Securitisation 2023

Securitisation: as Resilient and Essential as Ever for the World

As the direct effects of the pandemic have waned, the world has nonetheless had to deal with almost as severe economic, political and social shocks, including the war in the Ukraine (and fear of a similar warlike event in and around Taiwan); difficult supply chain obstacles; inflation at levels not seen for four decades; and preliminary signs of a global recession, even among advanced economies. Notwithstanding all of these challenges, securitisation has continued to function as an efficient form of financing for a large variety of purposes, with volume in 2022 likely to be just moderately less in volume than in 2021 and with financing costs not proportionately out of line with other, more traditional forms of financing.

In no small part, this continues to be the case because of the many improvements created by the numerous rounds of legislation and regulation passed or adopted to improve the market as the whole since 2008 which have clearly, in fact, strengthened the resilience of the market. I stated in 2022’s Introduction that I expected 2022 to be a year of consolidation and a test for the resiliency of the securitisation market and legal framework on account of the economic and political challenges then facing the capital markets. Clearly, the global securitisation market passed this test. While there have been some continuing challenges, the market as a whole (and especially in the US) has continued to function well and to fulfll its role of serving as one of the most efficient forms of finance available for almost any purpose.

This Global Practice Guide (Guide) is intended to serve as a practical means by which legal practitioners may deal with the ups and downs of the market, and any regulatory or other issues that may arise from time to time, whether pandemic, war, recession or otherwise. Over the 14 years since the beginning of the financial crisis, the most important development for securitisation, anywhere and everywhere in the world, has been the creation of a vast and complicated regulatory scheme that attempts to rein in securitisation’s perceived weaknesses and to strengthen its valuable structures, purposes and uses. Accordingly, much of this Guide is an attempt to alert legal practitioners to the scope and content of these new rules, whether they are being modified, filled out, or added.

In composing the questions that call for the answers presented in this Guide, efforts have been made to give the legal practitioner a thorough guide to the types of issues that may arise in any country around securitisation and a basis for beginning to structure most of the kinds of securitisations that issuers may use in the actual market place. Similarly, efforts have been made to focus on the real issues that may arise in order to make this Guide itself a practical one.

This is achieved first by summarising the ways that various types of laws of general application will almost certainly affect securitisation transactions. There is focus on insolvency laws, collateral transfer and lien validity laws, tax laws and other similar relevant laws, and the types of opinions that legal practitioners will typically be asked to deliver on account of the effects of such laws will be discussed.

Then comes the most difficult topics in this Guide: the content of the regulations and laws that have been adopted specifically relating to securitisation since the financial crisis. These include regulations on disclosure, retention of credit risk for sponsors or originators, periodic reporting, rating agency regulation, capital and liquidity requirements related to securitisation, derivative regulation related to securitisations such as interest rate and currency swaps applicable to special-purpose entities (SPEs) and credit default swaps, rules for compliance with regimes such as “simple, transparent and comparable” created by IOSCO and the Bank for International Settlements, and their effect on required capital and liquidity, rules similar to the so-called “Volcker Rule” in the USA, rules that regulate banks with regard to securitisation, rules regulating the form of SPEs, rules on credit enhancement, rules governing investments in securitisation by different types of entities such as pension funds, and, if appropriate, accounting rules for sales (vs secured loans) and consolidation of SPEs. We also examine enforcement of the new rules and applicable legal opinions.

After regulatory review, the focus turns to documentation, highlighting provisions for the transfer of financial assets themselves, representations and warranties, covenants, defaults, indemnities and remedies. Again, provisions on legal opinions are included.

The next topic is the roles and responsibilities of the parties to securitisations. Here, material responsibilities, obligations and rights of issuers, sponsors, underwriters and placement agents, servicers, investors and trustees is examined.

Finally, the Guide concludes with common structures for different types of financial assets commonly securitised. These include retail and dealer auto receivables, auto leases, equipment receivables, consumer credit receivables, market-place lending, revolving credit such as credit cards, commercial and residential mortgages, trade receivables, CLOs, and whole-business receivables.

Of course, the above few paragraphs are a mere summary serving as a portal to the extensive information that you will find for the jurisdictions featured in the following Guide itself. Questions, comments and suggestions for improving this Guide are welcomed, as new editions are published from year to year.