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In Print Reprints of articles written by or about Jones Day lawyers. New Securitization Legislation in Taiwan: A Comprehensive Review By William E. Bryson, ESQ and Shirlie Pai, ESQ. (Jones Day, Taipei) As was reported in the July 31, 2002 issue of International The FASL was re-submitted to the LY and was Securitization & Structured Finance Report , new passed into law shortly afterward on June 21, 2002. securitization legislation in Taiwan is expected to spark the While it is possible that deals could have been done under securitization market. The history of this new legislation the original version of the FASL, it is just as well that as well as a review of some of its most important features is they did not have to be. The amendments represent a presented below. substantial improvement in the versatility and viability of the statute. While there are some issues that still need to Introduction be resolved in the Implementing Guidelines that are ßexpected by the end of September. The basic principles For the past few years, there has been a lot of talk about and structures provided for under the FASL are described securitization in Taiwan, but little action. Securitization in more detail below. activity was sporadic (and hopeful) at best, and an urban renewal law that would have permitted a form of Special Purpose Vehicles securitization was largely ignored, mainly because other desirable legal structures (single-shareholder companies, The FASL permits the securitization of financial assets trust enterprises) were not available. through use of either a special purpose trust (“SPT”) or The talk ended in late 2001, when the ROC a special purpose company (“SPC”). This is a substan- Ministry of Finance (“MOF”) issued its first draft of tial improvement over the original draft of the FASL, the ROC Financial Asset Securitization Law (“FASL”). which did not contemplate the use of SPCs. Since the The first draft of the FASL, which was based on the SPT provisions were in the original draft, they are better Japanese ABS law, drew comments from scholars, developed and more detailed than the SPC provisions. arrangers, rating agencies and the Capital Markets Com- Many of the provisions that are applicable to SPTs, mittee of the American Chamber of Commerce. The especially as to incentives, are also applicable to SPCs. draft was submitted to the Legislative Yuan (“LY”), There are, however, enough differences that they bear Taiwan’s legislature, seminars were held, and the mar- separate examination. ket expected the legislation to pass in January, 2002, Special Purpose Trust prior to the LY’s election recess. The legislation did not pass, mainly because of political wrangling between the A SPT must be a trust that has been established under LY and the executive branch of the government. the ROC Trust Law. A foreign law trust would there- It is just as well that the earlier version did not pass. fore not qualify as an SPT, and is therefore unavailable During the ensuing five months, a new LY was elected as a structuring option under the FASL. which included many of the same scholars who had The trustee of the SPT must be a “trust enterprise” commented on the earlier version. The FASL underwent within the meaning of the ROC Trust Enterprise Law. a substantial re-draft at the hands of both the ROC Min- Since there are no companies in Taiwan that have been istry of Finance and Norman Yin, a professor who had established as dedicated trust enterprises, the only “trust joined the LY in January. enterprises” which qualify in the current market are the Reprinted from the September 30, 2002 edition of International Securitization & Structured Finance Report , with permission of the publisher, WorldTrade Executive, Inc. For more information on International Securitization & Structured Finance Report or other WorldTrade publications, contact WorldTrade Executive, Inc., P .O. Box 761, Concord, MA 01742 USA Phone: (978) 287-0301 Fax: (978) 287-0302. Web: www.wtexec.com Email: info@wtexec.com

trust departments of banks that have a trust business Of even more importance, however, will be the license. The good news is that this includes most of the implementing guidelines that govern the manner in large local banks in Taiwan, as well as many of the larger which the SPC can be used for securitization. If the foreign banks. implementing guidelines retain the breadth and flexibil- The bad news is that the Trust Law has been in force ity of the language of the FASL, and are drafted with a for less than a decade, the Trust Enterprise Law has been view towards filling the gaps in the FASL language, in force for only a little over three years, and there has then the SPC provisions in the FASL will represent a been virtually no activity under either Law since they marked improvement on the flexibility of the statute. were adopted. Any securitization structures utilizing If, on the other hand, the implementing guidelines are SPTs will therefore be breaking new ground under both used to interpret the FASL in a very conservative man- the T rust Law and the Trust Enterprise Law. ner, then the SPC provisions in the FASL will become so inflexible as to be useless in the development of Special Purpose Companies securitization structures. For example, it is not clear whether the use of an Special purpose companies, on the other hand, are well- offshore SPC also requires the use of an intermediary grounded in the ROC Company Law, though some onshore SPC or SPT. While the language of the FASL of the provisions which make SPCs possible ( e.g. , would appear to suggest that there is no need for an the provisions permitting single-shareholder companies) intermediary, it is possible that the MOF would be are less than a year old. SPCs can be either onshore or off- loathe to permit a securitization with no substantial shore, and the special purpose company must have a onshore component, especially in the early days of the single shareholder. The single shareholder must be a market. It is to be hoped that the MOF would take a financial institution, which is defined in the FASL more enlightened view, permitting direct transfers of fi- to include banks, insurance companies and securities houses. nancial assets from onshore originators to offshore SPVs. While the requirement that the shareholder be a Even beyond these basic entity issues, there are financial institution appears to be aimed at making sure additional issues as to whether or not the FASL will be that there is substance to the SPC, the financial institu- interpreted to permit some of the flexible structuring tions contemplated by the definition in the FASL which is common in mature securitization markets. For appear to be only financial institutions established in example, it is unclear whether the FASL will be inter- the ROC. Indeed, the requirement that the financial preted to permit master trusts and conduits, even though institution be one which is organized under local law, the language is clearly broad enough to permit such when read with the prohibition under local law against structures. If the Taiwan market is to develop into a the ownership of shares by the ROC branches of mature securitization market, these structures will have foreign banks, suggests that a foreign bank may not to be addressed at an early stage of the market’s devel- establish an SPC in Taiwan. This appears to be an over- opment, just as they are now being addressed in Korea. sight in the drafting of the FASL. The FASL does, however, give the MOF the ability to approve foreign Transfer of Financial Assets to the SPV banks as SPC shareholders on an ad hoc basis. The details of corporate governance for SPCs are The FASL provides several tax and fee breaks in con- still being determined. As a single-purpose, single-share- nection with the sale of financial assets by an originator holder company, an SPC is exempt from many of the to a SPV, as more fully described below. The definition corporate governance provisions of the ROC Company of “financial assets” in the FASL includes (i) certain Law. Since the SPC provisions were clearly drafted with specified assets, such as credit card receivables, chattel ROC companies in mind, however, there is some mortgages and real estate mortgages, and (ii) any other uncertainty about how potential disconnects between assets approved by the Ministry of Finance. The ability the Company Law and foreign company laws will of the MOF to expand the definition of what consti- be addressed. tutes “financial assets” makes this legislation very flexible.