In an effort to reduce settlement times, the Loan Syndications and Trading Association (the “LSTA”) recently revised its standard par loan trading documents to penalize buyers who take too long to settle. Beginning September 1, 2016, buyers who fail to fulfill their obligations to timely settle par loan trades will forfeit the right to receive interest that accrues prior to the settlement date. The changes do not apply to loans trading on distressed documents.
The LSTA’s revisions represent the trade group’s most aggressive step to combat settlement delays. The revisions are also the most consequential changes to the LSTA’s standard par trading documents in years.
Under the current version of the LSTA’s Standard Terms and Conditions for Par/Near Par Trade Confirmations (the “Standard Terms”), buyers are automatically compensated for interest that accrues on a loan during the period beginning on the seventh business day after the trade date up through the settlement date (“Delayed Compensation”). Starting on September 1, 2016, this provision will no longer be automatic. Instead, par loan buyers will only be entitled to Delayed Compensation if they satisfy several new requirements, including paying the purchase price to the Seller in accordance with specific timing requirements (the “Delayed Compensation Prerequisites”). The LSTA believes that the Delayed Compensation Prerequisites will create a new sense of urgency for buyers to close trades and discourage buyers from tying up sellers’ balance sheets.
Beginning September 1, 2016, in order to be eligible for Delayed Compensation, buyers who are drafting the trade documents and not executing via an electronic platform must deliver the trade confirmation and relevant assignment agreement to the seller on or before one business day after the trade date. If the buyer fails to do this, the seller may, within three business days after the trade date, send the buyer a notice indicating the buyer’s failure to comply (a “Failure Notice”). After receiving a Failure Notice, the buyer will have (i) five business days to comply with its drafting requirements and (ii) one business day, after receiving seller’s signatures, to provide the fully executed assignment agreement to the agent. Where the buyer is not the drafting party, the buyer must simply provide its signature to the seller by the applicable deadline set forth in the Standard Terms. If the buyer performs the requirements as set forth above, and the agent agrees to close the transaction, the buyer will be entitled to receive Delayed Compensation, provided it pays the purchase price to the Seller in accordance with the timing requirements provided by the Standard Terms (the “Paper Requirements”).
Settlement Platform Requirements
Under the updated Standard Terms, parties executing trades after September 1, 2016, will be required to settle via an electronic settlement platform unless they specifically opt out.
Where the parties are settling via an electronic platform, the Dealer (as defined in the Standard terms) or, if both or neither parties are Dealers, the seller must submit the trade details to the electronic settlement platform no later than one business day following the Trade Date. If the trade details are timely provided, then buyer must (i) provide its signature to the seller by the applicable deadline set forth in the Standard Terms, (ii) select a proposed settlement date no later than the applicable Commencement Date (as defined in the Standard Terms), and (iii) confirm that it is (and will continue to be) financially able to settle the transaction on any business day from and including the applicable Commencement Date until and including the Delayed Settlement Date.
Because the buyer often needs cooperation from others to comply with the requirements set forth above, the revised Standard Terms provide that the buyer will nevertheless be entitled to receive Delayed Compensation where: (i) third party consents are not received; (ii) the seller fails to provide required “know your customer” information; (iii) there is a purchase price calculation error; (iv) there is a material error in the assignment agreement; (v) the buyer notified the seller (in accordance with the Standard Terms) that it is a New CLO Issuer and, as such, needs to comply with a CLO Blackout Period (each as defined in the Standard Terms); or, (vi) if the transaction is settling via electronic platform, the electronic settlement platform fails to perform properly and prevents buyer from being able to perform its requirements.