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The role of trustees in capital markets transactions has been subject to scrutiny since the financial crisis at least in part because of pressure from market participants for trustees to become more proactive in carrying out their duties.

Certain capital markets participants believe trustees are too risk-averse; however, trustees insist that they are limited in the powers and the discretions that they can exercise owing to various legal risks and operational constraints imposed on them.
A failure to resolve this impasse may hamper the continued revival in the capital markets.

Potential options for reform include extending the powers and discretions of the trustee by creating, in effect, a 'super trustee' role, empowering noteholders to make more decisions without the involvement of trustees through a negative consent mechanism, as well as making noteholder voting processes more flexible so as to fast-track decision-making.

Other more radical options include lowering the statutory standard of care of capital markets trustees, or creating an indemnification fund that could be paid for by the market.

None of these options in themselves will totally address the challenges facing trustees in capital markets in the performance of their functions, but the need to find a solution to certain aspects of the current situation is crucial.

A version of this article first appeared in the September 2010 issue of Butterworths Journal of International Banking and Financial Law.

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