On 27 June 2017 the Loan Market Association (the "LMA") published an update to the Standard Terms and Conditions for Par and Distressed Trade Transactions (Bank Debt/Claims) (the "Standard Terms and Conditions") which amended certain provisions of the Buy-in/Sell-out mechanism contained in Condition 23.3 of the Standard Terms and Conditions (the "BISO provisions").
What are the BISO provisions?
The BISO provisions offer a form of remedy to a party to an LMA Par trade where there is a significant delay in settlement caused by the actions, or inactions (as the case may be), of its counterparty.
The BISO provisions allow a party (the “non-defaulting party”), under certain conditions, to serve a notice of its intention to terminate its obligations in respect of a trade with a counterparty (the “defaulting party”) and to enter into a substitute trade with a third party for the equivalent of the traded portion (a “BISO Notice”).
The non-defaulting party’s right to serve a BISO Notice is triggered if the defaulting party fails to perform its “settlement delivery obligations” (being the execution and delivery of a trade confirmation and/or execution and delivery of transfer documents necessary to settle the trade) within 60 business days of the trade date. Where a defaulting party receives a BISO Notice, it then has a 15 business day cure period to perform the outstanding settlement delivery obligations or, where the defaulting party is the seller, to show (amongst other things) that it does not beneficially own the loans yet and the delay is being caused by an upstream trade. If the settlement delivery obligations have still not been met by the end of the cure period, the non-defaulting party has the right to execute a substitute trade with a third party for the equivalent of the traded portion.
If the non-defaulting party enters into a substitute trade at a higher price than the original transaction then the defaulting party is obliged, under BISO provisions, to compensate the non-defaulting party for the price difference. Similarly, where the price is lower than the original transaction the non-defaulting party is obliged to compensate the defaulting party for the difference.
What has changed as of 27 June 2017?
In the circumstances where the defaulting party was of the opinion that the pricing of the substitute trade was unreasonable, the original BISO provisions provided a dispute mechanism whereby the price could be referred to a pricing panel constituted by the LMA. The panel would then determine what the reasonable price should be and its decision would be binding on the parties. However, such disputes were rare and no formal pricing panel was ever constituted so, as a result, the LMA decided to put in place new procedures that mirror market reality.
The LMA has removed the “Pricing Panel” concept altogether. Under the amended provisions, a non-defaulting party entering into the substitute trade is obligated to do so “on arm's length terms and in good faith…..at a purchase price which is commercially reasonable in the circumstances”. Therefore, the non-defaulting party must act fairly when agreeing to pricing for the substitute trade. However, with the pricing panel concept now removed, any future disputes over the substitute purchase price applicable in the BISO context may now have to be resolved by the courts.