OREANDA-NEWS. The announcement of new disclosure rules for consumer credit asset-backed securities (ABS) in China will improve transparency and contribute to the development of the market, says Fitch Ratings. The disclosures required by the National Association of Financial Market Institutional Investors' (NAFMII) new guidelines are still short of what Fitch requires from issuers, but should be sufficient to spur issuers to build the necessary infrastructure to capture and report much more relevant information for investors than is currently available.

Data sufficiency and adequacy are important rating considerations for ABS. Generally, Fitch expects the originator to provide performance data that covers at least one economic cycle with a minimum of five years and the usual lifetime (origination to maturity) of the securitised products. If the data provided are deemed to be insufficient and where market-wide proxy data is also not available, Fitch may decline to rate the transaction or implement a rating cap.

New rules for data transparency and standardisation are particularly important as China's securitisation market is still in an early stage of development, despite a boom in 2014. Many issuers still lack experience and knowledge on securitisation and may not fully appreciate the importance of disclosure to investors.

NAFMII, a self-regulatory body under the supervision of the People's Bank of China, has now released four asset-class-specific guidelines this year targeting improved transparency and standardisation in China's ABS market. The latest was promulgated in September and specifically pertains to ABS backed by non-revolving consumer loans originated by commercial banks or consumer finance companies in China. The earlier three disclosure guidelines were released in May and August 2015, and related to auto ABS, residential mortgage-backed securities (RMBS) and shanty-town reconstruction ABS.

In these guidelines, NAFMII requires that issuers provide specific information on collateral attributes, cash flow distribution, and static pool performance data. In addition, standard templates are provided to capture time-series collateral stratifications, cohort performance data and cash collections.

Notably, the guidelines require issuers to provide five years of cohort performance data for consumer credit and auto ABS issuance, or all available data since inception if issuers have been in operation for less than five years. For RMBS issuers, the data requirement is ten years of cohort performance data, or available data since inception if issuers have been in operation for less than 10 years.

This fourth guideline also addressed the disclosure requirements for a revolving structure, where principal collections can be used to purchase new eligible assets. This guideline does not apply to revolving credit ABS, such as credit card ABS, where new receivables originated from existing accounts are automatically replenished and included in trust assets. Revolving structure ABS transactions need to disclose additional information on asset selection criteria and performance data on principal and interest/fee collections.

Fitch believes that additional disclosure rules for revolving structures is appropriate, as repurchase of new assets could lead to changes in portfolio composition and expose transactions to the risk of changes in origination standards during the revolving period.