14 Syn<strong>the</strong>tic securitisations14.1 IntroductionIn a syn<strong>the</strong>tic securitisation, <strong>the</strong> credit risk <strong>in</strong> relation <strong>to</strong>specified receivables is transferred <strong>to</strong> a special purpose vehicle(and from <strong>the</strong>re <strong>to</strong> <strong>in</strong>ves<strong>to</strong>rs who acquire notes issued by <strong>the</strong>special purpose vehicle) without any transfer <strong>of</strong> <strong>the</strong> receivables<strong>the</strong>mselves.As is <strong>the</strong> case <strong>in</strong> <strong>the</strong> United States, <strong>the</strong> most common form <strong>of</strong>syn<strong>the</strong>tic securitisation <strong>in</strong> <strong>Australia</strong> is a syn<strong>the</strong>tic collateraliseddebt obligation (a syn<strong>the</strong>tic CDO). In this type <strong>of</strong> transaction,<strong>the</strong> special purpose vehicle issues notes (credit l<strong>in</strong>ked notes) <strong>the</strong>repayment <strong>of</strong> which is l<strong>in</strong>ked <strong>to</strong> <strong>the</strong> credit <strong>of</strong> a number <strong>of</strong> named,and usually well-known, companies (reference entities). Ifenough <strong>of</strong> <strong>the</strong> reference entities become <strong>in</strong>solvent or default <strong>in</strong>payment <strong>of</strong> <strong>the</strong>ir debts, noteholders may not receive fullrepayment <strong>of</strong> <strong>the</strong>ir credit l<strong>in</strong>ked notes. Credit l<strong>in</strong>ked notes <strong>in</strong>syn<strong>the</strong>tic CDO transactions have been issued both <strong>to</strong> retail and<strong>to</strong> wholesale <strong>in</strong>ves<strong>to</strong>rs <strong>in</strong> <strong>Australia</strong> (and are one <strong>of</strong> <strong>the</strong> fewsecuritisation structures <strong>in</strong> <strong>Australia</strong> that has retail <strong>in</strong>ves<strong>to</strong>rs -see section 1).Syn<strong>the</strong>tic securitisations <strong>in</strong> <strong>Australia</strong> have also occurred <strong>in</strong>relation <strong>to</strong>:• corporate loans;• small and large commercial property mortgages; and• equipment leases,amongst o<strong>the</strong>r assets.There are relatively few legal issues associated with syn<strong>the</strong>ticsecuritisations <strong>in</strong> <strong>Australia</strong>. One <strong>of</strong> <strong>the</strong> advantages <strong>of</strong> asyn<strong>the</strong>tic securitisation is that it can avoid <strong>the</strong> legal problemsassociated with outright transfers <strong>of</strong> some assets - and <strong>in</strong>particular complex tax and stamp duty issues.The pr<strong>in</strong>cipal legal issue peculiar <strong>to</strong> syn<strong>the</strong>tic securitisations iswhe<strong>the</strong>r <strong>the</strong> risk transfer agreement may be characterised as an<strong>in</strong>surance contract.14.2 Insurance contractThe transfer <strong>of</strong> risk that occurs <strong>in</strong> a syn<strong>the</strong>tic securitisation willusually be documented by way <strong>of</strong> a credit swap us<strong>in</strong>gInternational Swaps and Derivatives Association provisions.This is not always <strong>the</strong> case, however, particularly where <strong>the</strong>transaction is not a syn<strong>the</strong>tic CDO. O<strong>the</strong>r types <strong>of</strong> documents,such as f<strong>in</strong>ancial guarantees, may be used.Regardless <strong>of</strong> <strong>the</strong> document used, <strong>the</strong>re is usually some risk that<strong>the</strong> risk transfer contract may be characterised as an <strong>in</strong>surancecontract. Like an <strong>in</strong>surance contract, <strong>the</strong>se transactions <strong>in</strong>volve<strong>the</strong> transfer <strong>of</strong> <strong>the</strong> risk <strong>of</strong> a future event happen<strong>in</strong>g <strong>in</strong> return for<strong>the</strong> payment <strong>of</strong> a fee.It is important that <strong>the</strong> risk transfer contract not be characterisedas <strong>in</strong>surance contracts because if it is:• <strong>the</strong> transaction will be subject <strong>to</strong> <strong>the</strong> Insurance Contracts Act1984 which will <strong>in</strong>corporate terms <strong>in</strong><strong>to</strong> <strong>the</strong> contract,<strong>in</strong>clud<strong>in</strong>g duties <strong>of</strong> disclosure, which may not be appropriate;• <strong>the</strong> parties may be conduct<strong>in</strong>g an <strong>in</strong>surance bus<strong>in</strong>ess with<strong>in</strong><strong>the</strong> scope <strong>of</strong> <strong>the</strong> Insurance Act 1973 and, if so, will requireauthorisation under that Act;• this will affect <strong>the</strong> GST treatment <strong>of</strong> <strong>the</strong> transactions(<strong>in</strong>surance contracts are taxable supplies but swaps andguarantees are generally not); and• <strong>in</strong>surance contracts are generally subject <strong>to</strong> stamp duty.The position under <strong>Australia</strong>n law <strong>in</strong> relation <strong>to</strong> characteris<strong>in</strong>gcontracts as <strong>in</strong>surance contracts is very similar <strong>to</strong> that <strong>in</strong> <strong>the</strong>United K<strong>in</strong>gdom. There is no s<strong>in</strong>gle test for determ<strong>in</strong><strong>in</strong>g whe<strong>the</strong>ra contract is an <strong>in</strong>surance contract, it is a matter <strong>of</strong> compar<strong>in</strong>g<strong>the</strong> features <strong>of</strong> <strong>the</strong> contract <strong>to</strong> <strong>the</strong> usual features <strong>of</strong> an <strong>in</strong>surancecontract. As <strong>in</strong> <strong>the</strong> United K<strong>in</strong>gdom, <strong>the</strong> credit swap market <strong>in</strong><strong>Australia</strong> has satisfied itself that <strong>the</strong>re is no significant risk <strong>of</strong>recharacterisation – pr<strong>in</strong>cipally because <strong>the</strong>re is no necessaryrequirement <strong>in</strong> a credit swap that <strong>the</strong> buyer <strong>of</strong> protection needsuffer any loss for which a payment under <strong>the</strong> credit swap willcompensate (that is, <strong>the</strong> buyer <strong>of</strong> <strong>the</strong> protection need not haveany exposure <strong>to</strong> <strong>the</strong> reference entities <strong>of</strong> <strong>the</strong> relevant creditswap).The analysis becomes more difficult where <strong>the</strong> syn<strong>the</strong>ticsecuritisation relates <strong>to</strong> assets on a bank’s balance sheet (and <strong>in</strong>particular where <strong>the</strong> reference entities are not well knownentities). Never<strong>the</strong>less, it is usually possible <strong>to</strong> conclude that<strong>the</strong>se are sufficient differences such as <strong>to</strong> prevent <strong>the</strong> risktransfer contract from be<strong>in</strong>g characterised as an <strong>in</strong>surancecontract.73
14.3 Gam<strong>in</strong>gIn <strong>the</strong> past, ano<strong>the</strong>r concern has been that <strong>the</strong> transfer contractnot breach any gam<strong>in</strong>g or wager<strong>in</strong>g laws.Section 1101I <strong>of</strong> <strong>the</strong> Corporations Act now provides that acontract <strong>in</strong> relation <strong>to</strong> a f<strong>in</strong>ancial product is valid and enforceabledespite any gam<strong>in</strong>g or wager<strong>in</strong>g laws. This would apply <strong>to</strong> mostcontracts for <strong>the</strong> transfer <strong>of</strong> risk <strong>in</strong> a syn<strong>the</strong>tic securitisation.In addition, if <strong>the</strong> contract is governed by New South Wales law<strong>the</strong> relevant gam<strong>in</strong>g legislation <strong>in</strong> that State has a relativelynarrow def<strong>in</strong>ition <strong>of</strong> “unlawful game” which is unlikely <strong>to</strong> apply<strong>to</strong> <strong>the</strong>se types <strong>of</strong> transactions.14.4 ConclusionSyn<strong>the</strong>tic structures are now widely accepted <strong>in</strong> both <strong>the</strong>wholesale and retail markets. They are unlikely ever <strong>to</strong> approach<strong>the</strong> volume <strong>of</strong> traditional securitisations. But we would expectmore transactions <strong>in</strong> com<strong>in</strong>g years as banks <strong>in</strong>creas<strong>in</strong>gly tailorproducts <strong>to</strong> <strong>in</strong>ves<strong>to</strong>r demands.74