January 26, 2017 - The LSTA’s big story of 2016 centered on the new Delayed Compensation Standard that went live in September. So in this review, the Market Data and Analysis team wanted to spend all our time on settlement metrics which, after four months of data, look much improved. (Kudos to all those who’ve borne the brunt of change!) But first, let’s put today’s figures in historical perspective. Since peaking back in 2013 at an average of T+22.9 days and a median of T+16 days, par settlement times have steadily improved. Fast forward to full-year 2016 and the average and median settlement times have tightened to four-year lows of T+17.3 and T+13, respectively.
During the 8-month period of 2016 (January-August) before the changes in Delayed Compensation took place, average and median settlement times fell to T+17.7 and T+13, respectively. But following the start of the new standard (September 2016), the average settlement time dropped further to T+16.7, while the median tightened a full two days to T+11. From a distribution standpoint, the changes in results also were encouraging. In the pre-change period (January- August), the percentage of trades settled at T+10 or less totaled 39%, while 29% settled later than T+20. In comparison, trades settled after Aug. 16 (post-change) reported noteworthy improvements. Case in point, the T+10 or less dataset increased to 46%, while the greater than T+20 dataset fell to just 25%.
We then took a closer look at buy-side par sale data which has become even more important given the SEC’s recently released Open End Mutual Fund Liquidity Risk Management Rule. LSTA data has illustrated that buy-side sale settlement times (which include all vehicle types not just Open-End Mutual Funds, which actually settle faster) have been much improved over the past four years. Case in point – the median buy-side sale settlement time fell from a high of T+13 in 2013 to a multi-year low of T+10 in 2016. Furthermore, buy-side sale settlement times improved following the start of the new standard: The median came in at T+10 prior to the change and T+8, or two days shorter, following it.
But let’s get back to the SEC’s liquidity rules for open end mutual funds. The SEC rules require mutual funds to classify their assets into four liquidity categories, ranging from Category 1 (highly liquid) to Category 4 (illiquid). Many loans will probably be considered Category 3 assets, dubbed “less liquid” by the SEC. In order to make it into Category 2 – moderately liquid assets – loans would need to trade and settle within 7 calendar days or for our purposes by T+5 business days. While 62% of buy-side sales settled within T+10, we are hopeful that as loan mutual funds focus on faster settlement of sales, we will see a substantial portion of their loan sales settling within the T+5 benchmark.
In conclusion, all the aforementioned improvements realized after the LSTA’s New Delayed Compensation Standard went live did in fact include transactions that traded prior to the change but settled thereafter. And for that reason, there is even more room for optimism as we enter 2017.