JAPAN Law and Practice Contributed by: Hiroaki Takahashi, Kaoru Sato, Kenji Miyagawa and Koji Kawamura, Anderson Mori & Tomotsune
• The FIEA stipulates the requirements on disclosure of financial interests and other business-related matters applicable to the relevant parties under the various securitisa - tion structures. • The Act on General Incorporated Associa - tions and General Incorporated Foundations regulates general incorporated associations ( ippan-shadan-houjin ) in their capacities as SPEs that hold equity interests in TMKs or GKs. 5. Synthetic Securitisation 5.1 Synthetic Securitisation Regulation and Structure There are no laws or regulations that specifically prohibit synthetic securitisation in Japan. Issuers/originators engage in synthetic securiti - sation for the principal purpose of transferring the credit and other default risks in the assets held on their balance sheets, improving their capital ratios and thereby – especially for banks or other regulated financial institutions – freeing up capital for making additional loans. More generally, investors engage in synthetic securitisation because of stronger appetites for investment products that offer potentially better yields, given the current extremely low interest rate environment in the domestic market. The FSA amendment to the banks’ capital ade - quacy regulations became effective in March 2019 and has had a material impact on structur - ing synthetic securitisation products, including the originators’ risk retention policies, etc (see 4.3 Credit Risk Retention ).
As credit derivative transactions fall within the definition of “market derivative transaction”, those dealing in the brokerage, sale, purchase or arrangement of credit derivatives are required to register with the FSA and to comply with the relevant regulatory requirements under the FIEA. Synthetic securitisation transactions are not specifically regulated. However, since credit derivatives are subject to the FIEA regulations, synthetic securitisation transactions involving credit derivatives would similarly be subject to the provisions of the FIEA. The principal difference between synthetic and regular securitisation transactions is that syn - thetic securitisation transactions involve the transfer of credit risks to SPEs, not through the physical transfer of assets, but by utilising credit derivatives or other types of derivatives or guar - antees. Synthetic securitisation transactions typically take the form of a synthetic CDO, the structure of which is as follows: • an existing or newly established SPE will be used to acquire Japanese Government Bonds (JGBs) or other highly liquid financial products such as bank deposits (the collateral) through proceeds from the SPE’s issuance of notes to investors; • the originator then enters into a credit default swap (CDS) with the SPE and, as part of the CDS, the originator will designate certain assets that it owns (such as loan receivables and bonds) as the reference obligations, and transfer the credit risks of the reference obli - gations to the SPE; • the SPE will pay its investors interest on the notes, based on the CDS premiums it receives from the originator and the interests it receives on the collateral; and
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