The Loan Syndications & Trading Association is pushing to close the window of opportunity to back out of trades by binding parties to terms of their trade from the moment they reach agreement, including phone conversations. Currently, the loan trading market relies on oral agreements over the phone that are still open until documents are signed. Jane Summers, legal counsel for the LSTA, said the LSTA is taking aim at the period of time between when traders say "done" on the phone and when written confirmation is faxed back and forth. "That's the period we're trying to address with this change. We have begun a dedicated legislative effort in New York State to have the loophole closed in the statute," said Summers.
As it stands, general securities and derivatives are exempt from the New York State Statutes of Frauds that requires a signed agreement to bind parties to a trade. The LSTA initiative would put loans on equal footing with those markets. The LSTA anticipates that the legislation could be enacted by next summer, Summers said.
Peter Santry, head of distressed trading at Bank of America, said the move will provide a measure of security in the loan trading markets. "We're vulnerable between the time of trade and actual confirmation being signed," he said. Santry added that as documentation is more standardized it will cut down on people walking as prices move. "We just want to make sure that we have the same protection, especially in distressed, that the bond market gets."
Summers describes the loan trading market as "self-disciplined," adding that any player who tries to back out of an oral agreement will quickly get marked and lose business as a result. While no trading desks have expressed concerns over a possible loophole, Summers says there remains a concern in the LSTA that this will occur. "By changing the law we're trying to catch up with market practice," she said. "The risk is somebody will violate the market practices and try to walk away from a trade."
Dealers noted that trading phone lines are taped and that the recordings would hold up in a court of law. Summers says many firms do not tape their lines. Another dealer said his firm has brought in legal counsel on two occasions after market players at other firms attempted to back out of dals.
LSTA Conference
The Loan Syndications and Trading Association will be hosting its annual conference this week at the Grand Hyatt in Manhattan to review LSTA accomplishments and its upcoming agenda. A number of industry members will also participate in panel discussions, addressing new issues arising in the market due to the Sept. 11 terrorist attacks.
Confab To Tackle Market
After Attacks
The Loan Syndications and Trading Association has retooled the agenda of its conference to address the market in the wake of the terrorist attacks on the World Trade Center and Pentagon.Allison Taylor, executive director of the LSTA, said the conference will now focus many sessions on how the market is responding in the aftermath. Taylor said, for example, there will be an overview panel discussion with moderator Nancy DelGenio of Deutsche Bank,Ed Hamilton of Bank of America, Jon Calder of Citigroup, Anthony Clemente of INVESCO, Payson Swaffield of Eaton Vance, Bruce Ling ofCSFB , and Suraj Bhatia of Sumitomo Trust to discuss the market from the primary, secondary, and buyside perspectives focusing on the market following the crisis. "Both the primary and secondary markets have been disrupted significantly since the events of Sept.11th," said DelGenio. Taylor noted the LSTA is counting on a good turnout and has only had a few cancellations due to limiting corporate travel policies.
Taylor said the big question DelGenio will pose to the panel is, "What types of structuring, pricing, and industries will help re-open the primary market?" In addition, DelGenio is expected to ask about the effects of the possibility of redemptions of public mutual funds on the market and how secondary loan trading has held up since the attacks
"It will be a broad discussion which will probably take a lot more than an hour!" said Taylor, expecting the discussion to focus on many areas, provoking much conversation on where the market is heading.
Taylor said she will be presenting a review of the LSTA's accomplishments and a review of the mark-to-market changes in the market. "In the beginning we didn't have a separate mark-to-market section, but we thought it was more relevant today," said Taylor, explaining that volatility in the market following the WTC attacks has made this a bigger concern than ever.
CDOs In Focus
The impact of the terrorist attacks on the collateralized debt obligation market will get a special look at the conference, as many managers are seeking to mitigate risks inherent in the collateral underlying their vehicles. David Tesher, managing director at Standard & Poor's, participating panelist in the CDO Market discussion, will discuss how the rating agencies are closely monitoring many CLOs and CBOs that have exposure to the airline, lodging, and gaming industries. Last week, S&P issued a list of 30 CDOs put on credit watch due to exposure to airlines and lodging including: Balboa CDO I Ltd., Diamond Investment Grade CDO Ltd., Valeo Investment Grade CDO I Ltd., Pilgrim America CBO I Ltd., and Stanfield CLO Ltd. ( click here for a complete list).