LSTA Imposes New Rules for Par Trades in the Secondary Bank Loan Market

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.