Changes to Delayed Compensation for LSTA Par/Near Par Trades

On September 1, 2016, the Loan Syndication and Trading Association (the “LSTA“) implemented significant changes to the provisions in the trading documentation governing whether a buyer is entitled to receive delayed compensation for a par/near par trade (hereinafter, a “Par Trade“). Delayed compensation is a payment by seller to compensate buyer when a Par Trade does not close within seven (7) business days after the trade date (“T+7“).[1]

Under the revised documentation, the right to receive delayed compensation in Par Trades has changed from a no-fault basis to a requirements-based model. These changes are being implemented in two phases: the changes under Phase 1 apply to trades with a trade date on and after September 1, 2016, and the remaining changes will be applied during Phase 2 for trades on and after November 1, 2016.

During Phase 1, a buyer will be entitled to receive delayed compensation for trades that settle after T+7 only if it completes the following actions (collectively, the “Basic Requirements“) on or prior to T+6:

1. it executes all relevant trade documentation, including the trade confirmation and the relevant assignment agreement;[2]
2. it proposes a closing date which is no later than T+7 and is ready and able to settle the trade from and including such proposed closing date until the date that the trade actually settles (the “Settlement Date“); and
3. it pays the purchase price on the Settlement Date.

Under Phase 2, a buyer will be entitled to delay compensation only if it completes the Basic Requirements on or prior to T+5. In addition, a buyer may only select a “lead time” of one business day. For purposes of these new rules, “lead time” means the number of days of advance notice requested by buyer of the Settlement Date selected by the agent. During Phase 1, a buyer may select a “lead time” of more than one business day.

The new rules include various exceptions to the requirements outlined above. A buyer will be entitled to receive delayed compensation for trades that settle after T+7 even if it had not completed the Basic Requirements before the given deadlines:

1. if the parties agree on the trade date to settle by participation rather than assignment;
2. if the delay is due to buyer not having completed a “know your customer” review of seller as a result of seller’s failure to provide buyer with all requested information;[3]
3. if buyer does not execute the relevant assignment agreement because it contains a material error;[4] or
4. if buyer is unable to satisfy the Basic Requirements as a result of any event or circumstance relating to the functionality of the E-
5. Platform, which event or circumstance (a) is outside of the control of buyer, (b) cannot be prevented by buyer, and (c) prevents buyer from completing the Basic Requirements.[5]

In addition, if a buyer has timely completed the Basic Requirements, but the Settlement Date occurs after T+7 because the proposed transfer did not receive the consent or acknowledgement of any third party as required under the credit agreement, buyer will be entitled to receive delayed compensation. Finally, if a buyer does not timely pay the purchase price, buyer still will be entitled to receive delayed compensation if (x) buyer reasonably believes there is an error in the calculation, (y) buyer notifies seller of such error no later than the proposed Settlement Date, and (z) buyer has otherwise complied with all other Basic Requirements.

Today, the vast majority of Par Trades are completed via an E-Platform, and the deadlines for the Basic Requirements described herein relate to trades conducted on an E-Platform. The deadlines for trades that are not settled on an E-Platform are slightly different; however, the ultimate requirement that buyer has taken the necessary steps and is willing and able to settle the trade by T+7 would still apply. For certain trades, the trade dates of which are prior to the actual execution of the credit agreement or the funding of the relevant loans under the credit agreement (each, an “Early Day Trade“), the Basic Requirements include a revised schedule of deadlines for such Early Day Trade.

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[1] For purposes of this alert, the time period from and after the trade date is noted as T+X, where X is the number of business days after the trade date.
[2] If seller is a broker-dealer or if neither party to a trade is a broker-dealer, then seller must submit all trade details to the relevant electronic settlement platform (hereinafter, an “E-Platform“), such as ClearPar, no later than T+1, otherwise buyer will be entitled automatically to receive delayed compensation. If buyer is a broker-dealer and seller is not, and buyer does not submit trade details to the E-Platform by T+1, then seller must send a notice to buyer no later than T+3 stating that the trade details have not yet been submitted to the relevant E-Platform. If after receipt of this notice, buyer does not then submit the trade details to the E-Platform by T+5, buyer will not be entitled to delayed compensation. However, if seller does not send the reminder notice to buyer by T+3, buyer would be entitled to receive delayed compensation.
[3] Buyer must have requested such information from seller prior to T+6, during Phase 1, or T+5, during Phase 2, in order for this exception to apply.
[4] In order for this exception to apply, buyer must notify the E-Platform no later than T+3 of the material error in the assignment agreement. If the material error is corrected by T+4, buyer must complete the Basic Requirements by T+6, during Phase 1, or T+5, during Phase 2 in order to be entitled to delayed compensation.
[5] Under these circumstances, buyer agrees to use commercially reasonably efforts, in light of the event or circumstance, to remedy the situation as promptly as reasonably practicable.