May 9, 2019 - If you are looking for artwork that would both decorate your office space and also would help implement the new Primary Delayed Compensation Protocol, look no further!  The LSTA has developed flowcharts focusing on Primary AllocationsEarly Day Trades and Post Funding Trades that illustrate how Delayed Compensation is to be applied on a step-by-step basis.  And if a picture is not necessarily worth a thousand words, we’ve also provided the Primary Delayed Compensation Protocol together with a Glossary of Terms.

What should be done TODAY?  As the Protocol will be effective January 2020, it is very important that vendors are addressing and programming changes in the Electronic Settlement Platforms (ESP) and loan systems.  It is equally important that all loan parties revise their operational practices to reflect changes that will be required of them.  Today, Sellers can provide the draft Credit Agreement, Deal and Facility CUSIPs, legal names of the Borrower, Seller, Agent and Facilities, together with MEIs of the Seller and Agent to the ESP by no later than the date on which allocations are given (i.e. the Trade Date).  Today, Sellers can make the primary trade ticket available on the ESP by no later than the Trade Date + 1 Business Day.  Today, Sellers can work with their lawyers to provide an execution version of the Assignment Agreement to the ESP by no later than 3 Business Days prior to the expected funding of the deal.  Today, Buyers can execute documents and select a Proposed Settlement Date of no later than three business days after (i) the Trigger Date (typically the date the deal funds) or (ii) the date on which the allocation is given when it is given after the deal funds (aka Delayed Trigger Date) and Persist.  This will allow Buyers to practice meeting Ready Date requirements.   It is never too early change existing operational practices!  

When does the Protocol apply? The Protocol will apply only when the Seller and the Agent Bank are the same or affiliated parties.   In addition, it will only apply to a Buyer that has been onboarded, including having met the KYC (“Know Your Customer”) requirements determined by the Admin Agent/Seller, by the Ready Date.   Buy-side firms should be proactive in determining whether or not their sub-allocated funds have met this requirement.

How does the Protocol affect delayed compensation for secondary trades? When issued trades will be adjusted to align with the delayed compensation that a Buyer can earn on the Primary Allocation.  A Seller will not be required to pay delayed compensation on an Early Day Trade or a Post Funding Trade that it was not capable of earning as a Buyer of a Primary Allocation.  A Post Funding Trade is a new form of secondary trade for which the Trade Date is either on the Delayed Trigger Date  or the Delayed Trigger Date + 1 Business Day. 

The LSTA and its members are working on the revisions to the legal documentation that will be required.  The Protocol, developed by the LSTA and a wide range of market participants, should result in important changes in practices and behavior that will reduce both primary and secondary settlement times.   If you have questions, please contact ehefferan@lsta.org.

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