China’s securitization market recently saw a landmark deal in which blockchain technology was first utilized in capital markets. China’s asset-backed securities market is Asia’s largest.
The residential mortgage-backed securities (RMBS), originated by Bank of Communications (BOCOM), are the first such asset-backed securities (ABS) with all information of the notes and underlying assets uploaded to the blockchain in China, and one of the first in Asia.
Although RMBS are not a novelty in the Chinese market — the first RMBS was issued in 2005 — none of the preceding transactions utilized blockchain technology. Instead, the information of the issue and the underlying assets was in many cases only held by originators and underwriters. Under these circumstances, issues surrounding asymmetric information still exist in China’s ABS market.
“If you look at the history of the great financial crisis in 2008, the asymmetric information in securitization products such as collateralized debt obligation squared (CDO-squared) was one major trigger of the crisis. Investors have no understanding of the underlying assets,” explains Wei Chen, president of investment banking department at Bank of Communications in an interview with The Asset in Shanghai. “With blockchain technology in place, investors, accountants and lawyers are able to access the information of the underlying assets.”
BOCOM securitized 9.314 billion yuan (US$1.35 billion) worth of mortgage receivables in three tranches in late September. A1 tranche (4 billion yuan) offers a coupon at 3.8% while A2 tranche (4.39 billion yuan) offers a 4.78% coupon, oversubscribed by 2.25 times and 2.36 times respectively.
It is with respect to asymmetric information that the BOCOM transaction differs: the in-house built blockchain platform, called “Jucai Chain”, protects the recorded transaction details, making it difficult for any party to tamper with and forge the information. The platform shares and collects information to and from platform participants including banks, securities firms, accounting firms, rating agencies and law firms. The blockchain technology also enables investors to “look through” the underlying credit in ABS system.
The deal is expected to become a blueprint in the market, in future utilising blockchain application in capital markets. Indeed, Chen confirms to The Asset that similar transactions backed by the same technology are already in the pipeline, in asset-backed notes (ABN) and collateralized loan obligations (CLOs) space.
The next goal, according to Chen, is to explore more use cases in the blockchain platform. “It is all about the economics of scale. As more data is uploaded, the marginal cost lowers,” says Chen.