An Interactive Session to Discuss the New Delayed Compensation Standard. Stephen Casey, Neuberger Berman Ellen Hefferan, LSTA Bram Smith, LSTA

Transcription

1 An Interactive Session to Discuss the New Delayed Compensation Standard Stephen Casey, Neuberger Berman Ellen Hefferan, LSTA Bram Smith, LSTA

2 Today s Secondary Loan Market is Larger Than Ever S&P/LSTA Leveraged Loan Index Outstanding $1,000 Billions $900 $800 $700 $600 $500 $400 $300 $200 $100 Billions $700 $600 $500 $400 $300 $200 $100 Annual Secondary Trade Volume $0 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 $ Source: S&P/LSTA LLI & The LSTA Trade Data Study 2

3 Settlement Times Had Remained Elevated For The Better Part of The Past Three Years $200 Quarterly Secondary Trade Volume 25 Median Par Settlement $175 $ Billions $125 $100 $75 $50 $25 Par Settlement (T+) $- 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 0 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 Source: The LSTA Trade & Settlement Data Study 3

4 Despite Additional Market Pressures to Decrease Settlement Times in 2015, Only 20% of Par Trades Are Settling Within T+7 25 Median Buyside Purchases Median Buyside Sales 2015 Par Settlement Distributions <=7 Days 8 to 20 Days to 30 Days >30 Days Par Settlement (T+) >30 Days 19% <=7 Days 20% to 30 Days 16% 8 to 20 Days 45% Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 AVG Source: The LSTA Trade & Settlement Data Study 4

5 The LSTA Board Unanimously Approves Change to Delayed Compensation The Liquidity Committee has worked together for 18 months. First Step: revise delayed compensation from a no fault to a requirements based model Second Step: apply delayed compensation to primary trade settlement 5

6 Why the LSTA Board Changed Delayed Compensation Settlement is inefficient Free up capital Counterparty risk Help promote the asset class Eliminate settlement as objection Self-help vs. regulators leading change 6

7 Revising Delayed Compensation to a requirementsbased model is expected to: Increase the Dealer s incentive to use its own balance sheet to settle the Seller s trades when the Dealer is the Buyer Create urgency from the Buyer to close trades Reduce the Buyer s incentive to use the Seller s balance sheet 7

8 Basic Model: Regular Secondary Par Trade For a regular secondary par trade, the requirements based model will require that by T+6, in order to receive delayed compensation, the receiver of the compensation (for purposes of this presentation this is assumed to be the Buyer) must: (i) Execute the required trade documentation and (ii) Select a settlement date of no later than T+7 agreeing to be financially able to settle the trade without interruption (aka persist ) until the Settlement Date (together with (i), hereinafter referred to as the Regular Basic Requirements ). 8

9 Basic Model: Early Day Secondary Par Trade For an Early Day secondary par trade, the requirements based model will further require that by Trigger Date +12, in order to receive delayed compensation, the receiver of the compensation must: (i) Execute the required trade documentation and (ii) Select a settlement date of no later than Trigger Date+14 agreeing to be financially able to settle the trade and further agreeing to persist until the Settlement Date (together with (i), hereinafter referred to as the Early-Day Basic Requirements, and together with the Regular Basic Requirements, the Basic Requirements ). 9

10 Delays Due To KYC Pending, Waiting For Borrower Consent And/Or An Agent Freeze If trade settlement is delayed due to KYC pending, waiting for Borrower consent and/or an Agent freeze, delayed compensation will pass to the Buyer provided that: (i) In the case of waiting for Borrower consent and/or an Agent freeze, the Buyer has fulfilled the Basic Requirements and (ii) A trade that cannot settle in its entirety is SETTLED ON A PARTIAL BASIS meaning that any and all sub-allocations that can be settled must be settled and the remaining sub-allocation(s) will settle when, e.g. the KYC process is completed. BEST PRACTICES: Pursuant to the LSTA Operational Best Practices for Secondary Trade Settlement (released in February, 2015) at least three business days prior to entering into or sub-allocating a trade, a new financial entity should provide all its KYC/AML/credit and tax documentation to each of the Administrative Agents and counterparties that such institution expects to receive allocations from and trade with. 10

11 The Dealer (Seller or Buyer) must submit the trade details into the Settlement Platform by T+1 If both parties to the trade are Dealers, the Seller is responsible for submitting the details. If the Dealer is the Seller and the details are not submitted by T+1, then the Buyer shall automatically be entitled to delayed compensation for all secondary par trades. If the Dealer is the Buyer, and the trade details aren t submitted by T+1, then the counterparty must provide notice to the Dealer by T+3 that the trade details need to be submitted. If notice is provided by T+3 and the Regular Basic Requirements are met by the Dealer by T+6 or the Early-Day Basic Requirements are met by the Dealer by Trigger Date +12, then the Dealer will be entitled to delayed compensation. If notice is provided by T+3 and the Regular Basic Requirements are not met by the Dealer by T+6 or the Early-Day Basic Requirements are not met by the Dealer by Trigger Date +12, then the Dealer will forfeit the delayed compensation. If notice is not provided by the counterparty/seller by T+3, then the Dealer/Buyer is automatically entitled to delayed compensation. 11

12 There is one exception that should be noted New CLOs may select a maximum of five (5) business days during which time they will not have to settle trades and will nevertheless still be paid delayed compensation (the Blackout Period ). The Blackout Period occurs when the CLO exits the warehousing stage to price and go live. Before and after the Blackout Period, the CLO is expected to settle trades. It is the responsibility of the CLO manager to inform the settlement platform as to the specific dates of the Blackout Period once the dates become available and such dates will be non-selectable as settlement dates on the settlement platform. If the Blackout Period exceeds 5 Business Days and the Agent and Dealer are prepared to settle the trade, and the CLO is unable to settle, the CLO will forfeit the delayed compensation for the entire Delay Period. 12

13 Combined and Netted Trades Combined Trades: When trades are combined, the trade documentation must be signed by T+6 (Trigger Date +12) of the first trade in order to satisfy the delayed comp requirements. Trades can be combined as long as the combined trade does not delay settlement of the first trade beyond T+7 (Trigger Date +14). Bilateral Netting Agreement: When trades are netted, the trade documentation including the Bilateral Netoff Agreement must be signed by T+6 (Trigger Date +12) and a settlement date of T+7 (Trigger Date +14) and persist must be selected by T+6 (Trigger Date +12) with respect to the first trade in order to satisfy the delayed comp requirement for both trades. Trades can be netted off as long as the netted trade does not delay settlement of the first trade beyond T+7 (Trigger Date +14). Multilateral Netting Agreement: With respect to multilateral agreements (which will settle an A B trade and a B- C trade together), having Buyer B in the A-B trade sign the confirm and assignment agreement and choose the settlement date of T+7 (Trigger Date +14) by T+6 (Trigger Date +12) will satisfy Buyer B s ability to receive delayed comp from Seller A. Having Buyer C in the B-C trade sign the confirmation and assignment agreement and choose the settlement date of T+7 (Trigger Date +14) by T+6 (Trigger Date +12) will satisfy Buyer C s ability to receive delayed comp from Seller B. The multilateral agreement and revised A to C Assignment Agreement may be signed later but the date both are signed will have no effect the ability of either B or C to receive comp from A and B, respectfully. 13

14 Payout Letters and Participations Payout Letters: With respect to payout letters, if T+6 precedes the payout date then all the Basic Requirements, as applicable, must be fulfilled by T+6 in order to receive delayed compensation. If the facility is paid out on e.g. T+10, the accruals would terminate on that date but compensation would be paid from T+7 T+9, assuming that the requirements were met. If the payout date precedes T+6, then delayed comp would not apply. Participations: The only participations to be excluded from the rules are trades that were initially entered into as participations. The new delayed compensation rules will apply to trades that were originally expected to settle via assignment and later settle via participation. The basic requirements must be met by the Buyer who would have signed the assignment agreement. 14

15 Trades Settled on Paper If a trade is not settled on a settlement platform but rather is settled via paper, the changes to delayed compensation will still apply. Parties are expected to track the requirements via correspondence and excel spreadsheets. 15

16 How Will This Change Be Executed? Changes to the settlement platforms, including improved reporting and tracking mechanisms. Changes in the LSTA Standard Terms and Conditions for Par/Near Par Trade Confirmations. Better communications between settlement platforms and systems that accrue for delayed compensation. The LSTA and the industry are committed to making this work. In the first quarter of 2016, the LSTA will meet with vendors, operations and settlement professionals, portfolio managers and traders in a number of cities in order to facilitate the transition to this new standard. 16

17 Panel Discussion Moderator: Panelists: Ellen Hefferan, LSTA Denislav Ditchev, Neuberger Berman Sandy Savich, BMO Financial Group Bernadette Townsley, GE Capital

18 Workflow Challenges Trade input by T+1 / 3 business day notice provision Disagreement on trade details / other terms of trade Removal of signatures due to trade changes KYC Process and Partial Settlement Borrower Consent / DQ lists Assignment Agreement completion CLO 5 Day Blackout Period Trade readiness vs. actual settlement /cash management Agent delays when both parties to trade are ready Better communication between settlement platforms and systems that accrue for delayed compensation 18

19 Highlights: LSTA Best Practices for Primary Trade Settlement Review Credit Agreement for transfer provisions Review Assignment and Acceptance Agreement Encourage agents to apply for and publish CUSIPs using estimated data Ask for CUSIPs with your allocations All lenders of record should be identified with MEIs KYC documentation should be provided 3 business days prior to entering into or sub-allocating a trade CUSIPs and MEIs should be in included in front, middle and back-office systems 19

20 Highlights: LSTA Best Practices for Secondary Trade Settlement KYC documentation should be provided 3 business days prior to entering into or sub-allocating a trade Agents should post DQ Lists to virtual documentation websites or verify via Enter trades to platform on T; trade tickets uploaded by 9:00 am ET on T+1 Sub-allocate trades on T+1 Respond to pop-up questions and sign documentation by T+3 Reach out for Borrower Consent ASAP 20

21 Gearing up for the change Managing Capacity / Headcount Priority now is to settle older trades Has an element of P & L moved to the middle and back office? 21

22 Q &A 22