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...