Experience of Developing Economies in Securitization: Malaysia - A Regulator’s Perspective

1. Workshop on the Rise of Securitization in East Asia 7 – 9 November 2005 Experience of Developing Economies in Securitization: Malaysia - A Regulator’s Perspective Wong Sau Ngan SECURITIES COMMISSION, MALAYSIA Shanghai 8 November 2005

2. Overview of the Malaysian ABS Market • Development Initiatives Agenda • Issues and Challenges • The Way Forward 2

3. Efforts to develop securitization market in Malaysia accelerated after 1997 financial crisis • Prior to 2001, ABS market was non-existent due to a wide range of legal, regulatory, tax & accounting impediments • ABS issuance increased by 139% between 2001 and 2004. • As at end-September 2005, the value of outstanding ABS is RM 14.08billion (USD 3.75billion equivalent) Source: Bank Negara Malaysia

4. Types of ABS issues in Malaysia thus far …… • CDOs are the most common type of asset securitised, comprising 37% of total ABS outstanding • Commercial properties are the second most popular underlying assets, at 18% • July 2005 saw the first Islamic ABS issue in Malaysia, which was based on Musyarakah principles Collateralised Debt Obligations (37%) ResidentialMortgage (16%) Contract Receivables (17%) Auto Loans (12%) Charge Card Receivables (1%) Commercial Properties (18%) As at August 24, 2005

5. Overview of the Malaysian ABS Market • Development Initiatives Agenda • Issues and Challenges • The Way Forward 5

6. What are the benefits of developing ABS market in Malaysia? Lower funding cost Higher quality Creates tradable § § § - up securities instruments from due to rating pick illiquid asset (cash flows) Obtains liquidity from Products tailored to Diversifies risk § § § future cash flows meet investors’ from banking system specific risk and maturity needs Off balance sheet New class of security Reduces reliance on § § § treatment to provide greater banking system investment diversity Expands lending Adds to depth & § § business without breadth of bond increasing capital market base Source of fee income §

7. Building Blocks of the Malaysian ABS Market National Bond Market Committee Issuer • Issuance of ABS into market Infrastructure • Legal & Regulatory • Tax & Accounting standards SC as regulator and facilitator Intermediaries • Facilitate issuance of ABS into market Asset Securitization Consultative Committee Investors • Provide liquidity

8. Steps taken by the SC to develop ABS market in Malaysia Establishment of Asset Securitization Consultative Committee (ASCC) March 2000 • Made up of industry experts & regulators • Undertake analysis into broader regulatory issues that impede securitization in Malaysia • Report findings & provide support in implementation efforts April 2001 Release of ABS Guidelines • Setting out comprehensive & transparent regulatory requirements Nov 2002 Endorsement of ABS Report by NBMC • Recommendations on legal, regulatory, tax and accounting reforms necessary to provide a conducive environment for securitization April 2003 Refinement of ABS Guidelines

9. ABS Guidelines: Broad guiding principles • Applicable to all ABS transactions (assets of FIs & non FIs) • Efficient approval process within 28 days, provided full compliance • Obtain all other regulatory approvals before submission to SC • One submission for consideration under both PDS & ABS Guidelines • To facilitate efficient approval, SC engages actively with advisers to clarify on ABS Guidelines

10. ABS Guidelines : Facilitating Issuance 5 1 Custodian of securitized assets Impose prudential standards on SPV Facilitate submission for SC approval Provide transparent requirements (ABS Guidelines) 2 Only good assets to be securitized at initial stageImpose criteria for securitizable assets Protect assets from originator’s creditors Impose criteria to “ring-fence” assets within SPV Investor awareness & informed decision making Impose additional disclosure requirements 3 4

11. Overview of the Malaysian ABS Market • Development Initiatives Agenda • Issues and Challenges • The Way Forward 11

12. Have the benefits been realized? Remarks Benefits

13. Size of ABS market is still small Size of ABS market vs MGS and PDS • ABS merely makes up a small segment (about 2%) of total bond market • Investors prefer MGS and PDS to ABS • Denotes huge potential for growth • More initiatives required to further boost the ABS market

14. AAA yield differentials between ABS & PDS • All approved ABS involved AAA rated senior tranche • However, ABS are priced at higher yields in comparison with yields of comparable AAA PDS of similar maturity, largely due to: • Market novelty • Preference for plain vanilla straight PDS • Perceived higher risk due to complex structures • Illiquid nature & legal uncertainty priced in ABS yields PDS yields Source: SC What needs to be done to narrow this yield divergence?

15. Initiatives undertaken to address issues & challenges in development of ABS market LEGAL & REGULATORY (a) Rationalise approval process • Previously : BNM, SC & FIC • 1 July 2000 : SC as sole regulator (b) Facilitating Financial Institutions (FIs) as Originators • Blanket approval for FIs to dispose assets for a securitization transaction • Exemption from banking secrecy for FIs to disclose info on obligors (c) Prudential standards for FIs as Originators • BNM’s Prudential Standards on Asset-Backed Securitization (d) Transparent regulatory requirements for all Originators • SC’s Guidelines on the Offering of Asset-Backed Securities

16. Initiatives undertaken to address issues & challenges in development of ABS market (con’t) TAX Tax Neutral Framework for Originators & SPV • Tax position of originator and Government is not changed before and after securitization • SPV not to be over-burdened by additional tax • Income treatment of Originator, SPV and Servicer clarified Originator & SPV issuer • Stamp duty & real property gains tax exemptions • Tax deductibility for issuance expenses incurred Investor • Removal of withholding tax for non-residents • Exemption on interest income for unit trust funds and individuals

17. Overview of the Malaysian ABS Market • Development Initiatives Outline • Issues and Challenges • The Way Forward 17

18. Ongoing efforts in addressing issues & challenges in development of ABS market Director General of Insolvency • Amendments to Bankruptcy Act 1967: • section 53 - to limit the broad application of its deeming provision in relation to preferences in securitization transactions • section 53A - to include book debts that have grown due at the date of assignment Accounting standards • SC in discussions with industry bodies & the Malaysian Accounting Standards Board to provide greater certainty on interpretation & application of IAS39 (e.g clarification on de-recognition of asset) • Balance between the extent to which risks, rewards & control over securitized assets have been transferred resulting in a transaction being deemed as off-balance-sheet vs. on-balance-sheet Director General of Insurance • Secured credit facility status to ABS to provide greater investment flexibility to the insurance companies Financial Guarantee Insurance • Promotion of highly rated monoline insurers to provide credit enhancement

19. Taking the ABS Agenda Forward: A Snapshot ABS Benchmark Widen Asset Classes Reduce Time to Market Credit Enhancement Investment Status Secondary Market Liquidity: Price Discovery & Bond Pricing Agency

20. Key Reminders Diagnostic Process • All impediments must be identified and must be addressed simultaneously • Inter-agency cooperation is crucial • Issuer Convenience vs Investor Protection • Too much of one will affect the other • These 2 factors must be balanced • GovernmentSupport • Government support is crucial to success • Tax framework • Securitization of government assets/by government agencies may provide benchmark for corporate ABS

21. Thank you