A Guide to the Law of Securitisation in Australia - Clayton Utz

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IntroductionA Guide to the Law of Securitisation in AustraliaAustralia has one of the world’s most active securitisationmarkets. Over $160 billion of securities are outstanding andapproximately $40 billion of securities are issued annually.Almost all major issuers have established Euro and Global MBSprograms and Australia is now reputed to be the third largestMBS market in the world. Australia is also an exporter of itssecuritisation expertise, with a number of prominent,domestically-based investment banks arranging and structuringsecuritisation transactions in Asia and New Zealand.The law plays a pivotal role in the structure and regulation ofmany securitisation programs. As a result, to succeed in today’senvironment, a securitiser must have an understanding of the keyaspects of the law relating to securitisation. In this publicationwe give you an overview of these key aspects.This publication deals with the following major areas:• Section 1 examines the legal nature of securitisedinstruments used in the Australian marketplace.• Section 2 reviews the regulatory regime applying to thosesecurities under the Corporations Act.• Section 3 analyses the disclosure obligations for informationmemorandums used by the securitisation industry.• Section 4 deals with the stamp duty implications ofsecuritisation transactions, with particular focus on the NSWDuties Act.• Section 5 reviews the taxation position of securitisationstructures under the Income Tax Assessment Act, the InterestWithholding Tax exemptions and the Goods and Services Tax(GST) laws and also outlines some of the proposed changesto the taxation regime announced by the Government.• Section 6 examines the implications of the Consumer CreditCode for securitisation.• Section 7 reviews the requirements of Prudential StandardAPS 120 governing the role of banks, building societies andcredit unions in securitisations and some of the pertinentprovisions of the Banking Act.• Section 8 provides a brief review of the law of set-off whichis particularly important in the context of securitisations bydeposit-takers such as banks, building societies and creditunions.• Section 9 examines the insolvency provisions relating tospecial purpose vehicles.• Section 10 analyses a number of issues concerning trusteedebt securities in securitisation programs.• Section 11 considers a number of issues relating to the ASXListing Rules for debt securities.• Section 12 provides an overview of the legal aspects of theAustraclear System.• Section 13 examines commercial mortgage-backed securitiesin Australia.• Section 14 reviews the rationale and processes of syntheticsecuritisations.“A Guide to the Law of Securitisation in Australia” is available atwww.claytonutz.com then select: Area of Law > Securitisation >Publications.A Guide to the Law of Securitisation in Australia – Fourth Edition.Written by members of the Clayton Utz securitisation team.This publication states the position as at 1 April 2005.It is intended to provide general information on the law of securitisationin Australia and is current at the time of printing. The contents do notconstitute legal advice and should not be relied upon as such. Specialistlegal advice should be sought in particular matters. Persons listed maynot be admitted in all jurisdictions. We are happy for you to reproducethis material for personal and non-commercial purposes, or for purposespermitted by law, provided any reproduction is unaltered, shows the dateof first publication and an attribution of source is included. If you wish tomake any other use of this material, you must have our prior writtenpermission. To ask for permission or for further information, pleasecontact the webmaster@claytonutz.com.ISBN No: 1 876436 24 7. © 2005 Clayton Utz7
1 General overview of the nature ofsecuritised instruments1.1 IntroductionThis section briefly reviews the nature of securitised instrumentsand the types of issuers in the Australian marketplace. Theanalysis proceeds using the market’s distinction between equityand debt securities.1.2 Equity securitiesAn investor in an equity security issued through a securitisationstructure holds a beneficial interest in the underlying mortgageor asset pool. Although the instrument may be described as abond or note, strictly speaking an investor receives a unit in a unittrust entitling it to a share of the income and capital of the trustassets. The unit is structured to replicate the qualities of a debtinstrument. Measures are put in place to ensure that investorsreceive, on nominated dates, an amount equivalent to interest(ie. a distribution of income) and a repayment of principal (ie. aredemption of principal).The initial securitisation structures in Australia, such as the earlyFANMAC Trusts, were based upon equity securities. However,the then requirements of the former Insurance andSuperannuation Commission (ISC) favoured debt securities overequity securities. This resulted in these structures being modifiedso that investors held a debt rather than an equity security. TheISC requirements no longer apply, however, new stamp dutyimpediments have developed that prevent the Australia-wideutilisation of equity securities. The impediments are brieflydiscussed in section 4.1.3 Debt securities1.3.1 Overview of debt securities in AustraliansecuritisationsUnder a debt security, the issuer allots instruments known asbonds, notes or commercial paper. Unlike equity securities,investors do not have an ownership interest in the underlyingmortgage or asset pool. Instead, they hold a promise by theissuing vehicle to pay interest and principal. This is typicallycombined with a security interest over the securitised assetsthrough a charge given by the issuing vehicle to a security trusteefor the benefit of investors (and often for others who providesupports for the structure). Such debt securities can bestructured on a bullet maturity or pass-through basis and asfloating rate or fixed rate securities.1.3.2 The issuers of debt securitiesDebt securities overseas tend to be issued only by specialpurpose corporations. This also occurs in Australia, but heretrustees also issue debt securities (this is particularly the case forAustralian mortgage securitisations). The securitised assets areheld on trust by the trustee and its liability under the debtsecurities is limited to the proceeds from the underlying assetsthat are available to pay the securities in accordance with therelevant trust deed.The use of trusts to issue debt securities is largely confined toAustralia. This in turn has led to Australian securitisers and theiradvisers dealing with a series of unique trust issues connectedwith this development. Some of these are discussed in section 10.1.3.3 The form of debt securitiesDebt securities are typically issued in one of two forms.Physical securityUnder this, an investor holds an instrument which itself containsthe issuer’s debt obligation. The instrument can be transferred bydelivery or endorsement. Promissory notes are an example of thistype of debt security. While physical securities were oncecommon in the securitised market, they are less so now for threereasons. The first is that the preparation and issue of individualsecurities are relatively cumbersome when compared to othermethods, particularly the electronic issue and trading ofsecurities within the Austraclear system. The second reason isthat the requirement of the trustees that their liability on suchsecurities be limited, and the similar (but slightly different)requirement imposed by the rating agencies in relation tosegregated corporate issuers, mean that it is increasingly difficultto satisfy the strict legal requirements for such securities toqualify as promissory notes under the Bills of Exchange Act1909. This is discussed in further detail in section 10. Finally,section 126 of the Income Tax Assessment Act 1936 imposes adomestic withholding tax on interest paid by a company on adebenture payable to the bearer where the company does notgive the Commissioner the name and address of the holder of thedebenture. This tax discourages the use of bearer securities inAustralia.Registered securitiesThe other type of debt security is known as a registered security.The actual debt obligation of the issuer is constituted in aseparate document from the security itself. In the separatedocument, the issuer promises to pay the persons who from timeto time appear on a register as holders of the relevant securities.8
Page 6: 12.7.3 Euroentitlements............
Page 12: An interest in a managed investment
Page 15 and 16: 142.3.4 Provision of a financial se
Page 17 and 18: 3 The disclosure and civil liabilit
Page 19 and 20: 18The statutory source for this ste
Page 21 and 22: The implication of this approach in
Page 23 and 24: Interestingly, the majority then we
Page 25 and 26: 4 Stamp duty and securitisation244.
Page 27 and 28: 264.8 Relief for mortgage-backed se
Page 29 and 30: 4.10 ConclusionStamp duty is a very
Page 31 and 32: Despite the absence of an express a
Page 33 and 34: 32share of the profits of the compa
Page 35 and 36: (d) before the issue:(i) the compan
Page 37 and 38: 365.4 Debt/equity rulesDivision 974
Page 39 and 40: Entities that make GST-free supplie
Page 41 and 42: • “ enterprise” is defined in
Page 43 and 44: 6 The Consumer Credit Code andsecur
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Page 47 and 48: inclusion within the ELE depends on
Page 49 and 50: 8 Set-off and securitisation8.1 Int
Page 51 and 52: 50However, this result and the prin
Page 53 and 54: 9 Insolvency and securitisation529.
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Section 588FG provides a measure of
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10 Issues relating to debt securiti
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60indemnity existed) and had no han
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The effect of the decision has been
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the ASX has discretion to ask the e
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• Public Trustee Members - for pr
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When Austraclear receives notificat
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have been completed in relation to
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Some CMBS transactions allow the is
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14.3 GamingIn the past, another con
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16 Clayton UtzOur securitisation te
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A Guide to the Law of Securitisation in Australia - Clayton Utz

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