Individual versus Collective Enforcement Rights in Sovereign Bonds

Ten years ago, sovereign bond markets almost universally adopted so-called collective action clauses after years of public sector pressure for more efficient procedures to cope with sovereign default and restructuring. A second policy initiative, the standard appointment of a trustee to centralise enforcement of the bondholders’ claims against the debtor, has however remained largely fruitless. Yet, in light of the current European debt crisis, the need for market-based restructuring procedures is greater than ever. This short article provides a non-technical summary of earlier research on individual versus collective enforcement rights regimes. It evaluates theoretical arguments made in the literature and elsewhere and briefly presents the results of two empirical studies on market sentiment. We conclude that a collective rights regime, as found under a trust structure, is more likely to promote efficient crisis resolution procedures that do not depend on third party assistance. The necessary legislative steps appear to be straightforward.