Normative Framework for the Regulation of Holdout Creditors in the Sovereign Debt Market

Abstract

This article challenges the contemporary negative and dismissive narratives about distressed debt hedge funds (DDHFs), a subset of holdout creditors. A soft normative framework for regulating this category of creditors and other holdout creditors is however proposed to address their disruptive activities in the sovereign debt market. It is proposed that the Basel III framework be a conduit for enforcing the proposed normative framework because hedge funds are customers of institutions subject to Basel III oversight. One of the characteristics of these funds is their relatively sophisticated and high use of leverage. The authors therefore envisage the Basel III framework being expanded to provide for enforcement in this context. Finally, the normative framework proposed in this article differs from previous proposals including the Sovereign Debt Restructuring Mechanism (SDRM) and contractual solutions including Collective Action Clauses (CACs) and exit consents as it proposes the Basel III framework as an enforcement mechanism and is not a contractual solution.