Risk management during the existence of ABS in China

On 22 March 2018, the Shanghai Stock Exchange, Shenzhen Stock Exchange and the Inter-agency Quotation and Service System for Privately Offered Products issued the Guidelines for the Management of Credit Risks During the Existence of Asset–Backed Securities (for Trial Implementation) (Draft for Comment) – hereafter, the Risk Guidelines – and the Guidelines for the Substance and Content of Regular Asset–Backed Security Reports (Draft for Comment), indicating that the regulators have now formally placed regulation of the risks during the existence of the financial product that is asset–backed securities on their agenda.

As a legal service practitioner in this sector, the author pays close attention to the direction of regulation of the period of existence of asset-backed securities, and wishes to share her relevant understanding with readers.

Risk of deterioration of the quality of the underlying assets and the isolation of the risks of the underlying assets from those of the original rights holder are focal points of the management of the risks during the existence of asset-backed securities.

Asset-backed securitization is a form of financing where a specific asset pool provides the underlying assets to offer tradable securities that are backed by the specific cash flow arising from the underlying assets. Deterioration of the quality of the underlying assets and less than complete isolation of the risks of the underlying assets from those of the original rights holder are two major risks that exist during the life of asset backed securities. Looked at from the substantive risk level, the risk management measures described in the previously mentioned Risk Guidelines can be summarized essentially as revolving around the prevention and control of the risks associated with the underlying assets themselves and the mechanism for isolating the risks of the underlying assets from those of the original rights holder.

Li Wenmin is a partner at JunZeJun Law Offices. She can be contacted on +86 20 2801 6766 or by email at liwenmin@junzejun.com