SC Introduces Guidelines on the Offering of Asset-Backed Debt Securities

Kuala Lumpur, 10 April 2001

The Securities Commission (SC) today released the Guidelines on the Offering of Asset-Backed Debt Securities (ABS Guidelines). These Guidelines are part of the SC's initiatives to develop the corporate bond market and represents an important milestone in the development of the depth of the capital market. These Guidelines have been formulated after extensive consultation with industry members and professionals.

Asset Securitisation

Generally, asset securitisation involves the transfer of assets or risks to a third party (usually a special purpose vehicle) where such transfer is funded by the issuance of highly rated debt securities to investors. Payments to investors in respect of such debt securities are principally derived, directly or indirectly, from the cashflows of the assets. Thus, the credit rating of such debt securities are derived from the quality of the underlying assets and not the credit rating of the original owner of such assets (commonly known as an Originator) as is the case in debt securities issued by the corporation itself.

Benefits of Securitisation

As a capital market financing mechanism, asset securitisation generates a wide range of benefits whether viewed from the standpoint of an issuer or an investor, or from a broader social and economic perspective.

From an issuer's perspective, securitisation provides a vehicle for transforming relatively illiquid financial assets into liquid and tradeable capital market instruments. Issuers are also able to achieve a more efficient and lower cost source of financing as asset securitisation structures allow for the issuance of debt securities that carry a higher rating than the long-term credit rating of the Originator. This, in turn, translates into cheaper financing costs for issuers.

The variety and flexibility of credit, maturity and payment terms made possible through securitisation structures provide investors a much broader selection of fixed income products in the Malaysian market.

The establishment of liquid and efficient secondary securitisation markets would also have the effect of increasing the availability of financing options and also reduce the cost of financing in primary markets. It will encourage the efficient allocation of capital by subjecting credit granting activities to the pricing and valuation discipline of the capital markets.

Guidelines on the Offering of Asset-Backed Debt Securities

Applying a disclosure-based approach, the Guidelines serve to set out clear and transparent criteria so that market participants are able to understand the SC's requirements prior to any approval being given under section 32 of the Securities Commission Act 1993 for the offering of any asset-backed debt securities.

The SC is committed to a speedy issuance process for asset backed debt securities. As any issuance of asset-backed debt securities must comply with both the SC's Guidelines on the Offering of Private Debt Securities (PDS Guidelines) as well as ABS Guidelines, the maximum approval time taken by the SC will be 28 working days in respect of both the Guidelines.

The criteria in these new Guidelines governs various aspects and parties involved in securitisation transactions, whereas the transaction that involves the issuance of debt securities would be governed separately by the PDS Guidelines.

Criteria: Assets that may be Securitised

The assets that are eligible to be securitised must generate cash flow. The Originator must also have a valid and enforceable interest in the assets and in the cash flow of the assets prior to any securitisation transaction.

Criteria: Requirements for "Originators" and "True Sale Criteria"

Originators themselves must be a going concern at the date of transfer of any assets to a special purpose vehicle. Any transfer of assets by an Originator to the special purpose vehicle must, in addition, comply with the "true sale" criteria. This means that the assets which are transferred to the special purpose vehicle from the Originator must be put beyond the reach of the Originator and its creditors even in receivership or bankruptcy to the extent possible. To ensure this, the Originator must effectively transfer all rights and obligations in the assets to the special purpose vehicle and must not retain any residual beneficial interest in these assets. Conversely, the special purpose vehicle must have no recourse to the Originator for losses arising from those assets.

Criteria: Requirements for Special Purpose Vehicles

The special purpose vehicle itself must be "bankruptcy remote" in that it should not carry on any other business activity other than in relation to the securitisation transaction itself. Thus, it should merely hold the assets, issue the asset-backed debt securities and ensure appropriate management of the cash flows arising from the assets so that timely payments are made to holders of the asset-backed securities. To ensure that the special purpose vehicle can be considered for stamp duty and real property gains tax exemptions, where applicable, such special purpose vehicles must reside in Malaysia.

Real Property Gains Tax and Stamp Duty Exemptions

In accordance with the 2001 Budget announcement, asset securitisation transactions that are in full compliance with the SC's ABS Guidelines would be eligible for real property gains tax and stamp duty exemption, where applicable.

Disclosure Requirements

To ensure that investors have the relevant and necessary information to make an informed investment decision, the Guidelines also stipulate that an information memorandum must be made available to investors prior to their investment in asset-backed securities. The minimum information required in an information memorandum is also specified in the Guidelines. Some of this information include, but is not limited to, the disclosure of the risk factors of investing in asset-backed debt securities, detailed description of the structure of the securitisation transaction and all significant agreements relevant to the structure and detailed explanation of the flow of funds.

The ABS Guidelines will be available on the SC's website at


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