The launch of the loan index, LCDX, may have been pushed off a few more days after a noon call Thursday because documentation issues are still being worked out. It had been set to launch April 17. "It doesn't sound like it's going, but it doesn't sound like a large slippage," one market player said. Many had been confident it was a go before the call. "Yes, official," one trader said Wednesday night. "[The] 17th it is." But afterwards some were not so sure, "Not sure if we're going to be able to do it the 17, but it hasn't been decided," another dealer said. As CIN went to press on Thursday in a shortened week, the launch date had not been finalized.
Previously the index had been set to launch April 3 and then April 10, but it keeps getting pushed back as documentation is finalized. Still in question is the discussion of private credit agreements (CIN, 3/19) and what names will be included. Markit is repolling dealers before the index launches, going over the proposed 100 names to discuss what loans are outstanding and deliverable in each category. One name under discussion is Georgia-Pacific Corp. Tom Price, director and head of loans and LCDS at Markit, could not be reached for comment.
The index will be cash settled, unlike the single-name product, which is physically settled. However, many have suggested that once the index is launched the discussion of cash settling single names will continue. During the index meetings the topic has been discussed. "This is getting closer in single names," another dealer said.
Physical Settlement Rider Tweaked
This week the Loan Syndications and Trade Association will publish an exposure draft of an amended physical settlement rider that not only updates and revises delayed compensation that has been under discussion since December, but it also makes the rider applicable to trades that settle with the LCDX product if an auction is run. The LSTA, Markit, and law firms Richards Kibbe & Orbe and Cleary Gottlieb have been working together to publish the document. A call to an LSTA official was not returned by press time.
There are a few amendments to the physical settlement rider. While the LCDX is cash settled, there will be a small number of trades that can be physically settled. Individuals can submit bids and will enter into trades that are generated from bids and offers they submit, and these single-name trades will be physically settled and these prices will be used to determine the final price in that auction. There will be some physically settled trades generated by the auction and those will be settled according to the settlement rider.
Another layer to the amendment is that everything will indeed be cash settled, including single names that are generally physically settled, so that it is being amended with the LCDX launch. A market source explained that the vast majority of single names will be cash settled via the auction with the limited ability to enter into a physical trade by submission of limited bids and physical settlement in auction. "It's not at the end of the day, 'forget cash settlement, we want to physically settle,' it's not that kind of option," the market source said. "But each party unilaterally can submit notice, 'I want to buy this loan, I want to be matched with someone who wants to be matched.'" This process mirrors the auction setup used during the International Swaps and Derivatives protocol for Dura Automotive. A call to Kimberly Summe, ISDA general counsel, was referred to an ISDA spokesman who referred calls to Markit.
For any trade that physically settles, whether it is auction generated or it is a single-name trade, if the protection buyer has not bought into the loan and delivered the settlement document by 90 calendar days of the settlement, than the protection seller will have a buy-in right and can go on its own and buy into the loan instead of waiting for a protection buyer to deliver the loan.
The last change deals with delayed compensation and applies to trades not settled in auction. They will basically be limited to single-name trades in lesser known names or lesser known entities that aren't high profile enough to cause an auction to be run. Those trades will be subject to what the individual referred to as, "LCDS-style delayed compensation" and will be done if the protection buyer has not bought into the loan and delivered the settlement documents by physical settlement than they will accrue delayed compensation to the delayed seller for 90 calendar days. For the first 45 calendar days that rate will be equal to the spread of the loan over LIBOR that is paying on deliverable obligation and for the second 45 calendar days that rate will go up by 10%.
