Trends, developments and prospects
What is the general state of the securitisation market in your jurisdiction, including current trends, notable recent developments and future prospects?
Requests have been made for the introduction of structured finance solutions in Switzerland in the past 12 months with respect to all debt structures, including true sale securitisations and synthetic balance sheet securitisations. Most of the public (true sale) securitisation transactions which closed in 2018 related to Swiss credit card receivables and auto leases. Further, there were a number of trade and loan receivables securitisation transactions by Swiss originators. Finally, the Swiss market has seen several non-public synthetic balance sheet securitisations. These transactions are usually initiated by larger, systematically important banks with the aim of reducing the relevant institutions’ risk-weighted assets.
What primary and secondary legislation applies to securitisation in your jurisdiction?
Switzerland has not enacted specific primary legislation covering securitisation transactions. Instead, securitisation or asset-backed securities transactions are structured within the general legal framework. Applicable legislation includes the Swiss Code of Obligations and the Swiss Civil Code, which are relevant for establishing special purpose vehicles and the requirements for a valid transfer of underlying assets or receivables. For the listing of securitised debt, the SIX Swiss Exchange listing rules must be followed. However, these rules do not contain specific rules for the listing of securitised debt, which is subject to the same requirements as ordinary straight bonds.
Which authorities regulate securitisation in your jurisdiction and what is the extent of their powers?
As there is no specific securitisation regime in Switzerland, there are no specific authorities which regulate securitisation transactions. However, certain authorities are relevant when it comes to the regulation of such structures. These include:
- the SIX Swiss Exchange (in case of a listing of securitised debt); and
- the Swiss Financial Market Supervisory Authority (FINMA) with respect to certain regulatory matters.
As there is some uncertainty relating to licensing requirements and the scope for the qualification of entities as financial institutions, it is standard procedure to obtain negative confirmation from FINMA and other relevant (cantonal) authorities, particularly if the securitisation relates to consumer loan portfolios.
Originators and assets
Which entities are typically the originators in securitisation transactions in your jurisdiction? Are there any restrictions on entities that can serve as originators?
The most active companies acting as originators in Switzerland are auto leasing companies and credit card providers. Further originators include banks and other financial institutions and market lending platforms.
Which types of asset are typically securitised? Are there any restrictions on securitisable assets?
Securitised assets in securitisation transactions include:
- auto lease assets;
- trade receivables;
- credit card receivables;
- (customer) loan portfolios;
- residential mortgage loan portfolios; and
- commercial real estate loans.
In principle, any type of asset may be used in a securitisation transaction from a Swiss law perspective. However, the limiting factor is usually the view of the market on whether a specific asset is suitable in a securitisation context.
What structures are typically used to securitise assets in your jurisdiction? Are there any restrictions on which structures may be used?
Parties in Swiss securitisation transactions often use a Swiss special purpose vehicle (SPV) when setting up the structure. This is particularly common where:
- the underlying assets relate to residential real estate located in Switzerland as the use of a foreign SPV may lead to cantonal withholding taxes; or
- the parties would like to avoid a transfer of data abroad.
However, it is also possible to use a structure involving a trust. Although the concept of a trust does not exist under Swiss law, foreign trust structures are recognised in Switzerland.
Are foreign securitisation structures commonly used? What rules, restrictions and practical considerations apply to their use (if any)?
Securitisation structures using a foreign SPV or a trust are regularly seen in the Swiss market. However, such structures may not be suitable if the underlying assets relate to residential real estate located in Switzerland as the use of a foreign SPV can lead to the incurrence of cantonal withholding taxes.
What formal and procedural requirements govern the establishment of securitisation structures?
If the parties decide to use a Swiss issuance vehicle for the transaction, it can take either the legal form of a stock corporation or the form of a limited liability company. The minimum capitalisation is Sfr100,000 (of which a minimum of Sfr50,000 must be deposited) for stock corporations and Sfr20,000 for limited liability companies. Setting up an SPV usually takes one to two weeks. In order to ensure that the SPV is bankruptcy-remote, the purpose of the SPV (which is set out in the articles of association) is usually limited to the securitisation transaction in question. Further, it may be necessary to implement golden shareholder structures (ie, structures where an independent shareholder has certain veto rights) in order to fulfil the requirements of rating agencies as Swiss SPVs are typically held by the originator.
Transfer methods and procedures
How are assets transferred from the originator to the securitisation structure and what formal and procedural requirements must be met in order to perfect the transfer?
The transfer of receivables or claims which are the subject of a securitisation transaction is typically governed by a receivables purchase agreement between the originator as seller and the special purpose vehicle (SPV) as purchaser. From a Swiss law perspective, the assignment of the receivables takes place with the seller declaring in writing to assign the receivables. This declaration is usually embedded in the purchase agreement but may also be set out separately. From a Swiss law perspective, as future receivables which have been assigned to the SPV would fall into the originator’s bankruptcy estate once bankruptcy or insolvency proceedings have been initiated against the originator, the parties may decide to transfer the receivables by way of an assumption of contract. This means that future receivables will be directly owned by the purchaser on coming into existence.
Obligor notification and data protection
Must obligors be notified of the transfer of assets to the securitisation structure? If so, what rules and procedures apply? What data protection requirements apply regarding obligors’ personal data?
If the underlying agreements governing the receivables do not exclude an assignment, notification of the creditors of the assignment is not required. However, the parties to the transaction may have an incentive to notify the underlying obligors as such a notification will prevent them from validly discharging their obligations by making a payment to the originator as debtor. If the parties decide to transfer the receivables via an assumption of contract, the consent of the underlying obligors is required for the transfer to be valid and effective. In order to comply with Swiss data protection laws, the parties typically obtain a waiver from the underlying obligor. Such waivers are often included in the underlying agreement governing the receivables.
Anti-money laundering provisions
What anti-money laundering provisions apply to asset transfers to securitisation structures?
Generally, anti-money laundering provisions do not apply to asset transfers in a securitisation context. As there is a certain level of uncertainty with respect to some regulatory questions – including anti-money laundering legislation – the parties in a securitisation transaction typically obtain rulings from the Swiss Financial Market Supervisory Authority (FINMA) and other regulatory bodies confirming that anti-money laundering legislation does not apply to the structure.
Choice of law provisions
What rules and restrictions (if any) apply to the choice of law governing the asset transfer?
The parties to a receivables or asset purchase agreement are generally free to choose the governing law. They are also free to have the transfer governed by another law than the governing law of the asset. However, when making a choice of law with respect to the transfer and assignment of receivables, the parties must consider Article 145 of the Private International Law Act, which provides that a choice of another law than the law governing the receivables cannot be asserted against the third-party debtor without the latter’s consent and a party could also raise objections as to the validity of the assignment under the law governing the assigned rights. As a result, the parties of a securitisation transaction typically choose to govern the sale of receivables or other rights by the law governing the relevant receivables or rights.
Available types of security
What types of security are available and commonly used for securitisation transactions in your jurisdiction? What formal and procedural requirements must be met in order to perfect the security?
The use of comprehensive security packages for securitisation transactions is common. The most commonly used forms of security taken out are:
- an assignment for security purposes of the underlying trade or other receivables;
- pledges over bank accounts of the special purpose vehicle; and
- the assignment of certain claims under the transaction documents.
The security is typically held by a security trustee for the benefit of the investors. The formal and procedural requirements to perfect the security depend on the form of the security and the type of asset which serves as collateral.
How are security interests enforced?
Security established in connection with Swiss securitisation structures may be enforced by either private enforcement or official enforcement proceedings. In the course of private realisation, the assets serving as security can be either sold to a third party in a private sale or auction or acquired by the security trustee or agent for the account of the secured parties. Any such transaction must be made at market value. Private enforcement is only permitted if the security provider has consented to this enforcement method in advance. If the security trustee or agent chooses to enforce the security by way of official enforcement proceedings, it must apply for the commencement of debt collection proceedings with the competent debt collection office. Such proceedings involve multiple states, some of which require court involvement and are cumbersome. The actual enforcement typically takes the form of a public auction.
Issuance of securities
What rules, documentary requirements and procedures govern the public listing of asset-backed securities in your jurisdiction? How common is public listing? Are foreign exchanges preferred?
Asset-backed securities are not subject to specific listing rules. The general listing rules applicable to bonds also apply to securitised debt. In 2018 the Swiss market saw five new asset-backed securities listings on the SIX Swiss Exchange, which approximately matches the number of listings in 2016 and 2017.
If the parties decide to list the securities on the SIX Swiss Exchange, they must prepare a listing prospectus which follows the SIX listing rules and also meets certain requirements set out in the Swiss Code of Obligations. The SIX listing rules provide a number of exemptions for issuances of special purpose vehicles (SPVs). For example, an SPV does not need to have existed for three years and does not need to meet certain minimum capitalisation thresholds.
The Swiss prospectus regime will be substantially changed when the new Federal Financial Services Act comes into force. The act will provide uniform rules with respect to the prospectus duty, which applies to issuances targeting the Swiss market. Further, the act will provide for the preparation of a key information document, which will be supplied to financial instruments offered to retail investors. The Federal Financial Services Act will apply to the offering of asset-backed securities and is expected to enter into force on 1 January 2020.
What rules, documentary requirements and procedures govern the private issuance of asset-backed securities in your jurisdiction? How common is private issuance?
Private asset-backed security transactions are quite common. There are no specific rules, documentary requirements or procedures which specifically govern the private issuance of asset-backed security.
Credit enhancement and rating
Credit enhancement methods
What credit enhancement methods are commonly used in your jurisdiction? Do any restrictions apply? Are there any special issues specific to your jurisdiction in relation to credit enhancement?
There are a variety of techniques that can be used to enhance the creditworthiness and the solvency of a securitisation structure. Examples of widely used techniques include:
- the provision of collateral for the benefit of the investors;
- the subordination of certain tranches of an issuance (ie, introduction of tranches with different seniorities); and
- the use of derivatives for the purpose of hedging currency and interest rate risks.
Credit rating agencies
What factors do credit rating agencies consider when assessing asset-backed securities?
Credit rating agencies consider various factors when assessing asset-backed securities structures, including:
- whether the underlying receivables agreement contains any transfer restrictions or restrictions on the assignability of the receivables;
- the availability of true sale opinions;
- which credit enhancement methods have been chosen;
- the constitution of the board of directors of the special purpose vehicle (SPV) (ie, the appointment of an independent board member); and
- the ownership structure of the SPV (ie, a wholly owned subsidiary of the originator or a vehicle held by independent shareholders).
Are the activities of credit rating agencies and their relationships with issuers subject to any regulations or restrictions?
The activities of credit rating agencies and their relationships with issuers are not subject to any specific regulations.
What tax liabilities arise for originators in relation to securitisation transactions and how can these liabilities be mitigated?
Depending on the kind of assets transferred, the transfer of underlying assets can trigger transfer taxes and value-added tax. A transfer of real estate can also trigger real estate transfer taxes. In addition, any undisclosed reserves on the assets transferred may be deemed to be realised and subject to corporate income tax. In certain cases, a transfer of the underlying assets to a special purpose vehicle (SPV) may be structured as a tax-exempt restructuring.
What tax liabilities arise for securitisation structures and how can these liabilities be mitigated?
Swiss SPVs are subject to ordinary income tax. In specific cases a special tax status may be applicable (eg, the holding regime). However, since the income and expenses must match the level of the SPV, there should be no substantial taxable profit.
What tax liabilities arise for investors in asset-backed securities and how can these liabilities be mitigated?
The issuance of securitised debt by a Swiss SPV generally qualifies as an issuance of bonds from a Swiss tax law perspective. Accordingly, any interest payments will trigger Swiss withholding tax (currently 35%). For Swiss investors, the withholding tax is fully recoverable. The level of the recoverability for foreign investors depends on the domicile of the investor and the applicable double tax treaty.
The payment of withholding tax may be avoided by choosing a non-Swiss issuance vehicle. However, such structures are scrutinised by the Swiss tax authorities and may be judged to be part of a tax avoidance scheme. Non-Swiss structures may also lead to additional issues with respect to other aspects of the structure (eg, issues in connection with data transfers abroad). If the underlying asset portfolio relates to real estate located in Switzerland, the use of a non-Swiss issuance vehicle may further lead to the incurrence of cantonal withholding taxes on interest, if the transaction is secured by Swiss real estate. This cantonal withholding tax may be recoverable, depending on the applicable double tax treaty.
Swiss resident entities and individuals holding securities as part of their business assets may need to include any income and gains (or losses) realised in their profit and loss statement relevant for corporate income distributions.
Swiss resident individuals holding the securities as part of their private assets must include any interest payments as taxable income in their personal tax return. A capital gain realised on the sale of the securities should qualify as tax-exempt capital gain. A realised capital loss is not tax deductible.
True sale and recharacterisation
How is a ‘true sale’ determined in the event of the originator’s insolvency? In what circumstances will a bankruptcy court recharacterise an asset transfer as a secured loan?
Neither statutory law nor case law provide for a straightforward test to define whether a sale of securitisation receivables qualifies as an effective or true sale. In order to mitigate any risk of re-characterisation of the asset transfer by a bankruptcy court, parties of securitisation transactions lay particular emphasis on the transfer of the credit risk from the seller (originator) to the purchaser (special purpose vehicle (SPV)). The fact that the seller will remain in control of the collection process does not lead to a re-characterisation of the transaction as not being a true sale, provided that the purchaser has the right to notify the creditors at any time and direct them to pay it directly. Further, the asset transfer should meet the arm’s-length test as this element would likely be taken into account by a court when making a true sale analysis. Finally, the parties will usually avoid introducing any repurchase obligations of the originator other than standard repurchase obligations relating to ineligible receivables. The mere option of the originator to repurchase receivables is usually not considered to cut across the true sale analysis.
How can commingling risk in the context of the originator’s insolvency be mitigated?
The concept of a trust does not exist under Swiss law. However, as Switzerland accepts the Hague Trust Convention, foreign trust structures are generally recognised and can thus be used to mitigate any commingling risk. However, structures making use of a trust are the exception in the Swiss market. Rather, the commingling risk is addressed by the following (non-exhaustive) measures:
- the introduction of short intervals for the transfer of collections to the SPV;
- instructing debtors to make all payments directly to a bank account held by the SPV (in any case or after certain trigger events); and
- the introduction of mechanisms to ensure that debtors are notified immediately following certain trigger events and are instructed to make all payments to the SPV only.
How can securitisation structures be made bankruptcy remote?
The main way to make an SPV bankruptcy remote is to limit the corporate purpose of the SPV to the specific securitisation transaction in question and to provide for specific restrictions on the change of the legal form or any amendments to the SPV’s constitutional documents. Other elements include:
- the introduction of limited recourse and non-petition provisions; and
- waivers of the set-off provisions for any counterparties dealing with the SPV.
Finally – and irrespective of the fact that Swiss law as a general rule does not provide for the concept of consolidation in the case of an insolvency – the parties to a securitisation transaction will usually ensure that the SPV and its shareholders are managed independently and have different branding so that it is not qualified as being part of the same group of companies as the originator.