The Loan Syndications and Trading Association is looking to make some changes to the settlement rider for loan-only credit default swaps, specifically with regards to delayed compensation payment the protection buyer has to make. It has engaged law firm Richards Kibbe & Orbe to draft a document that is expected to be released in the first quarter, maybe as early as January.
In the current document, it is specified that the protection buyer, if late in delivering documents, would have to pay an amount that was the greater of the credit default swap premium and the interest of the underlying loan that was being delivered. The problem was that market players didn't want to refer to the interest component because they thought it would be unduly complicated to settle.
The interest component can cause an issue because the interest periods under the credit agreement will probably not coincide with a period of calculation for the delayed compensation payment. Attempting to figure out how much has been paid by the borrower and translating that into what has to be paid or not paid by the protection buyer can lead to complicated calculations where it is unclear what has been paid or not paid until after the settlement leading to post-settlement obligations. Eliminating the interest component should get rid of the potential to have post-settlement obligations.
The final decision about what the amendment will say is unclear because it has not been written, but it is anticipated the reference to the interest component will be removed and the premium component will be modified.