Loan traders will be legally bound to oral agreements on trades now that New York GovernorGeorge Pataki has signed an amendment to the New York State Statute of Frauds. The amendment, signed last Wednesday, eliminates the requirement of a signed agreement to bind parties to a trade. "You are legally bound to close the trade if you reach an agreement on the phone," said Jane Summers, general counsel for the Loan Syndication and Trading Association (LSTA).
Without the amendment, either party involved in a trade technically could deny responsibility for the agreement and back out between the date the agreement was reached and the date a written trade confirmation was signed. The new legislation adds bank loans, trade claims and private notes to the list of qualified financial contracts already exempt under New York law from the Statute of Frauds.
Separately, in an effort to take additional risk out of loan market trades, the LSTA is making a push to reduce distressed debt settlement times. Currently, the settlement times for distressed debt run an average of 45 days. The LSTA would like to bring this time down to 20 days and will hire an assistant general counsel to spearhead this effort. Shorter settlement times will reduce counterparty risk substantially, said Allison Taylor, executive director of the LSTA.
Taylor said the first issue was to identify how to fix the problem and then develop a market consensus around the issue. On the list of potential timesavers, the LSTA would like to simplify the documentation that is prepared in conjunction with trades, streamline the documentation delivery and try to develop practices to reduce deviations from the standard forms. The initiative is likely to take some time because the LSTA must work with various parties to bring loan market players onto the same page.