“Seven days or no pay” has been shortened to “five days or no pay.”
Under a final trade settlement rules for below investment grade corporate loans, buyers will have to have to commit to producing funds within five days of a purchase agreement if they want to collect interest while waiting for a deal to close.
The Loan Syndications and Trading Association, an industry trade group, had originally proposed requiring buyers to demonstrate their ability to produce funds within seven days (T+7) of a purchase agreement, or forfeit the so-called deferred compensation.
But buyers must now commit to producing funds even sooner to compensate for the longer lead time to transfer funds across borders.
The LSTA had planned to start enforcement of the T+7 regime on July 18, but delayed it last month after its members raised questions about cross-border trades.
The new rule is intended to speed settlement process that in recent years has stretched to three weeks and beyond, even for trades of loans not considered to be distressed. The rule is also meant to reduce the amount buyers collect, which currently can be weeks of earned interest beginning seven days after a loan trade agreement.
Critics alleged the existing regime gives buyers disincentives to close deals in a timely manner, given they are collecting interest without committing funds until the day of settlement. (Buyers, meanwhile, have argued the delays were also inherent in the complex, obsolete and paper-driven settlement process, of which they had no control.)b
“It is critical to remember why the LSTA is committed to these changes,” the trade group wrote in its weekly newsletter, published Friday. “The new delayed comp regime is designed to significantly reduce settlement times for loan trades.
“While we anticipate some early challenges, we strongly believe that the benefits of quicker settlement will materially outweigh any short term disruptions,” the LSTA wrote.
The LSTA enforces rules and standards for its electronic loan trading platform used by the industry. The existing delayed compensation protocol is an automatic “no fault” process for loan trades extending beyond seven days, regardless of which counterparty is responsible for delays beyond a seven-day settlement period.
The new “requirements-based” practice is to be phased in over the next three months. Beginning Sept.1, the LSTA will allow buyers to take up to six days to commit funds for deferred comp eligibility, as well as allowances for pre-designated lead times on their settlement platforms.
In the interim enforcement period, buyers will also have their deferred compensation rights protected during an extended settlement time beyond seven days occurs if the deal is still needing agent consent, “know-your-customer” clearance or if there is an agent freeze.
But on Nov. 1, the stricter “T+5” day funds commitment time goes into effect in order to meet the T+7 settlement deadline. Lead times over one day for funds transfers will no longer be accepted – forcing the buyer to forfeit any delayed compensation. Certain buyers may even find they’ll lose one day of deferred compensation, “under certain circumstances,” if they include a one-day lead time while still completing the deal with T+7.