A Government proposal to amend the bankruptcy law has raised alarm bells in the securitisation sector, which fears that one of the proposals poses the risk of significant disruption in the securitisation and covered bond markets.The Government issued a consultation paper last month, saying it wanted to shift the emphasis in bankruptcy law from protecting creditors to one where there is a balance between encouraging entrepreneurship and protecting creditors.It proposes to reduce the default bankruptcy period from three years to one year and to include safe harbour arrangements for directors that would protect them from personal liability for insolvent trading in certain circumstances.Another proposal is a crackdown on the use of ipso facto clauses, which allow contracts to be terminated solely due to an insolvency event.The Australian Securitisation Forum said in a submission to Treasury that a principle of securitisation and covered bond transactions is that they are designed to be "bankruptcy remote". This means that the trust (or sometimes company) involved in the transaction owns the securitised assets and can survive the failure of the originator of the assets.This ensures that investors' exposure is to the assets and not any counterparties to the transaction.Securitisation contracts include a number of protections that reinforce the bankruptcy remote principle. One of them is a flip clause, which shields investors from credit risks against swap providers, such as where a swap contract is terminated because the swap provider becomes insolvent.The ASF's concern is that restrictions on the use of ipso facto clauses could put the use of flip clauses at risk.The ASF has called for an exemption where swaps and close-out netting contracts are involved."That would protect the ability of the SPV [special purpose vehicle - the securitisation trust] to terminate a swap transaction if an insolvency event occurs in relation to a swap provider," the ASF submission said."A number of so-called ipso facto provisions that would appear to be caught by the proposals are essential features of a securitisation transaction."