FINANCIAL ASSET SECURITIZA-TION ENFORCEMENT RULES ANNOUNCED

11/01/2003

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After over six-month preparation, the Ministry of Finance (MOF) promulgated the Enforcement Rules of the Financial Asset Securitization Act on 28 August 2003, which comprise 25 articles. The main points are outlined below:

I.Supplementary provisions for "true sale"

With regard to the securitization of residential mortgage loans, it should be noted that bor-rowers of residential mortgage loans often provide mortgages with a maximum claimable amount. According to the precedent of the ROC Supreme Court, unless the maximum claimable amount is determined and the mortgage with a maximum claimable amount converts into an ordinary mortgage, transfer of the creditor's rights of the residential mortgage loan requires the prior consent of the bor-rower.

However, in practice, banks face difficulties to obtain consent from each borrower thus cre-ating a barrier to the securitization of residen-tial mortgage loans. In view of this, the en-forcement rules provide that if an originator transfers residential mortgage loans with a maximum claimable amount to a special purpose company (SPC) or a trustee in ac-cordance with a securitization plan, and sub-mits the relevant documents to the competent authority, then the mortgages will be auto-matically converted into an ordinary mort-gages, and can be transferred to the trustee or SPC without the consent of debtors or mort-gagors.

If the asset of the secured right transferred under a securitization plan is insured, the originator's beneficiary rights under the in-surance policy are transferred to the trustee or SPC along with the transfer of ownership in the security rights, without the consent of the parties under the insurance policy. However, the transferee cannot claim against the insurer until the trustee or SPC has informed the in-surer.

Because the securitization of revolving credit (such as asset backed commercial paper or credit card credit) is different from the securi-tization of ordinary loans, the enforcement rules include provisions on the subsequent enforceability of future credits, and on suc-cessive and supplement public announce-ments regarding asset transfers.

II.Restrictions on related-party transac-tions

The enforcement rules provide that an SPC may not appoint the originator to manage and dispose the assets transferred to the SPC. The monitor may not be an affiliated enterprise of a promoter or shareholder of the SPC. The enforcement rules define the required content of the moni-toring agreement, which would be the basis for the review of the regulatory authority. The Trust Association of the ROC will provide the formats of the statements and filing documents to be produced by special purpose trust (SPT) or SPC for the MOF's approval.

In addition, the trustee, the trust supervisor, the promoter or shareholder of an SPC, or a monitor, shall not be the authentication institution for beneficiary certificates or asset-backed securities. The lead manager for a securitization plan may not act as the authentication institution under the same plan either. All securities issued in a single securitization transaction shall be authenticated by a single institution.

III.Supplementary provisions on beneficiar-ies' meetings

With regard to beneficiaries' meetings, after considering the suggestions of international credit rating agencies by the MOF, the en-forcement rules provide that the rights of specific categories of beneficiaries are limited to the rights granted to them in the special-purpose trust agreement, and shall not include any other rights or benefits not stipulated in the agreement. This should prevent subordinated beneficiaries from willfully vetoing resolutions of beneficiar-ies' meetings, and should also prevent the credit rating of preferred beneficiary certificates from being adversely affected.

A single beneficiary or beneficiary certificate holder may not subdivide his voting right with regard to a single resolution. The enforcement rules also include additional provisions on the convention of beneficiaries' meetings at the re-quest of beneficiaries, and an exception to the required timeframe for delivering meeting notice provided by the Financial Asset Securitization Act in the circumstance that a meeting of bene-ficiaries or asset-backed securities holders passes a resolution to postpone or adjourn the meeting to a date within the following five days.

IV.Provisions to simplify operational pro-cedures and reduce costs

The enforcement rules contain various provi-sions to simplify procedures and reduce opera-tional costs. For example, it defines procedures for making minor amendments to securitization plans; exemption for presenting security certifi-cates when redeeming principal and interest; the procedures for securitization plan modifications that do not materially affect the plan; the simpli-fied content of the register of beneficiaries; and the exemptions from the requirement to make year-end operating reports.

Since the Financial Asset Securitization Act was promulgated in July 2002, a number of domestic and foreign financial institutions have been making preparations to enter Taiwan's financial asset securitization market. The Credit Lyonnais Taipei Branch has already closed a securitization of collateralized corporate loans valued at NT$8.8 billion. This was Taiwan's first asset securitization with a public offering of benefici-ary certificates, and Lee and Li acted as local legal advisor for the project. Lee and Li is also playing an important role in the securitizations currently being planned by Chinatrust Commer-cial Bank, Taishin International Bank, and Grand Commercial Bank.

Taiwan's securitization market is still in its in-fancy. In the future, as the legal framework be-comes more mature, banks can be expected to launch more financial asset securitization prod-ucts as a means to making more flexible use of their funds.