FAQ – Guidelines on the Offering of Asset-Backed Debt Securities (updated 12 September 2001)

Following the release of the Guidelines on the Offering of Asset-Backed Debt Securities (ABS Guidelines) on 11 April 2001, the Securities Commission (SC) will periodically issue responses to FAQs to clarify and facilitate better understanding among affected parties and the public in general in relation to securitisation transactions.

Special Purpose Vehicle (SPV)


What legal structure should the SPV take?

The ABS Guidelines are neutral on the legal form of an SPV and market participants are free to decide the most suitable SPV form in any securitisation structure. SPVs can be established as either companies or as trust structures. Where the SPV is established as a company, the amount of its paid-up capital would be determined by the promoters.


Can an SPV be incorporated in Labuan?

Yes, as such an SPV would be considered resident in Malaysia for tax purposes as required under the ABS Guidelines. Nevertheless, the acquisition of Ringgit assets by an entity incorporated in Labuan and the issuance of Ringgit denominated asset-backed debt securities by it to domestic residents, would among others, be subject to the approval of the Controller of Foreign Exchange. Parties should also be aware that the Offshore Companies Act 1990 places some restrictions on the activities of such offshore entities.

Approval Process


How long would the SC take to approve an ABS submission?

The SC is committed to granting an approval under both the ABS and PDS Guidelines within 28 working days upon receipt of an ABS submission which fully complies with all requirements under both Guidelines.


Is the Foreign Investment Committee’s (FIC’s) approval necessary for the transfer of all types of assets in a securitisation transaction?

FIC’s approval is only required for transactions involving real property or shares. The securitisation of financial assets need not require the FIC’s approval.

The Originator


Under what circumstances would the SC approve a foreign Originator in a securitisation transaction?

Subject to compliance with the SC’s requirements on acquisition of foreign securities/assets, the SC may consider granting an exemption from this requirement if the Originator is a foreign subsidiary of a Malaysian company, provided the Originator ensures compliance with all other requirements of the ABS Guidelines, particularly, to mitigate any increased insolvency or bankruptcy risks which might arise in such a structure.

Requirements for assets that may be securitised


Can assets in a securitisation transaction be foreign based?

The Guidelines do not stipulate the jurisdiction of the assets involved in a securitisation transaction. However, the legal opinion that is provided in relation to the securitisation transaction would be important to ensure that the requirements for such assets as stated in the ABS Guidelines are complied with.


The ABS Guidelines require assets to be transferred at fair value. How would the adviser ensure that the asset value is in fact “fair”?

“Fair value” under the Guidelines would equate with its market value where there is a market for the underlying asset (for example, real property). In the absence of a market value for the asset, “fair value” would be based on what a willing buyer and a willing seller would agree upon.


Are revolving structures permitted under the ABS Guidelines?

Revolving securitisation structures, such as the securitisation of credit card receivables, are permitted under the ABS Guidelines.

True Sale Requirement


Can the Originator have a buy-back arrangement on the underlying assets?

As provided for in the ABS Guidelines, Originators may retain a first right of refusal option, which serves as a “clean-up-option” of the remaining assets once the securitisation transaction becomes uneconomical to carry on upon maturity of the securitisation transaction. In addition, the Originator may also be obligated to repurchase assets from the SPV if the Originator breaches any conditions, representations and warranties in respect of the securitisation transaction.
Advisers to the transaction (particularly legal advisers) should ensure that the use of call options in a securitisation transaction would not negate the achievement of true sale as required under the ABS Guidelines.



Would an Originator be permitted to hold subordinated debt in an ABS structure?

Yes. An Originator may hold subordinated debt for credit enhancement purposes.



The Guidelines stipulate that the Originator should not have control over the assets transferred to the SPV. Can the Originator be a servicer and still comply with this requirement?

The Originator may act as a servicer in a securitisation transaction if the services are provided on an arm’s length basis and at market terms as provided for in paragraph 6.5 of the ABS Guidelines.

Exchange Control Matters


Must any ABS issued be denominated in Malaysian Ringgit or can the ABS be issued to foreign investors in a foreign currency denomination?

There are no restrictions in the ABS Guidelines on the issuance of foreign currency denominated bonds. In addition, such foreign currency denominated bonds would also be entitled to rely on Practice Note 1 issued under the PDS Guidelines which dis-applies, varies or clarifies the application of the PDS Guidelines in relation to the offer, issue or invitation of foreign currency denominated private debt securities of a Malaysian public company made exclusively to persons outside of Malaysia. However, such funds raised must comply with any requirements and regulations as may be issued by the Controller of Foreign Exchange from time to time.


Would funds, which are received by a non-resident controlled company as a result of the origination of an ABS issue, fall within the definition of “credit facilities” and therefore be subject to the computation of 3:1 domestic debt to capital funds ratio for the purpose of exchange control notices?

Such funds would not be deemed as “credit facilities” provided that the disposal of asset meets the true sale criteria under the ABS Guidelines.

14. ABS can be issued with assets purchased from residents or non-residents by special purposes vehicles (SPVs) which are residents or non-residents. As exchange control rules cover payments between residents and non-residents, what are some situations in which SPVs are freely allowed under exchange control rules to issue ABS.

The situations are as follows:

Permitted ABS structure


1 Sale of ringgit assets in ringgit by resident originators and issuance of ringgit ABS by resident SPVs. The issuance of ABS by the resident SPVs are subject to compliance with the Exchange Control Guidelines on Private Debt Securities For Lead Arrangers
2 Sale of foreign assets by non-resident originators, the issuance of foreign currency securities by non-resident SPVs (including those in Labuan) and the purchase of such securities by non-residents. The transactions are not under Exchange Control purview

All other situations would require the prior approval of the Controller.

Other matters


What other measures are being undertaken to develop the asset securitisation market in Malaysia?

The SC, under the auspices of the NBMC, would endeavour to deliberate with the relevant authorities on the possible creation of a tax neutral framework for an SPV involved in a securitisation transaction and to review various bankruptcy and insolvency provisions that impedes the development of asset securitisation in Malaysia.


Are there any restrictions imposed on institutions licensed under the Banking and Financial Institutions Act 1989 (“BAFIA”) in the structuring of a securitisation transaction?

Any disposal of assets by an Originator (which is a financial institution) may require the approval of the Minister of Finance on the recommendation of Bank Negara Malaysia under section 49 of BAFIA. In addition, the financial institutions need to observe section 97 of BAFIA in relation to the disclosure of any information pertaining to the underlying assets. BNM should also be consulted to ascertain any prudential requirements arising from the nature of the involvement of licensed institutions either as a servicer, liquidity provider, adviser etc. Any required approval of BNM should be obtained prior to any submission to the SC under its ABS Guidelines.


Can the ABS be sold to a parent or subsidiary of the Originator, in or outside Malaysia? Would the “true sale” requirement be met?

Only the Originator faces restrictions in purchasing the ABS issued (up to a maximum of 10% of the original amount of the ABS issued). No restrictions however, are imposed on related companies of the Originator from investing in these securities.


Can an Originator hold preference shares in an SPV? Would holding preference shares contravene the requirement that “an Originator must not hold any equity stake, directly or indirectly, in an SPV”?

Originators may hold preference shares in an SPV so long as such instruments do not entitle the holder to the right to vote at a general meeting or to any right to participate beyond a specified amount in any distribution whether by way of dividend, or on redemption, in a winding up or confer on the holder an ability to directly or indirectly exercise effective control over the SPV.