October 14, 2015 / 2:39 PM / 3 years ago

TRLPC: Private U.S. leveraged loan market pulls the shutters down

NEW YORK (Reuters) - Industry bodies and banks have started to limit the release of U.S. leveraged loan data, which is decreasing market transparency, even as regulators increase oversight of the asset class and stress the importance of adequate disclosures to individual investors.

Regulators led by the Federal Reserve (Fed) and the Office of the Comptroller of the Currency (OCC) have paid closer attention to leveraged lending after saying in 2013 that underwriting practices had deteriorated. The US Securities and Exchange Commission (SEC) in proposals last month called for more transparency around liquidity risks and risk management from fund managers.

The Loan Syndications & Trading Association (LSTA), the trade body for the private $840bn U.S. leveraged loan market, has stopped publicly releasing data on the time that loans take to settle in the secondary market. Regulators have flagged long settlement times as a potential threat to market liquidity.

Amid heightened regulatory scrutiny, banks have also pulled back from releasing some information they may deem as proprietary, including some content previously released to third-party data providers, sources said.

The LSTA has also excluded press from its 20th annual conference on Oct. 28, which is the US leveraged loan market’s biggest event and includes panels on key issues affecting the asset class. Journalists were also barred from attending the LSTA’s operations & settlement conference in April, which was also previously open to the press.

The trade body, which was founded in 1995, advocates for the shared interests of all loan market participants, promotes the growth of the asset class, and cites increased market transparency and efficiency as part of its mission.

The LSTA did not respond to requests for comment.

Information is tightly held by lenders in the private leveraged loan market, which provides non-investment grade financing to borrowers, unlike in the public bond market, where information is typically freely available to all bondholders. Some investors have raised concerns that the US leveraged loan market could become even more opaque as a result of the moves.  

“The LSTA is supposed to promote the interests of the market,” said one loan participant. “If all other markets open their conferences to the press, why wouldn’t the loan market? It just makes the loan market look defensive.”

The Loan Market Association’s annual conference in London on Sept. 24 was open to the press, and journalists attended an Asia Pacific Loan Market Association event in Taiwan in September. The Securities Industry and Financial Markets Association, a trade group for the securities industry, invited journalists to attend a liquidity forum on Sept. 30.

“We are in an era now where transparency is the watchword. It raises the issue of: Who is going to have the information? Is it just insiders?” said C. Samuel Craig, professor of marketing and international business at New York University’s Stern School of Business.


The LSTA’s moves follow heightened regulatory scrutiny, which has put the typically low-profile leveraged loan market in the spotlight and left many market participants feeling unfairly targeted.

The Fed, the OCC and the Federal Deposit Insurance Corp (FDIC) issued updated Leveraged Lending Guidance in 2013 in a bid to curb risky lending.

The Volcker Rule followed with new regulatory requirements that barred banks from investing in Collateralized Loan Obligation funds that own bonds, and risk-retention rules were also introduced, which, starting in December 2016, will require managers to hold 5% of their funds.

“We’re closely monitoring developments in the leveraged loan market and are working to enhance the effectiveness of our supervisory guidance,” Fed Chairwoman Janet Yellen said last year.

Spokespeople for the Fed, FDIC, OCC and SEC declined to comment or did not comment by press time.

The SEC is now focusing on liquidity amid fears that investors may not be able to withdraw funds on demand. Assets in bank loan mutual funds and exchange-traded funds have soared by almost 400% since late 2009, but many of the loans in these funds can take more than a month to settle, SEC Commissioner Kara Stein said in June.

“Promoting stronger liquidity risk management is essential to protecting the interests of the millions of Americans who invest in mutual funds and exchange-traded funds,” SEC Chair Mary Jo White said in a news release last month.

It took an average 20.2 days to settle a secondary loan trade in the third quarter, according to Markit; far longer than the seven days recommended by the LSTA and more than six times the three days it takes a bond to settle.

“If it takes over a month to settle, it is reasonable to wonder how the fund could possibly meet the seven-day redemption requirement in the Investment Company Act in times of market stress,” Stein said in the June speech.

Editing by Tessa Walsh and Jon Methven

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