The Loan Syndications And Trading Association (LSTA) is moving ahead with its efforts to expedite the settlement process, most recently completing drafts of four standardized netting agreements. These drafts include the multilateral netting agreement for par or near par paper, the multilateral netting agreement for distressed paper, the bilateral netting agreement for par and near par paper and the bilateral netting agreement for distressed paper.
The netting agreements allow parties to cash settle for trades with corresponding loans rather than execute a purchase and sale of the piece thus facilitating settlement. Instead of exchanging the paper, a bilateral netting agreement will allow parties who buy and sell paper between themselves to simply exchange the difference in purchase prices. In a multilateral netting agreement, where party A sells paper to party B and party B sells paper to party C, the agreement allows party B to drop out and parties A and C to net between themselves. In addition, if a netting agreement applies for the entire amount of a distressed bank loan trade, no purchase and sale agreement needs to be completed.
The LSTA had previously published netting agreement documents, but they were not user-friendly, explained Barbara Sherman, special counsel to the LSTA. "The concepts are the same but [the previous documents] are not user friendly and made the issue more complicated than they needed to be," she said. The documents are standardized in the interest of expediting settlement and improving liquidity, she added. The final drafts have now gone out to the LSTA membership for comments and the expected publishing date for the forms is Oct. 20.