On August 5th, the LSTA issued a revised version of its recently proposed "requirements-based" par/near par delayed compensation rules, which are intended to replace the current "no-fault" regime. The stated goal of the LSTA remains decreasing par loan trading settlement times to T+7 in order to increase liquidity in the market, draw in a broader range of investors, and demonstrate to regulators that the secondary loan market possesses the ability to effectively self-regulate itself.
Following the initial introduction by the LSTA in June of the revised delay compensation rules (see our June 17 RK&O Webinar - LSTA Delayed Compensation for a full, detailed discussion of the original proposed rules), the LSTA received numerous comments from market participants and service providers, most of which focused on operational issues, mainly concerning (i) the accelerated implementation schedule for the new rules would make timely compliance difficult and (ii) unintentional errors, technical glitches or delays caused by regulatory requirements would result in outsized and unintended financial penalty to market participants. As a result of these comments and concerns, the LSTA has further modified the par/near par delayed compensation proposal as follows:
- There will be a two-phase rollout of the new requirements-based rules, with Phase I (substantially similar to the June proposal (including an abbreviated, 7 day trigger for invoking a buy-in or sell-out remedy), with exceptions noted below) going into effect on September 1, 2016, and Phase II going into effect on November 1, 2016.
- With regards to Phase I, in addition to the revisions previously discussed in the RK&O Webinar, a few additional exceptions to a buyer's "Delayed Compensation Requirements" have been included and will go into effect on September 1, 2016:
- A buyer/dealer is no longer required to sign the trade confirmation and A&A within the required timeframe (T+5/T+6) if not in receipt of requested KYC information from the seller.
- Where there is a purchase price error that delays funding, a buyer retains delayed compensation benefits so long as it timely informs the seller of the error and had previously executed the trade confirmation and A&A within the required timeframe.
- A "force majeure" clause now provides a reprieve for a buyer when encountering "functionality" issues with the electronic settlement platform, to the extent such issues prevent a buyer from timely signing documents or checking-off SDC, are outside a buyer's control, and are unable to be "prevented or overcome" by the buyer.
- Where there is a "material" error in the A&A, a buyer does not lose delayed compensation benefits so long as it has timely signed the trade confirmation, notified the seller of such error by T+3, and signed the A&A on or before the cutoff date (T+5/T+6) where the A&A was corrected by T+4.
- With regards to Phase II, starting on November 1, 2016, new tighter buyer "lead time" provisions and accommodations will be implemented whereby a buyer, in order to comply with its "Delayed Compensation Requirements", (i) must have the trade confirmation and assignment agreement ("A&A") signed and SDC checked-off by T+5 (rather than T+6) and (ii) will be permitted a maximum of one (1) day of "lead time" from the date the administrative agent indicates it is ready to settle the trade to the date the buyer actually settles; provided, however, to the extent it decides to use this day of lead time, it will forfeit one (1) day of delayed compensation under certain circumstances.
RK&O will continue to closely monitor any new developments over the coming weeks, so please do not hesitate to contact us with further questions or if you would like more detailed information on the new regime.