ASIC Corporations (Repeal) Instrument 2016/273

EXPLANATORY STATEMENT for
ASIC Corporations (Securitisation Special Purpose Vehicles) Instrument 2016/272; and ASIC Corporations (Repeal) Instrument 2016/273

Prepared by the Australian Securities and Investments Commission

Corporations Act 2001

The Australian Securities and Investments Commission (ASIC) makes the ASIC Corporations (Securitisation Special Purpose Vehicles) Instrument 2016/272 under paragraph s926(2)(a) of the Corporations Act 2001 (the Act).

Paragraph 926A(2)(a) of the Act provides that ASIC may exempt a person or a financial product or class of persons or financial products from all or specified provisions of Part 7.6 of the Act (other than Divisions 4 and 8).

The Australian Securities and Investments Commission (ASIC) makes the ASIC Corporations (Repeal) Instrument 2016/273 under subsection 341(1) and paragraph 911A(2)(l) of the Act.

Subsection 341(1) of the Act provides that ASIC may make an order in respect of a specified class of companies, registered schemes or disclosing entities, which relieves directors, the companies, registered schemes or disclosing entities, or their auditors from all or specified requirements of Parts 2M.2, 2M.3 and 2M.4 (other than Division 4) of the Act.

Paragraph 911A(2)(l) of the Act provides that ASIC may exempt a person from the requirement to hold an Australian financial services licence for a financial service they provide. This is done by granting an exemption in writing and publishing it in the Gazette.

1.                                             Background

What is securitisation?

Securitisation is the process by which a portfolio of relatively illiquid assets is packaged into marketable securities (securitisation products). These securitisation products are debt instruments such as debentures or interests in managed investment schemes, which are then sold into capital markets on either a public or private basis. The benefits payable to investors from a securitisation will depend largely on the return from the underlying assets.

The securitisation industry operates almost exclusively in the wholesale market, where the securitisation product is sold to wholesale investors—usually through the on-sale of the securitisation product by a licensed dealer.

A securitisation transaction typically involves:

•                      An issuer, known as the securitisation entity, which purchases the underlying assets and issues the resulting securitisation products.  These entities are usually in the form of a special purpose vehicle (SPV), in that they are created solely for the purposes of a specific securitisation transaction. 

•                      A number of service providers that perform specific dedicated services in respect of the securitisation transaction, such as a securitisation manager and a servicer of the underlying assets. 

•                      An asset sponsor that sells the underlying assets for securitisation to the securitisation entity.

Existing licensing exemption

SPVs that have been established for the limited purpose of carrying on a specific securitisation transaction are exempted from the requirement to hold an Australian financial services (AFS) licence: see ASIC Class Orders [CO 04/1526] and [CO 05/1270].

Under the Legislation Act 2003, legislative instruments cease automatically, or ‘sunset’, after 10 years, unless action is taken to exempt or preserve the instrument.  The exemption for SPVs will expire on 1 April 2016 if not remade. 

Why licensing exemption required

The AFS licensing requirements are in Chapter 7 of the Act.

Parts 7.6 to 7.8 of the Act set out the AFS licensing requirements for providers of financial services.  Section 911A requires any person who carries on a financial services business in Australia to hold an AFS licence.  Section 766A(1) states that 'financial services' include (amongst other things):

(a) providing financial product advice;

(b) dealing in a financial product; and

(c) providing a custodial or depository service.

It is Parliament's intention to apply the licensing regime across both retail and wholesale sectors.  However, under s926A(2) of the Act, ASIC has the power to exempt a financial service provider from the requirement to hold an AFS licence.  ASIC's Regulatory Guide 167 Licensing: Discretionary powers (RG 167) explains how ASIC exercises this power.  ASIC has the flexibility under the Act to give partial or complete relief from the licensing requirements (including imposing conditions). 

Under RG 167, the fact that clients for a financial service are only wholesale clients is a factor when considering relief.  As stated above, the securitisation industry operates almost exclusively in the wholesale market. 

Chapter 7of the Act applied to the securitisation industry

Certain conduct engaged in by securitisation SPVs may amount to the provision of financial services in Australia, which attracts the AFS licensing requirements.  Such conduct includes:

(a) the issue by the SPV of securitisation products;

(b) the SPV entering into derivatives transactions;

(c) the SPV entering into foreign exchange contracts;

(d) the special purpose trustee dealing in the underlying assets of the trust that are financial products; and

(e) the special purpose trustee providing custodial services.

The conduct described in (a) to (d) may amount to 'dealing in a financial product'.  The conduct described in (e) may amount to 'providing a custodial service'.  This means that the provider of these financial services may require an AFS licence.

2.                                                Purpose of the instrument

The purpose of the ASIC Corporations (Securitisation Special Purpose Vehicles) Instrument 2016/272 is to provide relief from the requirement to hold an AFS licence to securitisation entities in the securitisation industry. This relief has been granted to address concerns about the disproportionate burden that would be placed on securitisation entities should they be required to hold a licence, where such an securitisation entities has been established for the limited purpose of carrying on a specific securitisation transaction

ASIC Corporations (Securitisation Special Purpose Vehicles) Instrument 2016/272 will continue the relief provided by [CO 04/1526] in a new legislative instrument that reflects current drafting practice, without any significant changes. 

The purpose of the ASIC Corporations (Repeal) Instrument 2016/273 is to repeal ASIC Class Order [CO 05/1270] which we made in December 2005 to remove doubt about the efficacy of various instruments that, because they were not gazetted before 1 January 2005, were arguably rendered inoperative from 1 January 2005 by the Legislative Instruments Act 2003 (as it then was). [CO 05/1270] was later amended to preserve the effect of certain additional instruments that were subsequently rendered inoperative by the Legislative Instruments Act. [CO 04/1526] is the last substantive instrument ‘saved’ by [CO 05/1270] and as it is being remade we may now repeal [CO 05/1270].

3.                                                Operation of the instruments

Section 911A(1) of the Act requires that a person who carries on a financial services business Australia must hold an Australian financial services licence covering the provision of the financial services.  Securitisation entities generally provide a financial service when they carry on the business of securitisation by issuing, dealing or providing a custodial or depository service. As discussed under sections 1 and 2, this would ordinarily require the securitisation entity to hold an AFS licence, unless otherwise exempted.  ASIC has the power to exempt a financial service provider under s926A(2) from the requirement to hold an AFS licence.

In ASIC Corporations (Securitisation Special Purpose Vehicles) Instrument 2016/272 we have provided relief from the requirement to hold an AFS licence to securitisation, in the circumstances set out below.

Relief from the requirement to hold an AFS licence for issuing a securitisation product

Paragraph 5(2)(a) of the instrument provides relief to a securitisation entity issuing a securitisation product where:

• the securitisation transaction is for the purpose of managing some or all of the economic risk associated with the underlying assets held by the securitisation entity;
• the issue is to a person who either holds an AFS licence or is otherwise exempt from holding a licence under any relevant ASIC instrument or section of the Corporations Act; and
• at the time of issue, the securitisation entity has taken all reasonable steps to ensure the securitisation product will not be subsequently acquired by a retail client.   Note: Section 761G of the Act provides a definition for ‘retail client’.

Relief from the requirement to hold an AFS licence for dealing in derivatives and foreign exchange contracts

Paragraph 5(2)(b) of the instrument provides relief to a securitisation entity for dealing in derivatives and foreign exchange contracts (or both) in the course of a securitisation business where:

• the dealing does not involve making a market for derivatives or foreign exchange contracts.  Note: Section 766D of the Act provides a definition for making a market for a financial product; 
• the dealing is entered into for the purpose of managing a financial risk that arises in the ordinary course of a securitisation business; and
• the counterparty for the dealing is a wholesale client.  Note: Section 761G of the Act provides a definition for ‘wholesale client’.

Relief from the requirement to hold an AFS licence for providing custodial or depository services for financial products on behalf of securitisation product holders

Paragraph 5(2)(c) of the instrument provides relief to a securitisation entity for custodial or depository services for financial products (such as the underlying assets or associated hedging transactions) on behalf of securitisation product holders where the securitisation entity has:

• not issued the securitisation products to retail clients; and
• taken all reasonable steps to ensure the securitisation products are not acquired by a retail client.

Relief from the requirement to hold an AFS licence for dealing in financial products as trustee on behalf of securitisation product holders

Paragraph 5(2)(d) of the instrument provides relief to a securitisation entity for dealing in financial products as trustee for holders of securitisation products where:

• the dealing is not by issuing or acquiring derivatives or foreign exchange contracts; and
• the securitisation entity has:

a) not issued the securitisation products to retail clients; and

b) taken all reasonable steps to ensure the securitisation products are not acquired by a retail client.

Further conditions of the relief

Paragraph 5(3) of the instrument provides that the exemptions from the requirement to hold an AFS licence only apply where the securitisation entity:

• only provides the financial services set out in set out in clause 5(2)(a)–(d) of ASIC Corporations (Securitisation Special Purpose Vehicles) Instrument 2016/272 in accordance with financial product advice given by a financial services licensee  who is authorised to provide advice on those particular financial products; and
• enters into a written agreement with the AFS licensee under which:

• the securitisation entity receives the financial product advice mentioned above; and
• the AFS licensee providing the advice does not limit its liability for any loss or damage resulting from any negligence in providing the financial product advice to the securitisation entity.

Schedule 1 of ASIC Corporations (Repeal) Instrument 2016/273 repeals [CO 05/1270].

4.                                                Consultation

As part of its review of [CO 04/1526], ASIC released Consultation Paper 246 Remaking ASIC class order securitisation special purpose vehicles:[CO 04/1526] (CP 246). A draft of the ASIC Corporations (Securitisation Special Purpose Vehicles) Instrument 2016/272 was attached to CP 246.  ASIC did not receive any submissions in response to CP 246.

ASIC also consulted directly with the Australian Securitisation Forum and the Australian Prudential Regulatory Authority, and they generally supported the approach proposed in CP 246.