CCB Being the First to Issue MBS in China

On December 15, 2005, CCB held an issuing ceremony for its MBS product, Jianyuan 2005-1, marking that the first MBS product, which was issued by CCB, formally entered the national inter-bank bond market.

Leaders from the People’s Bank of China (PBC) and China Banking Regulatory Commission (CBRC) and Chang Zhenming, Governor of CCB addressed the issuing ceremony respectively. Present at the ceremony were leaders from regulatory bodies including the General Office of the State Council, the National Development and Reform Commission (NDRC), the Ministry of Finance, the Ministry of Construction, the State Taxation Administration, the Legislative Affairs Office of the State Council, China Securities Regulatory Commission (CSRC), China Government Securities Depository Trust & Clearing Co. Ltd. (CDC) and China Foreign Exchange Trade System & National Interbank Funding Center (CFETS) and representatives from financial institutions including Industrial & Commercial Bank of China (ICBC), Bank of China, Agriculture Bank of China, Bank of Communications, China Development Bank, and CITIC Trust & Investment Co., Ltd. The ceremony was hosted by Chen Zuofu, Vice-Governor of CCB.

With the strong support from the State Council and the active promotion by PBC, CBRC and related departments, CCB’s pilot project introduced an important innovative financial business, pioneering mortgage securitization in China. According to Measures for the Pilot Supervision and Administration of the Securitization of Credit Assets of Financial Institutions published by PBC and CBRC, the securitization of credit assets is a type of structural financing activities in which a banking financial institution, as the promoter institution, entrusts the credit assets to a trustee institution, and the trustee institution issues beneficial securities to investment institutions in the form of asset-backed securities and pays the yields from asset-backed securities by the cash generated from the aforesaid assets.

In the trading, CCB played multiples roles, such as the promoter institution, loan service institution, arranger and administrator for book building. Learning from international operational model of assets securitization and under the existing legal framework of China, CCB designed a MBS trading structure suited to China’s reality. CCB has finished the comparatively complete project and design process ranging from selection of loans, creation of loans pool, and trust creation to the design and issuance of securities, cash flow collection and payment. In order to guarantee the successful implementation of the first MBS project in the country and in accordance with the related regulations and policies issued by related agencies including PBC, CBRC, Ministry of Finance and Ministry of Construction, CCB formulated internal regulations and developed the first information processing system for MBS in China by learning from the international and domestic advanced systems and management experiences.

In addition, CCB employed top-notch teams to participate in the MBS project and provide intermediate services for the issuance of securities, which include King & Wood PRC Lawyers, Freshfields Bruckhaus Deringer Office (UK), Standard Chartered Bank, China International Capital Corporation Limited (CICC), Beijing Moody's Investors Service, China Chengxin International Credit Rating Co., LTD, Platinum Deloitte Touche Tohmatsu CPA Ltd. and KPMG. The rating method of Moody’s was adopted. Moody's and China Chengxin conducted joint studies and analysis over the securities and made respective evaluations of credit quality. Then China Chengxin issued the rating report. 

China Chengxin became the entrusted agency and issuer for CCB’s MBS. The Industrial & Commercial Bank of China (ICBC) was the assets custodian bank. Hong Kong. Shanghai Banking Corporation (HSBC) was the transaction managing institution. China Government Securities Depository Trust & Clearing Co. acted as the agent for securities registration and custody and payment. When the assets-backed securities are issued, all participators shall follow the terms and conditions of the contract and fulfill their responsibilities of managing trust property so as to satisfy the needs of securities investors for timely payment of interest and principal.

The MBS issued by CCB is a kind of credit assets securitization product that regards the mortgage-backed loan as basic assets. As a new investment and transaction instrument, it differs from the traditional bond and other fixed income securities. First, CCB issued a series of securitization products with different grades, repayment terms, income rates and risks, which may satisfy varied needs of investors concerning risks and incomes. Second, different from national debt, corporation debt and financial debt that take the credit of securities issuer as the payment basis, the securities issued this time are the fixed income product based on basic assets credit. The payment for the principal and interest comes from the cash flow generated from loans in the assets pool, collateralized loan house property, other subsidiary rights and interests, securities layering and credit enhancement arrangement of reserve accounts. CCB and CITIC Trust & Investment Co., Ltd will not guarantee securities with their own credit.

Based on the distribution order of cash flow, CCB 2005-1 MBS is divided into levels priority level and secondary level (S). The priority level securities are classified into three grades: A, B and C based on the payment order of interest and principal, that are separately rated as AAA, A and BBB by China Chengxin. The securities of the secondary level are issued by CCB and they are not rated. According to the related regulations and laws, when the securities are issued, Grade A and B securities will circulate in the interbank bond market within two months of issuance and Grade C securities can also be traded based upon agreement.

CCB chose three first-level branches in Shanghai, Jiangsu and Fujian as the pilot branches. Based on the strict pooling standard, CCB selected out over 15,000 mortgage loans totaling approximately RMB 3 billion from these three branches to create the asset pool above. The personal mortgage loans put into the asset pool are all high-quality assets of CCB.

The purpose of developing MBS is to not only match and optimize the liabilities and assets structure of the bank, increase the capital adequacy ratio and prevent, disperse and transfer risks, but also play an indispensable and positive role in promoting the standardization of credit assets business and advancing the overall management of the bank. Meanwhile the development of MBS may strengthen the intermediary functions of the bank, provide a wide platform for the bank to step into the capital market and offer a profit-making opportunity for the bank to expand intermediary business. Moreover, the implementation of the MBS pilot project in China’s commercial banks is of positive significance to consolidating the stability of financial systems, promoting the development of the financial market, improving the efficiency of the financial market and satisfying the growing housing needs of the mass market.