The Loan Syndications and Trading Association is looking to tweak the physical settlement rider that goes hand in hand with the loan-only credit default swap confirm the International Swaps and Derivatives Association published. Elliot Ganz, LSTA executive v.p. and general counsel, said the document leaves room for negotiation and the association aimed to have a document that was formulaic and could be stapled to the confirm without any discussion. The gray area surrounds the cost of settlement because when credits are in default, it can be difficult to calculate the interest rate that should be paid.
"This...becomes problematic because it is difficult to calculate the interest, that is the measure of the penalty, because these loans are typically distressed," Ganz explained. "Calculating what the interest component of that penalty should be is difficult to get here."
In the next few weeks the LSTA working group will meet to discuss the document and then it will be brought before the Trade Practices and Forms Committee. The physical settlement rider, which was published in mid June (CIN, 6/26), provides detailed rules and guidance for the standards of a physical settlement under a LCDS. It recognizes that physical deliveries of loans after a credit event will use closing procedures developed by the LSTA, which can be modified to ensure an efficient and quick settlement (5/29). ISDA published the LCDS confirm in early June (6/12).