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

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 in two phases, the first phase to take effect on Sept. 1, 2016, and the second phase to take effect on Nov. 1, 2016. The expectation is that the rules will expedite settlements and discourage buyers from “borrowing” a seller’s balance sheet by delaying settlement.

New Rules as of Sept. 1, 2016

In order to receive delayed compensation, a buyer must (i) execute the trade confirmation and the assignment agreement by T+6 and (ii) select a settlement date of T+7 or earlier (i.e., select “Persist” in the settlement platform) (the “Basic Requirements”).

During the interim period between Sept. 1, 2016, and Nov. 1, 2016, a buyer will not be penalized for designating “lead time” on a settlement platform.

For Early Day (when issued) trades, a buyer has until T+14 to comply with the Basic Requirements.

New Rules as of Nov. 1, 2016

The Basic Requirements must be met by T+5 rather than T+6. For Early Day trades, the Basic Requirements must be met by T+10 rather than T+14.

If a dealer is party to a trade and the trade is on a settlement platform, the dealer is required to enter the trade details by T+1 (“Submission Deadline”). If the dealer is the seller and fails to meet the Submission Deadline, the buyer is automatically entitled to delayed compensation. If the dealer is the buyer and fails to meet the Submission Deadline, the seller must notify the buyer of this failure by T+3. Thereafter, the dealer will have until T+5 to enter the trade details into the settlement platform. Dealers that fail to submit trade details by T+5 will not be entitled to receive delayed compensation.

A buyer that selects one day of lead time may lose a day of delayed compensation. This will depend on when the agent executes the assignment agreement.

Exceptions to the General Rules

The new rules don’t apply to trades in which the parties initially agreed to settle by participation.

If a delay in the settlement is due to “Know Your Customer” (anti-money laundering and terrorism financing) requirements, delay in receipt of borrower consent or a temporary freeze in trading, the buyer will be entitled to receive delayed compensation, provided it has satisfied the Basic Requirements.

If a buyer does not pay the purchase price because it reasonably believes there is an error in the pricing calculation, the buyer will be entitled to receive delayed compensation as long as it has met the Basic Requirements and provides timely notice detailing such error.

If a buyer fails to execute an assignment agreement due to a material error in the document, the buyer shall be entitled to receive delayed compensation as long as it executed the trade confirmation by T+5 (or T+6 during the Sept. 1, 2016–Nov. 1, 2016, phase) and provided notice by T+3 of such error. If the error is cured by T+4, the buyer must execute the assignment agreement by T+5 in order to be entitled to receive delayed compensation.

A new CLO Issuer is permitted to select a five-day business period in which it is not required to settle trades (“Blackout Period”). The CLO Issuer will not be entitled to delayed compensation should it fail to properly notify the settlement platform of the Blackout Period or be unable to settle the trade once the Blackout Period expires.