March 28, 2019 - Delayed Compensation (aka Delayed Comp) is twenty years old – and it is changing. Below, we discuss what Delayed Comp is, how it has evolved, and how you can learn to get the compensation that is due to you.
Delayed Comp was born in 1998 to put (loan) Buyers and Sellers in the same economic position they would have been in if their par secondary trade had settled by T+10 (eventually T+7) and if their distressed secondary trade had settled by T+20. The idea is that, if there is a delay in settling the trade, the interest and accruing fees earned by the Seller is passed to the Buyer (and, conversely, the cost of carry is passed from the Buyer to the Seller).
That state of affairs persisted until January 2016. At that point, looking to shorten settlement times, the LSTA Board voted to transform delayed comp from the original no-fault system in which the Buyer was automatically entitled to compensation, to a requirements-based standard. (Basically, by no later than T+5, the Buyer must sign documentation and agree to settle by no later than T+7 and persist until the actual settlement date.) But the quid pro quo to the Buyside was that banks would implement delayed compensation on primary allocations, so that Buyers were paid for their exposure in the primary. This Primary Delayed Compensation Protocol was approved by the LSTA Board of Directors in October 2018 with the expectation that it be implemented early in 2020.
So what is Primary Delayed Comp? It is simply Delayed Comp for a primary allocation for either a new issue or an amendment. When does a Buyer get it? When (i) the Seller and the Administrative Agent are the same party, (ii) the a Buyer is KYC approved and onboarded by the Seller/Admin Agent by the “Ready Date” based upon the Seller’s/Admin Agent’s internal guidelines, and (iii) the Buyer signs the Trade Confirmation and the Assignment Agreement by the Ready Date and further selects a Proposed Settlement Date of no later than the Ready Date. (Plus the Buyer must “persist” within the Electronic Settlement Platform.)
But what is a “Ready Date”? The Ready Date is predicated off a “Trigger Date”, which is the date of initial funding under the Credit Agreement unless none of the facilities are funded on or around the time when the Credit Agreement is executed (in which case the Trigger Date is the date that the Credit Agreement is executed and delivered). The “Ready Date” typically will occur three business days after the facility funds (when allocations are given on or before the Trigger Date) or three business days after the allocations are given (when they are given after the Trigger Date).
Primary Delayed Compensation will begin to accrue, on an unsettled trade, on the sixth Business Day after the Ready Date, provided that the Buyer has ticked all the boxes described above.
Is there more to the story? Are there additional requirements? Yes! Legal documentation and systems will undergo change. The Protocol will also change what constitutes an Early Day Trade (better known as a “when issued trade”) and when delayed compensation will begin to accrue on such trade. The devil will be in the details so if you plan to earn delayed comp (or perhaps pay less delayed comp), plan to be in New York on April 9th for the LSTA Operations Conference. Several hundred dollars may save you several million dollars. Now that sounds like a good trade.