1. Securitisation in Hong Kong: The way forward Vinod Kothari 1012 Krishna 224 AJC Bose Road Calcutta 700 017. India Phone 91-33- 22811276/22817715/22813742/23233863/23233864 E-mail: vinod@vinodkothari.com; vinodk@vsnl.comvinod@vinodkothari.comvinodk@vsnl.com Fax 91-33-23233863/22811276

2. Securitisation: where it is now The second most important source of fixed income funding globally: Total outstanding volume approx 6.8 trillion USD About 75% sourced from the USA; the rest from Europe and Asia-Pacific and others Ex-Japan volumes for Asia

3. Securitisation: why they need it? Essential purposes: Liquidation motive Refinancing motive Arbitrage motive Refinancing-type securitisation: Economics of asset-backed funding: Creation of bankruptcy-remote funding to attain rating arbitrage Temptation for off-balance sheet funding: Increased leverage Reduced weighted average funding Regulatory capital relief Gain on sale accounting

4. Securitisation: who would need it? Anyone: Increased leverage and reduced weighted average cost Creating secondary mortgage markets, secondary markets in SME lending, etc. Banks: To strip and accelerate profits in reducing interest scenario For regulatory and economic capital relief For refinancing pools Risk diversification by synthetic transactions CRE owners: Capital market driven funding device CDO/arbitrage activity: To create leveraged structures for reaping equity returns and management fees Commercial entities: Future flows Whole business transactions Liquidating streams of revenue Governments: To raise capital marked-based funding based on income earning assets

5. Securitisation framework: what is required Removal of hurdles: True sale still remains a legal abstract, no safe harbour: Logically, judicial discretion in respecting a sale cannot be ruled out But the groundrules should be laid by legislation rather than court rulings Simplify procedures, particular for transfer of mortgage-backed receivables Reducing documentary taxes – an avoidable hassle Tax transparency of SPEs under specified conditions: Not all securitisations should be tax cleared, but definitive rules would be helpful Direct participation: Securitisation of public assets Securitisation of NPLs: Allow banks a prolonged write off window SME loans securitisation: Create market for synthetic securitisations by govt guarantees/first loss support

6. Securitisation of government revenues Securitisation sponsored or supported by government versus govt revenues securitisation Securitisation of government revenues: Tobacco bonds by several US governments Several revenue securitisations in Europe: by Italy, Spain, Austria Toll revenues securitisation by Hong Kong Securitisation by the govt: what decision it is: Funding versus no funding Capital market funding versus other sources of funding Disinvestment versus refinancing Securitisation versus traditional bond issuance

7. Securitisation of govt. revenues: the public accounting perspective Does off-balance sheet treatment matter for governments? Debt/equity matters for corporates, regulatory capital for banks, and deficit financing for governments From deficit financing viewpoint, is there a difference between: Creating an asset and refinancing it Inspite of the structure, if investors take it as assets originated by the govt., it exposes the govt. to the same reputational risk as straight bonds Would be sale or borrowing? Eurostat issued detailed rules July 2002 to provide for borrowing treatment: Securitisation of future flows not attached to an existing asset, currently on the balance sheet Granting of guarantees or incomplete transfer of risks/rewards

8. Potential dangers Creation of sub-prime assets Too much trading with too little capital: Residual risks and capital The volatility of gain-on-sale treatment SPVs - is it a myth or a reality? Unperfected, untested legal systems in most countries Too much reliance on external agencies

9. Hong Kong securitisation: what has been holding it? From once a Mecca of securitisation: To meek local activity for last several years Are there any significant barriers to growth? Or is it that you would not do it unless you needed it Capital relief: synthetic options work easier Liquidity : possibly not needed Non-banking issuers: Missing motivation for alternative sources of funding?

10. Opportunities for Hong Kong Nerve center of activity in the Far East Generally securitisation-friendly legal environment Parallel streams of true sale and synthetic transactions well accepted Massive capital equipment needs for China Government support clear with government’s reliance on securitisation funding