer loans.
Marketable Debt Securities
Various additional requirements apply to different types of securities – that is to say, there are different requirements for sales and perfection of each type of marketable debt securities. Corporate bonds, for example, can be issued as registered or in bearer forms. On the one hand, the sale and purchase of registered corporate bonds require endorsement and delivery. On the other hand, when a seller sells corporate bonds to the purchaser in bearer form, delivery alone will be sufficient to complete the sale. Moreover, either a registered corporate bond or one in a bearer form shall be made by book-entry only.
True Sale and Secured Loan
As stated in 1.1 Insolvency Laws, if a transfer is not a true sale, the authority might deny the application. Therefore, if the transfer of assets is considered a secured loan and is not considered an asset transfer in accordance with the Act, the transferor shall notify its debtor in accordance with the Taiwan Civil Code and will be subject to the Bankruptcy Law if the transfer occurred during the six-month period prior to the transferor’s bankruptcy.
True Sale Requirement
According to the Act, securities may be issued either through an SPC or through an SPT. Transfer of the assets of both SPCs and SPTs should meet the conditions of a true sale. In a true sale, ownership of financial assets will be transferred from the originator to the SPE, and the SPE (ie, the transferee) is entitled to hold and manage the transferred assets. If the transfer fails to meet the requirement of a true sale, the transferee is not able to rule out the risk of the assets being deemed to be the property of the originator, in which case the creditors of the originator would be entitled to request a court to prohibit the transferee from managing and disposing of the transferred assets.
Under the securitisation structure in Taiwan, according to the Act, beneficiary securities and asset-backed securities (referred to collectively simply as the “securities”) may be issued by an SPT or an SPC respectively.
In an SPT structure, the originator entrusts its assets to the trustee. The right to the assets is thereby transferred by the originator to the trustee issuing beneficiary securities to investors.
In such a transaction, while the assets are legally owned by the trustee, the management of them shall be distinct from and shall not be commingled with that of other property owned by the trustee. Moreover, except for the collateral that existed before or was created for the establishment of the trust, no compulsory execution or disposal shall be enforced upon the assets.
In consideration of the originator’s better knowledge of the structure and the proceeds of the assets, the trustee would usually appoint the originator to manage the assets as the servicer.
In the SPT structure, a true sale is the only way to achieve bankruptcy remoteness. The originator shall transfer the underlying claims and the subsidiary rights thereof to the trustee and ensure a clean break between the originator and the assets. In such a transfer, the interest of investors would not be affected by the bankruptcy of the originator or other forms of insolvency proceedings.
When the originator transfers its assets for cash and/or subordinated beneficiary securities, the cash received shall be deemed consideration for the asset, and shall be included in the calculation of net income or loss of the originator for the current fiscal period; income taxes shall be levied on such income in accordance with law. However, when the originator transfers its assets to the trustee, pursuant to the act, such a transfer would be exempt from sales and not subject to business tax.
According to the Act, the revenues of the SPT, after deduction of costs and expenses, shall be deemed income of the investors and subject to income tax, and shall not be deemed corporate income of the trustee. These rules shall apply mutatis mutandis when adopting the SPC structure.
According to the Income Tax Act in Taiwan, when an entity distributes income to individuals or entities with offshore headquarters, the distributing entity will be obligated to withhold tax. The withholding tax rate for dividends is 21%. However, general interest income will be subject to withholding tax at a rate of 20%, and the withholding tax for interest distrusted by the trustee or an SPC in accordance with the Act will be 15%.
Pursuant to the Income Tax Act in Taiwan, taxation of income derived from securities transactions ceased in 2016. Therefore, investors will not be subject to income tax for selling their beneficiary securities (issued by the trustee in the SPT pursuant to its asset trust securitisation plan); deduction of the loss incurred due to the securities transaction from the income will not be allowed.
Under the securitisation structure in Taiwan, lawyers do not normally issue legal opinions in respect of tax regulations related to transactions. These opinions will be issued by an accountant instead.
According to the Act, the accounting rules for transfer of assets should be in accordance with the GAAP when adopting an SPT structure. These principles would also apply in the event that an SPC structure were adopted.
Under the securitisation structure in Taiwan, lawyers do not issue legal opinions on the accounting regulations of transactions. These will be issued by an accountant.
The major laws and regulations on securitisation disclosure in Taiwan are as follows:
The regulations identified above in the first four items stipulate requirements for disclosure throughout the entire securitisation process, from issuance, offering, asset entrustment or transfer, through to subsequent management and operation. The regulations identified in the final two items stipulate disclosure requirements and relevant timeframes in the case of material events occurring after public listing has taken place.
Material Forms of Disclosure
For public offerings, the trustee or the SPC should provide each subscriber with an offering prospectus which should disclose relevant information pursuant to the Regulations Governing Information to be published in Prospectuses for Public Offerings of Beneficiary Securities by Trustee Institutions and Public Offerings of Asset-backed Securities by Special Purpose Companies. This information should include:
For private offerings, the trustee or the SPC should provide each subscriber with an offering prospectus which should disclose relevant information pursuant to Rules Governing Private Placement Memoranda of Beneficiary Securities and Asset-backed Securities to Specific Persons and Transfer Restrictions. This information should include the following.
The Banking Bureau of the FSC is the competent regulatory authority for securitisation cases in Taiwan, and supervises the relevant disclosure requirements. Since the Banking Bureau is a central government agency at a national level, it has jurisdiction over all securitisation cases.
In Taiwan, for all the beneficiary securities issued and traded on the public market, the issuer of the securities shall enter into a listing contract to undertake its compliance with the regulations regarding the Procedures for Verification and Disclosure of Material Information of Trustees and SPCs, and to be under supervision of the Taipei Exchange or Taiwan Stock Exchange, which has jurisdiction over every securitisation case.
Principal Laws and Regulations
The Act provides penalties for violation of relevant disclosure requirements. Fines will be imposed on violators. The competent authority may disapprove application for securitisation if the prospectus or investment memorandum fails to disclose information in accordance with the relevant laws and regulations.
The Taipei Exchange will impose liquidated damages on every violation of the Taipei Exchange Procedures for Verification and Disclosure of Material Information of Trustees and Special Purpose Companies.
Public Market v Private Market
According to public records of the FSC, as of 9 November 2021 it had approved 62 applications for securitisation of financial assets in the aggregate amount of TWD605,574 million. Only three applications were approved after 2012, all of them applying for public offering.
There are no statutory eligibility requirements for subscription to publicly offered securities, while subscribers to non-publicly offered securities are subject to restrictions. The investors should be limited to:
Securitisations conducted via a public offering should post annual financial statements and reports to the market observation post system for investors’ reference. Securitisations offered through private placements should send financial statements and reports to investors in accordance with the investment memorandum.
Obtaining Legal Opinions
According to the Rules Governing Issuance of Beneficiary Securities by Trustees and Issuance of Asset-backed Securities by Special Purpose Companies in Taiwan, when a trustee intends to issue beneficiary securities or an SPC intends to issue asset-backed securities, it should submit a legal opinion (issued by lawyers) to apply for approval. In public offerings, such a legal opinion should also be included in the prospectus for the investors’ review.
The purpose of the issuance of legal opinions is to confirm the legality of a particular securitisation: for example, whether the originator and the trustee have duly passed the relevant resolutions, whether the written agreement between the originator and the trustee is valid, and whether any material violation has been committed by the trustee during the previous three years. However, compliance with the disclosure requirements is not included in the legal opinion.
The matter is not applicable in this jurisdiction. See 4.1 Specific Disclosure Laws or Regulations.
There are no credit risk retention requirements under Taiwan’s financial asset securitisation laws, but in practice it is common for the originator to hold subordinate classes of beneficiary securities for the purpose of credit enhancement, and for it to undertake not to transfer such subordinate classes of beneficiary securities in the trust agreement.
Under the financial asset securitisation laws, the trustee should prepare the balance sheet, income statement and trust asset management report after each year-end and send copies to each investor. An SPC should regularly compile book balances of the transferred assets, returned principal, outstanding payments, payment notices and other material information into a report, and send this to each beneficiary. It should also provide the investors with annual financial statements and reports.
The Banking Bureau of the FSC is the competent authority for supervision of the securitisation of assets and can impose penalties for violations of relevant regular reporting requirements.
Under the Financial Asset Securitisation Act, when a trustee or an SPC offers securities to unspecific persons in a public placement, it should be rated by credit rating agencies that are recognised by the FSC, and the resultant credit rating report should be included in its application for approval of the securitisation. The credit rating result should be illustrated in the offering prospectus, investment memorandum or other documents required by the competent authority.
The FSC currently recognises the following credit rating agencies (RAs): Standard & Poor’s Corporation, Moody’s Investors Service, Fitch Ratings Ltd, Taiwan Ratings Corp, Fitch Ratings Taiwan Branch and Moody’s Corporation.
The RAs in Taiwan are licensed businesses under the Securities and Exchange Act and the Regulations Governing the Administration of Credit Rating Agencies, and are regulated by the FSC, whose issuance of business licences is a prerequisite for RAs to commence trading.
The Regulations Governing the Administration of Credit Rating Agencies stipulate the scope of business, rating targets, corporate by-laws and required announcements on the company website. Penalties will be imposed on RAs that are not properly licensed.
The capital rules governing financial entities in regard of securitisation are mainly provided under Section 3 of the Explanation and the Schedule of the Calculation Method of the Regulatory Capital and Risk-weighted Assets of Banks in Taiwan, which was promulgated in 1998 pursuant to the Regulations Governing the Capital Adequacy and Capital Category of Banks, and most recently amended in 2019.
In addition, the principle liquidity rules in respect of securitisation are the Explanation and the Schedule of the Calculation Method of the Liquidity Coverage Ratio stipulated pursuant to the Standards Implementing the Liquidity Coverage Ratio of Banks, enacted in 2015, and the Explanation and the Schedule of the Calculation Method of the Net Stable Funding Ratio stipulated according to the Standards Implementing the Net Stable Funding Ratio of Banks, enacted in 2018.
The foregoing laws and regulations were stipulated and amended so as to be in harmony with the Enhancements to the Basel II framework and the Enhancements to the Basel II market risk framework published in July 2009. However, according to the regulatory authority, the adoption of the 2016 Amendment of Basel III is still under discussion and not yet incorporated into the existing securitisation laws of Taiwan.
The aforementioned laws are regulated by the FSC, which may at times seek the advice of the Central Bank of the Republic of China.
According to the regulatory authority, the adoption of specific rules like those relating to “simple, transparent and comparable” (STC) securitisations and “simple, transparent and standardised” (STS) securitisations are still under discussion and yet to be applicable in Taiwan.
According to the Act, if there are any risk-hedging plans, trustees or SPCs shall disclose these risk-hedging plans and the major terms of the relevant contracts in their prospectuses. There are no specific laws or regulations applicable to the use of derivatives in securitisations in Taiwan. However, the prospectuses will be reviewed by the FSC. If the risk-hedging plans are not properly disclosed in the prospectuses, or the risk-hedging schemes could not meet the FSC’s expectation, the FSC may disapprove the securitisation application directly.
Laws and regulations for investor protection that are applicable specifically to securitisation are stipulated in the Act, governed by the FSC.
In the case of an SPT, a trust supervisor may be appointed either by the trustee, in accordance with the SPT contract, or by means of a resolution of an investors’ meeting, for the purpose of protecting the rights and interests of the investors. In the event of securitisation via an SPC, a supervisory institution shall be appointed, which shall enter into a supervision agreement with the SPC in compliance with the asset securitisation plan.
A trust supervisor or supervisory institution may perform litigious or non-litigious acts related to the trust of an SPT and the asset-backed security of an SPC respectively. Such acts are performed in the supervisor or institution’s own name for the interest of the investors. Trust supervisors are obligated to attend the investors’ meeting and exercise their rights, for the common interest of the investors, at the request of investors holding 3% or more of the aggregate underlying principal amount. If a trust supervisor violates this obligation, they (the supervisor) may be subject to an administrative fine of between TWD2 million and TWD10 million. It is further expressly stipulated in the relevant laws that supervisory institutions shall exercise their power and perform their obligations in the interest of, and shall have a fiduciary duty to, the investors in respect of due diligence. If a supervisory institution violates these duties, it shall be liable to compensate the investors for any damages sustained as a consequence.
In regard of the distribution of the securities, the terms and considerations (such as annual dividend payout ratio and the waterfall thereof) are generally agreed in the asset trust securitisation plan and the asset securitisation plan for SPTs and SPCs, respectively, which shall not be amended unless approved by a resolution of the investors’ meeting and approved by or effectively registered with the competent authority according to the Act.
An SPT’s or SPC’s failure to distribute profits promptly and in accordance with the securitisation plan constitutes a default and normally triggers rights to compensation, or any other rights granted in the securitisation plan. Also, according to the Act, such a failure shall be reported to the competent authority, as well as the trust supervisor (if any) or supervisory institution, and shall be publicly announced through methods as prescribed by the competent authority within two business days of its occurrence. If the foregoing reporting/announcement obligations are violated, the responsible person, agent, employee or other staff of a juristic person shall be subject to an administrative fine in the same amount.
The principal laws and regulations pertaining to banks that securitise any of their financial assets (ie, banks that serve as originators) are provided under articles 5 to 8 of the Act.
As set forth above, after an application is filed with the competent authority for approval or effective registration by the issuer, the bank serving as the originator is obligated to make announcements on the variety, quantity, and content of the major assets entrusted to the trustee or transferred to the SPC for three consecutive days in the daily local newspapers circulated at the place of its principal office, or in other ways prescribed by the competent authority.
For banks that invest in positions in securitisations, principal laws and regulations are provided under the Directions Governing Limitations on Types and Amounts of the Securities in which a Commercial Bank May Invest in Taiwan.
The aggregate outstanding amount of the original acquisition cost of securities that are unrated or rated under a certain required grade may not exceed 10% of the calculation basis of the commercial bank.
In addition, commercial banks may not invest in securities with an issuance maturity of no less than one year, or of a company in which the bank’s responsible person acts as a director, supervisor, or manager thereof.
A commercial bank that acts as an originator, a trustee, or an investor of an SPC may not invest in the following securities respectively:
In respect of banks’ disclosure requirements, specific rules for banks are stipulated in the Regulations Governing Information to be published in Financial Statement of Published Banks and the Regulations Governing Information to be published in Annual Reports of Banks. According the foregoing laws and regulations, banks are obligated to disclose the types of the securitisation products approved by the competent authority and related information in both annual reports and financial statements; the risk management systems, exposure, and capital requirement of the securitised product shall be disclosed in the annual report.
According to the Act, there are two different methods for an originator to securitise its assets, as detailed below.
SPTs are trust relationships established for the purpose of asset securitisation. In other words, after organising the asset pool, the originator entrusts the assets to a trustee. Upon the approval of the competent authority or an effective registration, the SPT will be established and the trustee will raise funds by issuing beneficiary certificates through public offerings or private placements. The investors participating in the private placements shall be specified. Furthermore, the originator and the trustee shall not be affiliated.
SPCs shall be established by financial institutions, and are companies limited by shares, with only one shareholder incorporated under the approval of the competent authority for the purpose of engaging in the business of asset securitisation by issuing asset-backed securities. Furthermore, the aforementioned financial institutions and the trustee shall not be the same affiliated enterprise, and the financial institutions may be appointed by the SPC as the servicer to make collections from the debtor.
Regarding the management of such entities, an SPT can generally be managed by itself or its management may be delegated to an institution (servicer) to manage and dispose of the trust property and/or transferred assets, which shall be stated expressly in the asset trust securitisation plan. An SPC, by contrast, shall delegate an institution (ie, the servicer) to manage and dispose of the transferred assets. For the protection of the transferred assets, the institution shall manage the assets and its own property separately. Creditors of the servicer shall have no claims or other rights against such assets and/or property.
So far, all 62 asset securitisation plans that have been approved and duly registered in Taiwan have been conducted in the form of an SPT structure. This is due to the following considerations:
It is rare for SPEs to attempt to evade supervision. This is due to the fact that advantages and privileges created under the preferential regulations pertaining to securitisation outweigh the disadvantages.
The credit of the securities issued by the trustee or the SPC may be enhanced either by the originator (ie, internal enhancement) or other financial institutions (ie, external enhancement) in order to reduce the risks to the investors and thereby increase the rating of the underlying securities.
Internal enhancement may be done by way of:
External enhancement may be done by way of:
A good example is provided by the first assets securitisation permitted in Taiwan, in which the Industrial Bank of Taiwan(which was restructured into a commercial bank and renamed O-Bank in 2017) securitised its receivables and security interests, with the Land Bank of Taiwan as trustee, in 2003. In addition to the issuance of subordinated securities, the Industrial Bank of Taiwan deposited an amount in the reserve account for the purpose of credit enhancement.
The principal legal issues concerning senior/subordinated securities normally arise from the terms of the securitisation plan. It is therefore critical to examine on a prudent basis the conditions therein, such as the priority under such a structure. In regard to the insurance, guarantee and the letter of credit, the terms in the respectively agreement or instrument shall be in compliance with laws and regulations in order to avoid potential legal issues.
There are no government-sponsored entities that participate in the securitisation market in Taiwan.
Most of the entities investing in securitisations are public companies listed on the Taipei Exchange, insurance companies or other financial institutions that are driven to achieve a higher return than what could be obtained by simply parking the capital in bank deposits.
There are a few investment restrictions pertaining to securitisation, in consideration of the nature of the entities set forth – especially for funds in connection with specific public policy. The National Pension Insurance Fund serves as a good example. This fund is established for the purpose of ensuring that the basic economic needs of citizens are met, as well as to maintain stability in the lives of their surviving families. The investment restrictions applicable to it include:
Furthermore, the investment in domestic asset securitisation products issued by any single entrusted institutions or an SPC shall be no more than 10% of the issued certificates of such an entrusted institution or the SPC at the time of investment.
There are also restrictions on insurance enterprises’ investments in securitised products: the aggregate amount of a purchase may not exceed 10% of the funds of the insurance enterprise. Moreover, the insurance enterprise shall not serve as trust supervisor for securitisation products it has purchased.
Since all of the existing cases of securitisation in Taiwan have adopted an SPT structure, a bankruptcy remote mechanism is usually arranged through agreement between the originator and the trustee. Also, given that the originator serves as the servicer in most securitisation cases, the arrangement of the service agreement will also have a certain effect on the bankruptcy remote mechanism.
In order to successfully achieve bankruptcy remoteness, the trust agreement will generally include the following provisions to represent that a transaction is a true sale, and to ensure that no event would expose the originator or trustee to insolvency proceedings:
Granting full recourse or controlling right over the assets to the originator in the trust agreement or the service agreement should be avoided. The originator should not be allowed to repurchase the assets at any time or at its will.
As above, since an SPT structure has been adopted in all existing cases of securitisation in Taiwan, the clauses of representation and warranty are mainly stipulated in the trust agreement and the service agreement. The originator, the trustee and the servicer will provide standard representations and warranties, including those relating to due incorporation, capacity and authority to enter into the agreements or other transaction documents, solvency, and possession of the necessary permissions and/or licences to perform its respective obligations. Representation of the accuracy of the documents or information should also be provided.
As to the assets being transferred, the originator’s representation and warranty will include representations that:
As to the enforcement of these provisions, the parties will generally agree that when there is a breach of representation and warranty, the breaching party is obligated to compensate the non-breaching party. Also, a compulsory buy-back mechanism will be stipulated in the trust agreement, requiring that if the originator violates its representation and warranties, the originator is obligated to buy back the defeated assets.
In order for assets to be successfully transferred, the following provisions will be included in the trust agreement, and the originator and the trustee shall complete each process during a certain period of time:
Failure of the originator to perform these perfection procedures, and failure to rectify such a failure within a given timeframe, would possibly lead to suspension of the trust plan and result in refunds being made to the investors.
The principal covenants in securitisation documents are as follows:
The principal covenants given by the servicer will be related to fulfilment of its obligations.
If a party fails to comply with a covenant, the non-breaching party might claim damages from breaching party, or the breaching servicer might be replaced. If such a breach cannot be rectified, it might constitute an event of default that will lead to the termination of trust agreement and the trust plan.
In Taiwan, since all 62 existing financial securitisations adopt the SPT structure, the trustee has usually retained the originator as the servicer. The servicer will agree to provide the following services to the trustee:
The trust may replace or claim damages from the servicer, if the servicer fails to fulfil its obligation under the service agreement.
Generally, failure to make interest payments when scheduled or failure to repay the principal on the maturity date will constitute events of default, resulting in the termination of the trust agreement.
Upon the occurrence of any of the termination events, the trustee shall retain an expert to issue a fairness opinion for non-cash assets in the asset pool, and dispose of such assets at fair price. The cash and amount received from disposal shall be distributed in accordance with the following waterfall:
The originator will indemnify the trustee against any loss arising from a misrepresentation of the originator under relevant agreements.
If the trustee suffers damages due to the originator’s failure to perform, or to comply with applicable laws, the trustee may claim for compensation.
For securitised products that are publicly offered, it is possible that originator or the trustee will be obligated to compensate the arranger and the underwriter for its failure to fulfil its obligations required by the underwriting agreement or the financial consulting agreement.
Moreover, if the investor suffers any damage due to the originator’s or the trustee’s failure to perform, the investor may claim compensation.
Under Taiwan’s framework for securitisation of assets, issuers can be divided into two groups, as detailed below.
Trustee of an SPT: the assets are held by trustee, which are institutions falling under the definition of the Trust Enterprise Act and approved by competent authorities to have met certain required scores given by credit rating agencies.
SPCs: the assets are held by special purpose companies which are established by financial institutions in the form of companies limited by shares. These companies should be held by only one shareholder and obtain approval from competent authorities to be formed for the purpose of managing businesses in the securitisation of assets. A trustee or an SPC will obtain ownership of the assets from the originator and then receive funds from the securitisation by way of issuing beneficiary securities or asset-backed securities based on the underlying assets.
Under such a securitisation framework, the main responsibilities of the issuer include preparing applications and other relevant documents (including the asset trust securitisation plan, special purpose trust agreement, trust asset management and disposal policy, and risk aversion plan) pursuant to the Act and its related laws and regulations, and subsequently submitting them to the FSC to apply for approval or filing as well as issuing securities and providing offering prospectuses to the subscribers or investors, abiding by relevant laws and regulations, regularly issuing, announcing and disclosing settlement reports of the assets, and convening beneficiary meetings.
For securitisation of assets in Taiwan, the role of sponsor is usually taken by the originator, which holds the assets and is either a financial institution or other institution approved by the competent authorities. The originator is responsible for organising and designing the overall securitisation structure, and transferring the assets to a trustee or SPC which will serve as the issuer issuing the securities. Since the originator would best understand the contents and values of the assets, after the originator transfers the assets it is common for the originator to act as a servicer in the securitisation structure and to be responsible for management and disposal of the assets.
Beneficiary securities and asset-backed securities are “other securities approved by the competent authority” under Article 6 of the Securities and Exchange Act. Therefore, their underwriting should be conducted by securities underwriters. Short-term bills should be underwritten by bills agencies.
In addition, according to the Rules Governing Issuance of Beneficiary Securities by Trustees and Issuance of Asset-Backed Securities by Special Purpose Companies, securities underwriters should be responsible for submitting an assessment report in their application for securitisation which should clearly illustrate the feasibility and reasonableness of the then issuance plan for the securities. For beneficiary securities being publicly offered by trustees or asset-backed securities being publicly offered by SPCs, the securities underwriters should also be responsible for underwriting on a firm commitment basis. However, if between any securities underwriter and the originator any of the situations exist as set forth in Article 26, paragraph 1 of the Regulations Governing Securities Firms – for example, there is a specific shareholding relationship, or an involved party has direct or indirect control over another’s personnel, finance or business management – then the securities underwriter in question should not be the lead underwriter for the trustee or SPC issuing the securities.
In the securitisation of assets, a servicer is engaged by the trustee or SPC via a service agreement whereby the servicer would be responsible for management and disposal of the financial assets concerned, regularly collecting the principal or the benefits, interest and other proceeds, and transferring these same to the trustee or supervisory institution for distribution to the investors in the securities. The servicer would also provide the trustee or supervisory institution with repayments of liabilities, outstanding payments, payment notices, and other material information relating to the assets. In practice, many originators also act as servicers. The management and administration of these assets shall be segregated from the servicer’s own assets. Any debtor of any servicer should not make any claim or exercise any right against the assets that are or have been securitised.
Investors may subscribe to securities issued in connection with the securitisation of assets through public or private placement.
In the case of public placement, when a trustee offers beneficiary securities to unspecific persons in a public offering, it should apply for approval or filing with the securities’ competent authorities. It should also provide its offering prospectus to its subscribers or purchasers in accordance with the manner prescribed by the securities’ competent authorities. There are no eligibility requirements for the investors or restrictions to subsequent transfers.
In the case of private placement, when a trustee offers beneficiary securities to specific persons in a private placement, it should provide the offering prospectus to its subscribers or purchasers, and the trustee should clearly specify the transfer restrictions on the beneficiary securities in relevant documents given to the investors. The investors should be limited to:
The total number of subscribers should not exceed 35. If in the future any investor intends to transfer their subscribed securities, the transferee should also meet the foregoing eligibility requirements.
Natural persons, legal persons or funds meeting the requirements set by the competent authorities include the following.
Under Taiwan’s framework for securitisation of assets, only under an SPT structure does the trustee conduct securitisation of the assets it holds in trust. The originator entrusts certain assets to the trustee who should be an institution falling under the definition of Trust Enterprise Act and approved by competent authorities to have met or exceeded certain required scores given by credit rating agencies.
Beneficiary securities are issued by the trustee pursuant to the asset trust securitisation plan, representing each beneficiary’s holding of beneficiary interests in the principal of, or the benefits, interest and other proceeds derived from, the trust assets. The trustee should appoint a servicer to be responsible for the management, proceeds and disposal of the assets, convene beneficiary meetings and elect appropriate persons as supervisors of the trust in accordance with relevant provisions of the SPT agreement.
Under Basel II, a traditional securitisation is defined as a structure under which financial assets are transferred to an SPE, and the securities therefrom are issued to investors in the name of the SPE. A synthetic securitisation is defined as a structure with at least two different stratified risk positions or tranches that reflect different degrees of credit risk, where the credit risk of an underlying pool of exposures is transferred, in whole or in part, through the use of funded (eg, credit-linked notes) or unfunded credit derivatives or guarantees (eg, credit default swaps) that serve to hedge the credit risk of the portfolio.
In Article 4 of the Act, only chattel secured loans, loans secured by real estate mortgage, or other monetary rights or other rights approved by the competent authority can serve as assets for securitisation. Synthetic securitisation is not on the list expressly provided by the Act, and is not practised in Taiwan.
According to public records of the FSC, 62 applications for the securitisation of financial assets have been approved in Taiwan, in the aggregate amount of TWD600,574 million. The approximate amount of RMBS (residential mortgage-backed securities), ABS (asset-backed securities), and ABCP (asset-backed commercial paper) is TWD76,070 million, TWD406,915 million and TWD110,989 million respectively.
ABS mostly consists of CBO (collateralised bond obligations), CLO (collateralised loan obligations) and leases-ABS, and the approximate amount thereof is TWD94,347 million, TWD250,808 million and TWD34,000 million respectively.
However, in the past ten years, financial securitisation issuance has dramatically declined, and only four financial securitisations were issued in the aggregate amount of TWD23,000 million. This decline can be attributed to the fact that financial crisis of 2007–08 led to the loss of investors’ confidence, and low interest rates reduced incentives for originators to securitise assets.
Residential mortgage-backed securities are a type of securitisation product involving mortgage-backed debt from financial institutions. The mortgage may be entrusted to the trustee, who issues RMBS after ratings are determined by RAs.
Due to the low interest rate, financial institutions have had low motivation for securitising mortgage loans in the past ten years.
CBOs and CLOs
Collateralised bond obligations are asset-backed securities backed by the receivables from bonds (mostly government bonds or corporate bonds), packaged and issued into classes and tranches. Compared to CBOs, most collateralised loan obligations (CLOs) are backed by corporate loans; as the terms of the facilities for corporations in Taiwan are relatively strict, the default rate and the bad debt rate thereof are relatively low. However, as in the case of RMBS, in the context of the global financial crisis no CBO or CLO has been issued for the past ten years.
In Taiwan, lease-asset-backed securities are mainly backed by receivables from short-term leases (less than five years). Although there is only one company that issues lease-ABS in Taiwan, lease-ABS has been the only type of securities issued in the recent ten years in Taiwan.
In Taiwan, regardless of the type of the financial assets securitised, securitisation is regulated by the Act and the related laws and regulations.
Some delays in enforcement procedures are to be expected as a result of COVID-19; however, the pandemic has not caused significant new or unusual legal issues arising from enforcement or when preparing for enforcement in Taiwan.