The Loan Syndication and Trading Association
("LSTA") is making changes to the rules that govern
pricing calculations that will impact whether a party is entitled
to receive delayed compensation.
The LSTA is making these changes in order to address lengthy delays
in the settlement of par trades in the secondary bank loan market
and to penalize parties responsible for such delays. The loan
market has been under increasing pressure to complete such
transactions more quickly in order to ease liquidity concerns
created by settlement delays.
Delayed compensation is currently a "no-fault" adjustment
to a purchase price that compensates a buyer for a delay in
settlement beyond T+7 (seven days after the trade date). Under the
LSTA's new "requirements based approach," buyers may
lose delayed compensation if they fail to timely deliver signatures
to transfer documentation and pay the purchase price on the delayed
settlement date.
The new rules are proposed to go into effect on July 18, 2016. The
expectation is that the rules will expedite settlements and
discourage buyers from "borrowing" a seller's balance
sheet by delaying settlement. The new approach imposes different
requirements depending on whether the parties settle manually or on
an electronic trading platform.
Manual Settlement
If parties to a trade intend to settle manually, the rules
differ depending on which party is responsible for drafting the
trade documentation.
If the seller is responsible for drafting, in order for the buyer
to receive delayed compensation, the buyer must execute trade
documentation by T+5 and pay the purchase price on the delayed
settlement date ("Basic Requirements"). However, in order
for the Basic Requirements to apply, the seller must have delivered
trade documentation by T+1 ("Draft Delivery
Requirement"). If the seller fails to meet its Draft Delivery
Requirement, the buyer is entitled to receive delayed
compensation.
If the buyer is responsible for drafting and fails to meet the
Draft Delivery Requirement, the seller must notify the buyer of its
failure by T+3 ("Failure Notice"). If a Failure Notice
isn't delivered, the buyer is entitled to receive delayed
compensation. However, if the seller provides a Failure Notice and
the buyer delivers signed trade documentation to the seller before
T+6, the buyer shall be deemed to have satisfied its Basic
Requirements, provided further that the buyer must then deliver,
within one business day of receipt of seller's signatures to
the trade documentation, an "Assignment Agreement" to the
administrative agent. Otherwise, the buyer shall not be entitled to
receive delayed compensation.
Electronic Trading Platform
If the parties to a trade intend to settle on an electronic
trading platform, the rules differ depending on whether or not one
of the parties to the trade is a dealer and whether or not that
dealer is a seller or buyer.
As a general rule, in order for the buyer to receive delayed
compensation it must execute trade documentation by T+5, select a
settlement date of no later than T+7 on an electronic trading
platform and indicate its readiness to settle (the "Basic
Settlement Platform Requirements").However, in order for these
Basic Settlement Platform Requirements to apply, the dealer
(whether a seller or a buyer) must submit the trade details into
the trading platform by T+1 (a "Submission
Requirement").
If the dealer, as seller, fails to meet the Submission Requirement,
the buyer is entitled to receive delayed compensation.
If the dealer, as buyer, fails to meet the Submission Requirement,
the seller must provide notice to the dealer containing certain
trade details by T+3 ("Dealer Failure Notice"). If such
Dealer Failure Notice isn't provided, the buyer is entitled to
receive delayed compensation. However, if the seller provides the
Dealer Failure Notice and the dealer, as buyer, enters the trade
details into the platform and meets the Basic Settlement Platform
Requirements within T+6, the buyer shall be entitled to receive
delayed compensation. Otherwise, the dealer, as buyer, shall not be
entitled to receive delayed compensation.
Exceptions to the General Rules
Whether the parties to a par trade intend to settle manually or
on an electronic platform, there are additional exceptions to the
proposed rules if (i) the parties are settling by participation,
(ii) the trade involves a new CLO issuer or (iii) the trade relates
to an initial funding of a Credit Agreement.
Where a delay in the settlement of a par bank loan trade is due to
"Know Your Customer" (anti-money laundering and terrorism
financing) requirements, the consent of a borrower or a temporary
freeze in trading, the buyer will receive delayed compensation,
provided it has satisfied either the Basic Requirements or the
Basic Settlement Platform Requirements, whichever is
applicable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
