Client Alert

The New Draft Directive on Hedge Funds: A Sting in the Tail for the ABS Market

May 07, 2009

Conor Downey and Diego Shin

On 30 April 2009, the European Commission (the Commission) released its widely anticipated draft Directive on Investment Fund Managers (the Draft Directive). If implemented in its current form, the Draft Directive will not only have an immediate impact on hedge funds but also on the asset backed securities (ABS) market. The new requirements will be particularly onerous for the CMBS and RMBS markets.

The ABS market is very familiar with the proposal from the E.U. for originators and/or sponsors to retain at least 5 per cent. of any of their related ABS issuances. This will be imposed by an amendment to the Capital Requirements Directive. Penal regulatory capital charges will be levied on regulated E.U. credit institutions that do not obtain an explicit commitment from the related originator, sponsor or underwriter that such parties will maintain a material net economic interest of not less than 5 per cent. in securities of the same tranche or tranches acquired by such credit institution. However, the Draft Directive signals that a new front is being opened by the E.U. in their efforts to regulate the ABS industry by limiting the type of ABS assets in which hedge funds and similar entities may invest.

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