The European secondary loan market has undergone significant changes over the past two years, particularly with reference to the post-Lehman Brothers environment and a marked increase in price volatility. After 10 years of sustained growth in secondary loan activity in the euromarkets, unsurprisingly this trend reversed in 2008, when volumes for the year fell to €80bn from €173bn in 2007.
In light of the changes, the Loan Market Aassociation (LMA) initiated a project seeking to minimise the documentation-related basis risk faced by institutions; dealing with a lender/investor becoming insolvent; and addressing documentation matters that commonly attracted debate.
The decision was taken to harmonise the LMA par and distressed trading documents and create a standard set of documents with only a few key variations reflecting the nature of the different markets. One of the goals of harmonisation was to speed up the time it takes to settle a trade, thereby limiting counterparty risk, according to Justin Conway, in-house counsel, Goldman Sachs, speaking at a LMA event in London.
The new standard LMA terms and conditions were formally launched on 25 January 2010, along with all the related revised documents. Prior to then, the market was given access to the draft revised documents over a two-month period to enable participants to become familiar with them.
Clare Dawson, LMA managing director, said: “Given the widespread concern about lenders or investors becoming insolvent post-Lehmans and the other market issues thrown up by the disturbance in the financial markets, we consider this move to a combined set of documents, incorporating termination on insolvency of a lender, to be an important step in enhancing overall market liquidity, which continues to be one of the LMA’s prime goals. The changes have been well received by the market and we will, of course, monitor their usage over the coming months.”
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