Maria Chetcuti-Cauchi | 21 Jun 2012

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1. What is securitisation?

Securitisation is a means to raise finance on markets for financial instruments on the back of other forms of assets.  Securitisation is typically structured as a two-tiered transaction.  Firstly, one party (the ‘Originator’) transfers existing or future assets (known as ‘Securitisation Assets’) to another party (the ‘Securitisation Vehicle’) in return for a consideration.  Alternatively, risks held by an originator may be assumed by a securitisation vehicle in return for a period payment from the originator.  
Secondly, a securitisation vehicle (at this point referred to as an ‘Issuer’) makes use of its acquisition from the first step to issue financial instruments and offer them to the public on their respective market according to the instrument in question.  
The investment an Issuer receives in return for the financial instruments generates fresh funds for the first leg of the transaction. The securitisation cycle can carry on for as long as a demand for financial instruments lasts. 

2. Securitisation and market trends

Securitisation offers a possibility to establish new markets or to amplify existing markets in securitisation assets and financial instruments.  The new demand for assets would push up their price for as long as the securitisation structure remains successful.  An originator can cash in on assets (albeit at a discount) which he no longer cares to hold on account of the demand by the securitisation vehicle.  This transfer simultaneously allows an originator to jettison risks of suffering losses in relation to these assets (say on account of a defaulting debtor) and do away with counter risk measures he might be obliged to observe.  Further, a transfer of assets is necessarily reflected in the Originator’s balance sheet and securitisation is a popular means to exploit off-balance-sheet financing opportunities.
In parallel, a securitisation vehicle looks to create a margin between the cost of acquiring securitisation assets from an originator and the investment charged on the market for financial instruments he issues.       

3. Securitisation Assets

The Securitisation Act (hereafter referred to as the ‘Act’) establishes a very wide scope of forms of assets which may serve as securitisation asset.   In general terms securitisation assets may be:- 
1. existing or future, 
2. movable or immovable,  
3. tangible or intangible, 
4. where the context so allows, risks.

4. A transfer of securitisation assets

The transfer from originator to securitisation vehicle may be by novation, sale, assignment, and declaration on trust.   However any means of transfer which is permitted by Maltese law serves this purpose fine.   
Typically a transfer of securitisation assets takes place by assignment.  The general law of assignment renders the procedure somewhat cumbersome, and unlike say assignments under English law which provide popular in securitisation structures.   In order to give the local securitisation industry a fighting chance, the Act has relaxed these rules where securitisation assets are transferred.  A number of formalities have been done away with and the procedure was tailored to suit large volumes of transfers which are seen in securitisation.   

4.1 Certainty of transfers

An assignment of securitisation assets is as a general rule considered to be final, absolute and binding on all parties concerned.  In practice this means that an assignment of securitisation assets cannot be successfully challenged notwithstanding a contractual or statutory prohibition in place or any restriction on the originator to transfer the assets in question.  

4.2 Challenging a transfer of securitisation assets 

Notwithstanding the presumption referred to in point 4.1 above, a transfer of securitisation assets may be successfully challenged when:- 
1. the securitisation vehicle has acted knowing of a restriction prohibiting the transfer of securitisation assets, 
2. the assignment was made at a time when either, 
(a) an application for the dissolution and winding up of the originator because of its insolvency was pending, or 
(b) the originator had taken formal steps to bring about the dissolution and winding up due to its own insolvency, and 
(c) the securitisation vehicle (at the time of the assignment) knew or ought to have known of either of these circumstances.  

5. The securitisation vehicle

A securitisation vehicle is an independent entity, distinct from an originator.  Any proceeding taken against the originator and proceedings affecting the originators’ creditors’ rights shall not effect:-
the securitisation vehicle;
securitisation assets acquired or risks assumed by the securitisation vehicle;
any cash flow or other asset of the securitised vehicle (such as the investments);
any payments due by the underlying debtors in connection with the assets acquired by the securitisation vehicle.  

5.1 Which entities may act as securitisation vehicles?

A securitisation vehicle may be any of the following entities, whether established in Malta or another jurisdiction which is recognised by the MFSA:-  
1. companies and investment companies
2. partnerships
3. Trusts  

5.2 Management of a securitisation vehicle

A securitisation vehicle is free to delegate to any third party, including the originator, the management responsibility for:-
1. day to day administration of the securitisation vehicle,  
2. day to day administration of the assets or risks thereof, 
3. the collection of any claims on assets it has acquired.  

6. Licensing requirements

In general a securitisation vehicle does not require a licence from the Malta Financial Services Authority (MFSA)  in order to act in or from Malta.   This is not affected by the nature of the securitisation assets it intends to acquire or risks it intends to assume.  
A securitisation vehicle should merely notify the MFSA before it commences its trade.   Moreover, it should be founded with limited objects and declare in its constitutive that the vehicle is subject to the provisions of the Act.   Therefore a securitisation vehicle should perform only those functions required to carry out securitisation transactions and ancillary acts.   No other trade or business whatsoever may be carried out.   

6.1 The issue of financial instruments

The general framework of laws apply when an Issuer offers financial instruments on their respective market.  In practical terms an issue of securities to the public by a securitisation vehicle should comply with the provisions of the Investment Services Act  and the Companies Act. 

6.2 Public Securitisation Vehicles

A licence from the MFSA is mandatory in the case of public securitisation vehicles.  A public securitisation vehicle performs the same functions and role of a (non-public) securitisation vehicle, however, it ‘offers financial instruments to the public’  on a continuous basis.   In terms of the Directive 2000/12/EC offers of this nature are equated to the taking of deposits and consequently should be regulated by the member states.  Consequently a public securitisation vehicle should obtain a licence from the MFSA before commencing their trade. 

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