CHINA Law and Practice Contributed by: Borong Liu, Xiaoli Liu, Jingyi Lu and Zhijie Zhang, Zhong Lun Law Firm
ing circular. The trust agreement/asset manage - ment contract is like a charter for the SPV and provides basic terms and conditions of the SPV, such as purpose of trust, parties relating to the SPV, establishment of the SPV, entrustment/ purchase of the underlying assets, distribution of the SPV cash flow, articles for the meeting of security holders, costs and services fees relating to the SPV, and information disclosure. The offering circular often includes risk disclo - sure, introduction to participating institutions, description of transaction structure (such as distribution of cash flows, credit enhancement measures, meeting of security holders, and a summary of rights and obligations of the trans - action parties), information on the underlying assets, information on securities, intermediary opinions, and information on PRC law factors. 3.9 Derivatives Derivatives such as interest rate swaps, cur - rency swaps, and credit risk mitigation/protec - tion instruments could be used in securitisation transactions. However, most transactions will avoid using derivatives, to simplify the transac - tion structure and to save transaction costs. Interest Rate Swap The coupon rates of securities/notes are often designed to cope with the characteristics (fixed/ floating) of the asset pool, so there is rarely the need for an interest rate swap. For instance, as most of the underlying mortgages of RMBS are floating rate, the coupon rates of RMBS are often designed to be floating rate and will be adjusted simultaneously with the underlying assets, to as to avoid interest rate mismatch risk. Currency Swap Currency swaps are also rarely used because the majority of cross-border issuances are in
Chinese yuan and are in line with the currency of the underlying assets. Nevertheless, if the securities/notes are issued in other currencies, a currency swap would be required to hedge exchange rate risk. Credit Risk Mitigation/Protection Instruments Credit risk mitigation/protection instruments can be used to hedge credit risks in connection with a reference entity or a target debt in a securitisa - tion. These instruments can be roughly divided into two types: agreements and warranties. The former are financial agreements between buyers and sellers for the purchase of credit protection, while the latter are securities of value created by the warranty issuer (often a qualified underwriter or guarantee company). However, as the credit derivative market in China is overall less devel- oped, credit instruments are not commonly used in securitisations. 3.10 Offering Memoranda Offering memoranda are customarily required in a securitisation, often in the form of an offering circular. Credit Asset Securitisation For credit asset securitisation, the Administra - tive Measures for the Securitisation of Credit Assets provides the framework of contents and the release time for an offering circular. The Announcement of Matters Regarding Informa - tion Disclosure of Credit Asset Securitisations’ Underlying Asset Pool (Announcement of PBOC [2007] No 16) and the disclosure guidelines pub - lished by NAFMII for various kinds of underly - ing assets provide detailed requirements on the contents and forms of an offering circular. CIBM Business Asset Securitisation With regard to CIBM business asset securitisa - tion, the Information Disclosure Guidelines on
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