The New Law of Asset Securitization in Japan

• Publication year: 1994
• Citation: Vol. 17 No. 03

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 17, No. 3SPRING 1994

The New Law of Asset Securitization in Japan(fn*)

Michael T. Kawachi(fn**)

I. Introduction

The importance of the international financial services market in balancing U.S. trade is significant, although often overlooked in discussions of trade issues. In 1992, the United States enjoyed a $61 billion trade surplus in financial services, compared to a $96 million merchandise deficit.(fn1) As the financial markets of the Pacific Rim continue to grow, they are becoming an increasingly important source of business for American financial institutions.(fn2) Likewise, the influence of the American financial industry in the Asia-Pacific region should not be limited to the expansion of market share. The more interesting and significant contribution will be the introduction of new financial products and services to this growing market.

This Article discusses one financial product developed in the United States and expected to develop in Japan as a result of recent legislation adopted there. The Article examines the high degree of regulation of this new financial product under that legislation and concludes that such regulation, while common in Japan, will delay the full development of the market in Japan. This Article begins with a description of an important financial tool first developed in the United States, the securitization of financial assets. The Article next examines several aspects of the new Japanese legislation and reviews the provisions of that legislation. The Article concludes with brief comments from the Author.(fn3)

II. Securitization-Background

A. Origins of Asset Securitization

The securitization of financial assets, which first arose in the United States in the 1970s,(fn4) originated as a financing method developed in connection with home loans by the quasi-governmental Federal National Mortgage Association (FNMA) and, more recently, the Government National Mortgage Association (GNMA or Ginnie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC).(fn5) These quasi-government agencies buy qualifying home mortgages from lenders, package them into new securities backed by a pool of mortgages, provide certain guaranties, and then resell the securities on the open market.(fn6) The resulting instruments are often referred to as mortgage-backed securities. The active secondary market for these securities provides an important continuing source of home mortgage funds in the United States and remains the largest market for securitized financial assets in the United States.(fn7)

In recent years, the numbers and types of assets that have been securitized through similar, but increasingly sophisticated and complex structures have grown dramatically. Among the more prominent examples of the types of assets that are now regularly securitized are automobile, computer, and other equipment loan and lease receivables, credit card receivables, and trade receivables.(fn8) These securities are generally referred to as asset-backed securities.

B. Benefits of Asset Securitization and Market Growth

Securitization transactions tend to be relatively complicated and require consideration of a number of regulatory, business, accounting, rating, and legal issues-the latter including securities, bankruptcy, commercial, and tax issues-and the interplay among all of these.(fn9) Nevertheless, this method of financing often provides significant benefits to companies that generate receivables.(fn10) These companies are often referred to in U.S. securitization structures as "originators." Properly structured, the originator is able to remove the securitized financial assets and associated financing from its balance sheets, making the company financially stronger from an accounting viewpoint, and, therefore, able to acquire more funds at a lower cost for other business activities.(fn11)

Despite the relatively high transaction costs of securitizing receivables, the originator is often able to obtain funds at a cost that is lower than traditional bank lending.(fn12) Therefore, although transaction costs may be higher, the company is able to obtain a lower "all-in" cost of funds. In part, this lower cost often results because the company is able to separate stronger assets from weaker assets, creating a pool of higher quality assets upon which financing can be obtained. The company also gains access to a source of financing other than traditional equity markets or third-party lenders.(fn13) Finally, the originator is better able to match its assets and liabilities, providing for greater management of its financial resources.(fn14)

Of course, the originator enjoys other potential economic benefits including, in the case of banks and other regulated financial institutions, an improved ability to meet capital adequacy requirements.(fn15)

Because of the significant potential benefits provided by securitization transactions, the demand for securitization of financial assets has grown at a remarkable pace in the United States. Currently, over half of all debt securities issued in the United States are issued through one form or another of such securitization transactions.(fn16) One report estimates that the total value of U.S. securitized assets as of the end of 1992 exceeded $1 trillion.(fn17) Since the market began in the mid-1980s, $90 billion to $200 billion in new assets have been securitized annually.(fn18)

The success of the U.S. market was in part the result of economic, regulatory, and historical factors that may have been unique to a certain period in the United States.(fn19) This success, together with other global economic factors such as increased direct access to capital markets and reduced liquidity of traditional bank lenders, has generated interest in securitization outside the United States.(fn20) The European market for asset-backed securities is not yet as large as the U.S. market.(fn21) This differentiation can be attributed to the relative lack of experience with such transactions, the complicated nature of the transactions, and the differing regulatory environments.(fn22) However, active securitization markets do exist in the United Kingdom and elsewhere in Europe, including France, Spain, and some Scandinavian countries.(fn23)

III. Securitization in Japan

Certain types of securitized financial products existed in Japan prior to the adoption of the new legislation described in this Article. Among such products are commercial paper, securitized commercial real estate mortgages, somewhat less popular securitized residential real estate mortgages, residential mortgage trusts, and bank loan securitizations.(fn24) Transactions that allow divided ownership of real property through legal entities known as kumiai have also been completed.(fn25) The market for these products is generally less developed than similar markets in the United States.(fn26) The lack of market development may be attributed to a number of factors, not least of which is the relatively rigid regulatory control exercised over the markets by governmental bureaucracies in Japan.(fn27)

IV. Summary of the Specified Claims Law

A. Background

Since 1988, Japanese government-sponsored research committees have studied the field of asset securitization.(fn28) These studies have focused on the practices of U.S. regulatory agencies and market participants, such as investment banks, lawyers, accountants, and investors.(fn29) In 1990, the Securities and Exchange Council, sponsored by the powerful Ministry of Finance (MOF), published its first report on the legal and institutional improvements necessary to cope with asset securitization.(fn30) Paralleling the efforts of the MOF, a group of scholars, businessmen, and government officials referred to as the Asset Securitization Research Committee, sponsored by the Ministry of International Trade and Industry (MITI), completed its study of U.S. securitization.(fn31) That Committee published the results of its efforts on March 12, 1992.(fn32) Later that year, on June 5, 1992, the Japanese Diet passed the "Law Regarding Regulation of the Business Concerning Specified Claims."(fn33) The Law went into effect one year later in June 1993.

B. Chapter 1: General Provisions

Chapter 1, Section 1, sets forth the Law's general purposes, which assure the proper operation of the businesses that take assignment of receivables and businesses that sell instruments backed by such receivables, ensure that such businesses are operated fairly, and confirm that there is sufficient investor protection.(fn34)

Chapter 1, Section 2, includes definitions of the principal terms used in the Law. Of particular importance is the term "Specified Claims" (Tokutei Saiken). Specified Claims, generally speaking, refer to the kinds of receivables that may be securitized under the Law. These receivables include (1) equipment lease receivables that arise from leases of machinery or other goods with lease terms of at least one year and are not terminable by either party following the commencement of the lease term; (2) receivables that arise from purchase by presentation of a voucher where payment of the purchase price is to be made over at least three installments over a period of at least two months; (3) receivables that arise under agreement other than by voucher where, as a condition...