The new year has rung in the much-anticipated regulatory capital changes under the new Basel II accord, with the first wave of European banks having already implemented the standardized approach. A second wave of banks that would adopt the internal ratings-based approach will follow at the start of 2008. Initial reaction to the implementation process indicates that everything is going well. However, despite the efforts of many regulators and market participants, there are still a few of discrepancies that need to be worked out.

For banks in the European Union, much of the guidelines were codified into law through the Capital Requirements Directive (CRD). Securitization comes up prominently, having its own section for regulatory framework. One of the bigger issues still under discussion is the U.K. regulator Financial Service Authority's (FSA) approach toward asset substitution. According to Mark Nicolaides, a partner from the London office of Latham & Watkins, the FSA is concerned that asset substitution would constitute prohibited implicit support of a transaction.

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