The Loan Syndications and Trading Association is looking to release best market practice guidelines for total return swaps next year. The form the guidelines will take is not yet clear, but with a number of risks involved with a TRS trade and many of the firms handling the trades differently, the LSTA wants to offer guidelines to eliminate some of the uncertainties that may arise.
The association held a "working group call" Sept. 6, which featured 225 people on the phone and 75 in person. Elliot Ganz, executive v.p. and general counsel at the LSTA, said the hour-long call introduced some of the issues at hand, including questions regarding settlement and confidential information. A second call has not yet been scheduled.
"What we are trying to do is get a working group together that will go through the issues one by one and determine what the best practices ought to be and presumably issue some type of advisory," Ganz said.
With an increasing percentage of loan trades facilitated through TRS, questions can arise following a trade made like this example: A buysider wants to source a loan from one bank and then calls another bank that provides swaps and rather than buying the loan directly from the first bank, the second bank will buy the loan and swap it to the buysider in a total return swap. In this scenario settlement questions arise because three parties are involved instead of two. Also, there is the question of whether or not the borrower, often a hedge fund, should be treated like an owner of the loan and be given corresponding information. Also where the bank will place the trade--some will put it on its balance sheet and others will place it into a specific structure--plays a role.
Ganz said this can have accounting implications, tax implications, counterparty risk implications and there can be exposure risk. He said there can also be questions surrounding the management of the loans facilitated through the TRS, including voting amendments. The intent is to have two different working groups, one that looks at settlement and one that looks at the use and dissemination of confidential information.