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Efforts to reform the securitisation and structured debt market to restore investor confidence following its near paralysis during the financial crisis have led to various new and proposed regulations across Europe and the USA.

One such initiative is the European Commission's proposed amendments to Article 122a of the Capital Requirements Directive (CRD).

Proposed amendments to Article 122a include a requirement for the originator to retain a five per cent net economic interest in securities it has issued.

There are also substantial investor due diligence requirements including the obligation by investors to carry out their own credit analysis of the assets underlying the securities.

The Commission of European Banking Supervisors (CEBS) is expected to publish guidelines on Article 122a of the CRD on 31 October 2010.

Similar proposals in the USA by the Securities and Exchange Commission (SEC) are included in the amendments to Regulation AB which form part of the SEC's plans to overhaul the regulation of asset-backed securities (ABS) in the public and private markets in the USA.

The proposals were published in April 2010 in the SEC regulatory statement ABS Release. If the SEC's plans are implemented, they will affect domestic US transactions and non-US issuers that are looking to access the US market, including private transactions under Rule 144a and Regulation D of the Securities Act of 1933.

An alternative approach to restoring confidence in the securitisation and structured debt market is to focus on improving the transparency and soundness of the underlying assets instead of the securitisation product.

This approach may prove to be particularly effective in the commercial property market where a new class of debt-based assets can be created for professional and retail investors by applying strict underwriting and valuations criteria to create 'approved' assets that can be securitised using existing techniques.

The securitisation and structured debt market plays a crucial role in supporting the fragile economic recovery and ensuring the wider availability of credit to support growth.

For any reform of the securitisation and structured debt market to succeed, it will have to create products that are transparently structured, easily understood and are backed by soundly-originated assets.

A version of this article was first published in the March 2010 issue of the Law and Financial Markets Review.

An in-depth analysis of the issues examined in this article and other legal and regulatory developments that affect securitisation structures in the UK, Europe and the USA can be found in New Beginnings (November 2009) and in New Horizons (June 2010). Both publications have been produced by Clifford Chance's international securitisation teams.

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