HONG KONG Law and Practice Contributed by: Vincent Sum and Sylvia Leung, Mayer Brown
5. Synthetic Securitisation 5.1 Synthetic Securitisation Regulation and Structure Synthetic securitisation is not expressly prohib - ited under Hong Kong law and can be achieved under the current legal framework. However, there have been only a few synthetic securitisa - tion transactions in the past two decades. The laws and regulations that apply to a non- synthetic securitisation would also apply to syn - thetic securitisations. Balance sheet synthetic securitisations involve the transfer of credit risks of the assets owned by the originators to investors. The risk transfer can be achieved through an SPE to the investors or directly to the investors, commonly through the use of credit default swaps or total return swaps. Another type of synthetic structure is commonly referred to as an “arbitrage structure”. In an arbi - trage synthetic securitisation, the originator does not typically own or have any exposure to assets while credit risks are transferred on said assets. The originator and investors usually engage in an arbitrage synthetic securitisation for speculative purposes. The arbitrage structure is not com - monly used in Hong Kong. 6. Structurally Embedded Laws of General Application 6.1 Insolvency Laws Insolvency laws are a major consideration in securitisation as these enable a securitisation structure to be commercially feasible and serve to protect all parties’ interests. Typically, the assets backing the securing will need to be insulated from the financial and credit
4.10 SPEs or Other Entities There are no specific rules or restrictions that apply to the form of SPEs or other entities used in securitisations. For the typical jurisdiction of an SPE, refer to 1.4 Special Purpose Entity (SPE) Jurisdiction . 4.11 Activities Avoided by SPEs or Other Securitisation Entities The business undertaken by SPEs is usually restricted. Typically, unless the transaction spe - cifically requires it, SPEs will avoid activities that require appropriate licensing, such as advising on, or dealing in, securities. A typical securiti - sation structure would not require the SPE to obtain any licences. 4.12 Participation of Government- Sponsored Entities Government-sponsored entities do participate in the securitisation market. For example, the Hong Kong Mortgage Corporation Limited (an entity wholly owned by the Hong Kong government through Hong Kong’s exchange fund) has par - ticipated in a securitisation to provide a platform for banks to convert illiquid assets (eg, mortgage portfolios) into more liquid assets, among other purposes. 4.13 Entities Investing in Securitisation Investors in securitisations include various finan - cial institutions and private funds. There is no law specifically prohibiting or limiting investment in securitisation products by any type of enti - ty, other than the generally applicable banking regulations to which authorised institutions (eg, banks) are subject. 4.14 Other Principal Laws and Regulations All principal laws and regulations are covered in 1.3 Applicable Laws and Regulations .
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