Large investment banks, central banks, bond investors and asset managers have joined forces to propose a new framework that aims to negate complicated disputes such as the fight over Argentina's default earlier this year.
The International Capital Market Association (ICMA) represents around 450 institutions located in 52 countries and includes members from Goldman Sachs, Morgan Stanley and Citibank. It has published revised and updated proposals to facilitate future sovereign debt restructuring which contain a plan to introduce collective action clauses (CACs).
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These CACs would allow a majority of bondholders to agree to changes in the bond terms in the event of a default. Holders of the debt could extend the maturity, for example, and any changes would be legally binding on all holders of the bond. This means that those who voted against the restructuring would still be obliged to follow the changes that are agreed upon.
The proposals hope to provide a practical solution to the problem of blocking minorities and also shed more detail on the "pari passu" clause which it says had brought about uncertainty in the Argentine default case. Pari passu or equal footing refers to equal treatment of all parties affected.
"The potential adverse fallout globally from the default and restructuring of Argentina's debt demonstrates the importance of having clear, unambiguous contract terms for sovereign bonds," Leland Goss, ICMA's general counsel said in a press release on Friday morning.
"In‐depth consultations with our members and other interested public and private sector representatives have led to the development of enhanced legal technology that will make more orderly and efficient sovereign debt restructurings achievable in the future."
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In June, the U.S. Supreme Court rejected an appeal in Argentina's battle with hedge funds, which led to a sovereign default by Latin America's third-biggest economy in July. These U.S. hedge funds had previously rejected a bond restructuring plan in the wake of the country's 2001 catastrophic sovereign default.
The financial institutions and bond issuers may have agreed on these new proposals but the next stage would be for global governments to start adopting the rules.