What legislation governs securitisation in your jurisdiction? Has your jurisdiction enacted a specific securitisation law?
There is no specific legislative framework for securitisation, however, Australian Prudential Standard 120 (APS 120), made by the Australian Prudential Regulation Authority (APRA) under section 11AF of the Banking Act 1959 (Cth) (Banking Act), governs securitisations involving authorised deposit-taking institutions (ADIs) in Australia.
Additionally, Division 3A of Part II of the Banking Act regulates covered bonds.
More broadly, corporations, the underlying receivables contracts and other aspects of securitisation transactions are governed by general law and other legislation.Applicable transactions
Does your jurisdiction define which types of transactions constitute securitisations?
APS 120 defines securitisation as:
a financing structure where the cash flow from a pool is used to make payments on obligations to at least two tranches or classes of creditors (typically holders of debt securities), with each tranche or class entitled to receive payments from the pool before or after another class of creditors, thereby reflecting different levels of credit risk.
How large is the market for securitisations in your jurisdiction?
According to Macquarie Debt Markets Analysis:
- the total outstanding securitisation issuance (comprising ABS, residential mortgage-backed securities (RMBS) and small-ticket commercial mortgage-backed securities (CMBS)) for Australia as at 31 October 2018 was around A$90 million; and
- the total year to date (up to 31 October 2018) securitisation issuance (comprising ABS, RMBS and small-ticket CMBS) for Australia was around A$29 million.
Which body has responsibility for the regulation of securitisation?
APRA regulates the securitisation activities of ADIs, including setting capital adequacy requirements. Although not specifically related to securitisation, the Australian Securities and Investments Commission (ASIC) regulates issuances of securities, Australian financial services licensees and the conduct of corporations generally.Licensing and authorisation requirements
Must originators, servicers or issuers be licensed?
There are no specific licencing requirements for securitisation, however, certain activities undertaken by the entities involved in securitisation may require a licence. An Australian financial services licence (AFSL) under the Corporations Act 2001 (Cth) (Corporations Act) is generally required in order to deal in financial products or provide financial services. Additionally, some originators may require an Australian credit licence (ACL) under the National Consumer Credit Protection Act 2009 (Cth) if the underlying receivables contracts involve credit activities. Further, the relevant entities will generally be corporations, which are required to be registered with ASIC.
What will the regulator consider before granting, refusing or withdrawing authorisation?
The considerations for granting, refusing or withdrawing AFSLs and ACLs and registration with ASIC are not specific to securitisation.Sanctions
What sanctions can the regulator impose?
- require an ADI to publicly disclose implicit support provided on a securitisation transaction;
- require an ADI to hold additional regulatory capital commensurate to the risk arising from implicit support or other non-compliance with APS 120; or
- impose quantitative or qualitative limits on the extent to which additional exposures may be securitised by an ADI or the extent to which it may provide additional services.
Such limits may include:
- prohibitions on securitisation activities;
- prohibitions on specific securitisation activities;
- caps on the value of an ADI’s securitised loan book; and
- prohibitions on winding up of securitisation structures.
While APRA cannot directly impose sanctions against non-ADI entities, it can affect the treatment of their securities where held by ADIs.Public disclosure requirements
What are the public disclosure requirements for issuance of a securitisation?
In Australian securitisations the securities are generally issued privately in wholesale transactions, with minimum subscription amounts of A$500,000 or to professional investors. This removes the transaction from the disclosure and reporting requirements for retail transactions, which would ordinarily require lodgement of documents with ASIC.
Separately, under APS 120, an originating ADI must ensure that there is clear and prominent disclosure regarding the nature and limitations of the ADI’s obligations in relation to the securitisation, and it must be clearly disclosed that an investment in the securitisation does not represent a deposit with or other liability of the ADI.
Although not required by law, securitisation transactions will generally include an information memorandum for prospective investors.
What are the ongoing public disclosure requirements following a securitisation issuance?
There are no ongoing public disclosure requirements following a securitisation that has been structured as a wholesale transaction. However, the Reserve Bank of Australia imposes mandatory reporting requirements in relation to securities eligible to be purchased by it under repurchase agreements, including submission of data at the loan, security, transaction and pool levels, a cash flow waterfall model and other related data on a monthly basis, which must be made available to the public.
Outside licensing considerations, are there any restrictions on which entities can be originators?
There are no legal restrictions on which entities can be originators.Receivables
What types of receivables or other assets can be securitised?
There are no legal restrictions on the types of receivables or other assets that can be securitised, although there are practical and commercial considerations that affect which types of underlying assets will be acceptable or appealing to investors.
Predictable payments, low delinquency rates and high collateralisation are generally seen as desirable characteristics. Hence, residential mortgages are the predominant form of asset securitised, although other assets that are commonly securitised include:
- trade receivables;
- credit card receivables;
- commercial loans and mortgages;
- office equipment loan and lease receivables; and
- automobile loan and lease receivables.
Are there any limitations on the classes of investors that can participate in an offering in a securitisation transaction?
There are no legal restrictions on the classes of investors that can participate in an offering in a securitisation transaction, but owing to transactions generally being structured as wholesale transactions with a minimum subscription amount of A$500,000 or to sophisticated investors (to limit disclosure and reporting requirements), participating investors tend to be institutional investors.Custodians/servicers
Who may act as custodian, account bank and portfolio administrator or servicer for the securitised assets and the securities?
There are no legal restrictions on who may act as custodian, account bank, portfolio administrator or servicer for the securitised assets and securities, but for practical and commercial considerations, originators often assume this role, as they have the requisite expertise, platforms and relationships in place, although this role is also outsourced to third parties.Public-sector involvement
Are there any special considerations for securitisations involving receivables with a public-sector element?
No specific requirements apply to securitisations involving receivables with a public-sector element, although it should be noted that:
- actions of governments and governmental bodies, such as entry into contracts or payment of debts, must be authorised by legislation;
- governments can pass laws that retrospectively affect contracts they have entered into;
- enforcement against the Crown is subject to specific procedures; and
- in some cases, the Crown may be permitted to breach contracts without penalty on the basis of its public responsibility.
Transactional issuesSPV forms
Which forms can special purpose vehicles take in a securitisation transaction?
Australia does not have specific laws pertaining to securitisation special purpose vehicles (SPV) and so SPVs can take a number of different forms. The most common form is a special purpose trust established for a specific securitisation transaction. Other forms that may be utilised are special purpose companies or a combination of an issuing company and an asset holding trust.SPV formation process
What is involved in forming the different types of SPVs in your jurisdiction?
A trust can be formed quickly and easily and is established by a trustee declaring, often by way of executing a trust deed, a trust over initial assets held by the trustee and future assets acquired by the trust. The initial assets of the trust are typically nominal. There are no registration requirements for a trust (except for a limited number of trusts, such as managed investments schemes, although this is unlikely to apply for a securitisation), however, an Australian Business Number (ABN) is typically obtained in relation to the trust. There are limited ongoing filing requirements for trusts with an ABN (such as an annual business activity statement).
A company is incorporated in Australia by registration with ASIC. This is also a relatively quick and inexpensive process. However, in addition to the initial registration documentation for corporations, there are ongoing filing requirements for companies with ASIC (such as annual returns).Governing law
Is it possible to stipulate which jurisdiction’s law applies to the assignment of receivables to the SPV?
Australian laws do not require a sale of receivables to be governed by the same law as the law governing the receivables.
The Australian courts will generally give effect to an express choice of law, including foreign law. However, this is subject to:
- the choice being bona fide;
- there being no public policy reason to not give effect to such choice; and
- the choice not infringing on any statute.
If any of these situations arise, local law is likely to override a choice of law clause.Asset acquisition and transfer
May an SPV acquire new assets or transfer its assets after issuance of its securities? Under what conditions?
An Australian SPV may acquire new assets or transfer its existing assets after the issuance of its securities. However, in respect of ADI originators, APS 120 restricts the circumstances in which receivables can be transferred back to the originator. The transaction documents will also often contain a restriction on disposal of the SPV’s assets. The originator is often allowed to substitute new assets into the SPV as consideration for repurchasing assets that are found to have breached representations and warranties. APS 120 allows for this, provided such substitution occurs within 120 days of the issue of securities.Registration
What are the registration requirements for a securitisation?
There are no specific registration requirements for a securitisation, however, there are a number of incidental registrations that will be made as a result of the securitisation.
The security trustee’s security interest in the trust assets will be registered on the Personal Property Securities Register (PPSR) to perfect the security trustee’s security interest in the SPV’s assets (see question 26 for further details).
Other registration requirements may need to be satisfied where the issuance from the securitisation is to be listed on an exchange or traded through a clearing system.
In respect of ADIs, APS 120 requires an ADI to undertake a written assessment of each securitisation in which it participates, demonstrating compliance with the requirements of the prudential standard.Obligor notification
Must obligors be informed of the securitisation? How is notification effected?
In relation to an equitable assignment, the obligors do not need to be informed for receivables to be validly assigned to the SPV. An equitable assignment is the most common form of assignment for Australian securitisations.
Notice of assignment to the obligors allows the purchaser to perfect assignment; however, notice is not always given at the time of assignment. An ability to perfect assignment at a later date if required is often relied on. This approach does, however, leave the SPV exposed to some risks. In particular, the debtor’s obligation to pay is owed to the originator, not the SPV. If the debtor were to default, the SPV has no direct right to take action against the debtor. This can be overcome by the originator agreeing to transfer legal title or grant a power of attorney to the SPV on the occurrence of particular events, such as the originator’s insolvency.
What confidentiality and data protection measures are required to protect obligors in a securitisation? Is waiver of confidentiality possible?
In Australia, the Privacy Act 1988 (Cth) (Privacy Act) regulates how personal information can be collected, used and disclosed and imposes ongoing standards in relation to personal information. The Privacy Act applies to information about individuals and applies regardless of the individual’s purpose in entering into the underlying contract. The Privacy Act also contains specific requirements that apply to credit information; this information is subject to tighter restrictions on how the information can be collected, used and disclosed.Credit rating agencies
Are there any rules regulating the relationship between credit rating agencies and issuers? What factors do ratings agencies focus on when rating securitised issuances?
Under the Corporations Act, credit rating agencies are required to hold an AFSL and to comply with the conditions of the licence, including requirements to comply with the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies. Credit rating agencies are also required to provide assistance to ASIC, including in relation to their compliance with the Corporations Act.
Credit rating agencies must use rating methodologies that are rigorous, systematic, consistently applied, and, where possible, result in ratings that can be subjected to some form of objective valuation. The factors that rating agencies focus on in Australian securitisations are outlined in their global or Asia-Pacific ratings methodologies for the relevant asset class.Directors’ and officers’ duties
What are the chief duties of directors and officers of SPVs? Must they be independent of the originator and owner of the SPV?
Directors of a company are under a duty to act in the best interests of that company, and to prevent that company from insolvent trading. A trustee will also need to carry out its responsibilities under the trust deed and must discharge its fiduciary duties that are owed to the beneficiaries of the trust.
APS 120 contains a restriction on the ability of an originator’s directors to sit on the board of the SPV. If the SPV’s board contains 4 or fewer members, none of the originator’s directors may sit on the board. If there are more than four members, a restricted number of the originator’s directors may sit on the board.
In addition, APS 120 does not permit an originator ADI to act, or allow any of its directors, officers or employees to act, in any circumstances as a trustee of the SPV (or in any similar capacity).Risk exposure
Are there regulations requiring originators and arrangers to retain some exposure to risk in a securitisation?
There are no Australian requirements for an originator or arranger to retain a certain amount of exposure in the securitisation. Conversely, APS 120 requires a significant credit risk transfer in relation to the underlying receivables if the ADI originator is seeking regulatory capital relief.
What types of collateral/security are typically granted to investors in a securitisation in your jurisdiction?
The most common form of security granted by the SPV is a general security interest over all assets of the SPV, including the receivables, bank accounts and other assets of the SPV. The security is usually granted in favour of a security trustee who holds the security on behalf of, and for the benefit of, the investors and other secured creditors.Perfection
How is the interest of investors in a securitisation in the underlying security perfected in your jurisdiction?
The security interest held by the security trustee must be perfected by registration on the PPSR within prescribed time limits. It is possible to perfect security interests in some assets by only possession or control, with no registration; however, this is unusual in securitisations as the date of perfection can be difficult to determine. The date of perfection is important as it will determine priority of competing security interests. For this reason perfection by registration is the preferred approach as it provides a definitive date.Enforcement
How do investors enforce their security interest?
As security is most often held by a security trustee, on an event of default it is the security trustee’s role to enforce the security interest.
The security trustee often has the sole right to enforce the security granted by the issuer. Most securitisation documentation will also require the security trustee to enforce the security if directed to do so by a certain proportion of investors.Commingling risk
Is commingling risk relating to collections an issue in your jurisdiction?
The investors are exposed to the risk that the servicer becomes insolvent before the proceeds from the receivables are paid to the SPV, and are available to the servicer’s creditors. If the funds are not held separately, it is likely to be difficult to establish that they are held on trust for the investors.
To mitigate this risk, the collections from the receivables can be paid into a nominated account into which only receivables that are subject to the securitisation are paid. Often there will also be a requirement to sweep funds frequently from the collection account to an account in the name of the SPV.
What are the primary tax considerations for originators in your jurisdiction?
The primary tax considerations for originators is to ensure, as far as possible, that the securitisation does not lead to any additional tax liabilities and that the SPV is tax neutral.
Some of the key taxation issues for an originator are:
- transfer of receivables: taxation of the transfer of the receivables to the SPV and whether the sale will give rise to a taxable profit or loss for the originator, or whether the transfer will be liable to transfer duties or other indirect taxes, such as GST;
- profits: taxation of profits received from the issuer, and the timing of receipt of such profits;
- deductions for bad debts: structuring the securitisation to provide effective recognition of bad debts arising in connection with the receivables; and
- servicing arrangements: taxation of the servicing arrangements (eg, whether servicing fees will be liable to GST).
What are the primary tax considerations for issuers in your jurisdiction? What structures are used to avoid entity-level taxation of issuers?
In Australia, the main structures typically used are either a unit trust (for the purposes of utilising a flow-through vehicle) or a corporate vehicle (where expected cash flows can be managed).
Some of the key taxation issues for an issuer are:
- ensuring there are nil or minimal taxable profits within the issuer on which direct tax could be charged;
- ensuring as far as possible that no withholding taxes will be imposed on the receivables income of the issuer or on the interest payable by the issuer in respect of the notes issued; and
- ensuring that any indirect taxes, such as stamp duty and GST, at the issuer level are minimised.
Structural considerations that are taken into account when setting up the securitisation to minimise tax liability include the following:
- structuring the SPV trust so that the beneficiaries are entitled to the income of the trust estate, and ensuring that the beneficiaries are not non-residents of Australia;
- the location of the underlying assets to avoid or minimise any stamp duty payments;
- the mechanics of transferring the assets from the issuer to the SPV; and
- if the notes are to be sold publicly, consideration of the relevant jurisdictions in which they may be sold to minimise the risk of any withholding tax being required.
What are the primary tax considerations for investors?
The application of withholding tax is a primary consideration for investors. For certain underlying receivables, an exemption from withholding tax may be available if the underlying issue satisfies the public offer test. Securitisations are often structured in a manner to meet this test.
Where investors participate as equity investors (eg, unitholders) rather than as debt holders, the key concern is to ensure that the timing in respect of expected gains and profits aligns with the timing of the tax liability to avoid unfunded liabilities.
How are SPVs made bankruptcy-remote?
The usual steps taken to assist in achieving bankruptcy remoteness include:
- the SPV and its creditors giving undertakings in the securitisation documents that preserve the SPV’s purpose and maintaining the solvency of the SPV;
- enabling the replacement of the SPV trustee if the trustee becomes insolvent, including a mechanism to vest the SPV trust’s assets in a new trustee;
- limiting the liability of the SPV; and
- limiting the SPV’s creditor’s recourse to the securitised assets.
What factors would a court in your jurisdiction consider in making a determination of true sale of the underlying assets to the SPV (eg, absence of recourse for credit losses, arm’s length)?
When determining if a true sale has occurred, the courts are likely to consider the legal, rather than economic, substance of the transaction. As such, the contract should clearly express that the receivables are being sold, and all associated rights and obligations must be consistent with that of a sale.
In particular, Australian courts are likely to review the following aspects of a transaction when determining if a true sale has occurred:
- the rights and obligations the parties gave to each other under the terms of the contract of sale; and
- the characterisation of such rights and obligations as a matter of law, without taking into consideration the parties’ intentions.
What are the factors that a bankruptcy court would consider in deciding to consolidate the assets and liabilities of the originator and the SPV in your jurisdiction?
An insolvency official in Australia is not able to consolidate the assets of the originator and SPV in insolvency proceedings, provided that the originator and SPV are distinct, independent entities. If, however, the originator and SPV are not independent (for example, if they are related entities or their affairs are intermingled) the liquidator may obtain a pooling order permitting the liquidator to wind up the originator and SPV on a pooled basis.
Updates and trendsRecent developments
Are there any rules governing securitisations pending in your jurisdiction or reforms under way, such as prohibitions on financial firms betting against the securities they package, improved disclosure and oversight of the asset-backed securities market, rules limiting bank compensation structures that incentivise risk, etc?No updates at this time.