The Loan Syndications and Trading Association plans to publish guidelines next year that govern the use of private information for players that invest in both the private and public securities markets. The issue is becoming increasingly thorny as more investors seek to invest in both the private bank loan and public bond markets. Allison Taylor, executive director of the LSTA, said the association gets calls from investors that play in both markets seeking guidance on the use of private information. "Ten years ago most investors in loans were on the private side of the walls," she said. "Now more investors, such as hedge funds, have chosen to invest in the loan market based on public information. They are wondering how to invest in both loans and bonds. We hope to save them time by developing guidelines."
Elliot Ganz, executive v.p. and general counsel for the LSTA, is heading the effort to put together the rules that govern the use of non-public information. "We are trying to develop guidance on the flow of information," said Ganz. He added that many firms have already developed their own guidelines on how to play in both the public and private market. "We are trying to give a market view," he said.
Chris Haga, an analyst at Carlson Capital, a Texas-based hedge fund, welcomed the guidelines. "The source of the problem is the lack of clarity around information you get as a bank debt lender. You need to have some sort of standardized disclosure principles that allow companies to raise funds efficiently in the loan and bond markets," he said.
The LSTA first developed guidelines related to this issue in 1998 when it put together rules designed to prevent institutions from trading a company's security based on material non-public information.
JPMorgan and Lehman Brothers are examples of banks that have merged their bank loan and bond teams to accommodate investors that play in both the private and public securities markets. One head of sales and trading at a bank that recently moved its loan trading operations to the public side of the wall said it made the decision to switch from both a regulatory and business point of view. "Our customer base has migrated to the public side CLOs, loan funds, hedge funds and some banks are largely public. About 60% of the buyer universe is on the public side. We want to deal with those customers in the safest way from a regulatory standpoint," he said.
He added that a big advantage of going public is the additional liquidity it gives to loan trading. He explained that sometimes it is only possible to obtain additional liquidity through credit default swaps or by hedging in the public bond markets. "You would not be able to do this if you are only on the private side," he said. He acknowledged, however, that there are disadvantages. One of these is the lack of public information on aspects such as amendments, impending defaults and asset sales. Those that have private information can act on this information before those that are exclusively on the public side of the wall.
He also welcomed the LSTA's move to bring out guidelines. "Having a framework that everyone can look at as an industry standard is a good endeavor," he said.
Ganz declined to give details of the guidelines the LSTA is working on, but he stressed that the association is seeking to develop broad principles that do not aim to lay down hard and fast rules. "What works specifically for one institution will not work for others. The principles we will develop will work for all institutions," he said.
