HONG KONG Law and Practice Contributed by: Vincent Sum and Sylvia Leung, Mayer Brown
• undertakings to maintain full and proper records in respect of the loans. 3.6 Principal Defaults The principal default events are typically con - tained in the trust deed or indenture entered between the bond/note trustee and the issuer, as applicable, and include default provisions, without limitation, the following: • non-payment by the issuer of the principal or interest on the notes; • default by the issuer and/or its subsidiaries in respect of other indebtedness incurred by the issuer and/or its subsidiaries; and • winding-up or bankruptcy in respect of the issuer and/or its subsidiaries. The principal default events in receivables sale documentation include the following, without limitation: • breach of warranties made by the originator; and • winding-up or bankruptcy in respect of the originator. 3.7 Principal Indemnities The originator (as the seller and servicer of the loans) typically agrees to indemnify the issuer for damages and losses sustained by the issuer in connection with the originator’s failure to fulfil its obligations or breach of the contracts. On the note-level documents, the issuer would agree to indemnify the note trustee against dam - ages and losses caused by the issuer. The issuer would also agree to indemnify the note trustee for other damages and liabilities sustained by the note trustee (including its directors, officers and affiliates) in connection with:
• the note trustee’s exercise of its powers in accordance with the terms of the transaction documents; and • the costs and expenses incurred by the note trustee for defending itself against or inves - tigating any claim with respect to the note Terms and conditions of the bonds/notes/securi - ties, outlining all the rights and obligations of the issuer and the investors (eg, rights to payment, security, notices, and exercise of bondholders’ voting rights in bondholders’ meetings) would be included within the offering memorandum, the trust deed or indenture, and eventually annexed to the certificate evidencing the bonds/notes. 3.9 Derivatives trustee’s exercise of its powers. 3.8 Bonds/Notes/Securities Derivatives that are commonly used to hedge different types of risks in a securitisation trans - action include, without limitation, the following. • Interest rate derivatives – for hedging against the risk of fluctuating interest rates – eg, inter - est rate swaps, caps, and floors. They help mitigate the mismatch between the interest rates of the securitised assets and the rates payable to the investor under the terms of the notes. • Foreign exchange derivatives – where assets or cash flows involved in the securitisation are denominated in different currencies, foreign exchange derivatives like currency swaps or forwards can be used to hedge against the risk of currency value fluctuations, which can significantly impact the returns from the securitised asset. • Credit derivatives/credit default swaps (CDS) – these are used in securitisation to hedge against the risk of credit defaults within the
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