LMA Releases Guidelines for Use of Nonpublic/Confidential Information in Secondary Loan Trading

by Morrison & Foerster LLP

On June 6, 2011, the Loan Market Association (the “LMA”) issued guidelines (the “LMA Guidelines”) for the use of nonpublic information in the context of secondary loan trading in the European market (or other markets where LMA documents are used or LMA protocols followed). In general, the LMA Guidelines are consistent with the guidelines (the “LSTA Guidelines”) for trading in the U.S. market set forth in the Confidential Information Supplement, published as of October 20, 2008, to the Code of Conduct of the Loan Syndications and Trading Association (the “LSTA”). Both sets of guidelines are voluntary, and are independent of both the trading documentation published by the LMA and LSTA and applicable legal requirements. Both divide material nonpublic information (“MNPI”) between “syndicate” confidential information, which is available to all members of a lending syndicate that choose to receive it, and “borrower” confidential information, which is not available to all members of the syndicate and is obtained through some other role played by, or connection to the borrower of, the loan market participant in possession of it (e.g., membership on a steering or creditors’ committee or affiliation with the borrower).4 Both (i) also state that trading on the basis of syndicate confidential information is generally permissible, even when one’s counterparty has chosen not to receive, or otherwise lacks, such information, while trading on the basis of borrower confidential information is generally not, and (ii) recognize the validity of informational walls that separate decision-makers with respect to trades from information in the possession of other personnel of the same institution. However, the LMA Guidelines go beyond the LSTA Guidelines in several respects that could impair the ability of market participants in possession of borrower confidential information to engage in any trading transactions.

In addition to providing recommendations for specific situations, the LSTA Guidelines call upon parties to act in accordance with “general standards of professional integrity and fair dealing.” As noted above, the LSTA Guidelines state that parties may trade on syndicate confidential information; they then go on to provide detailed recommendations for disclosing, or offering to disclose, syndicate confidential information to a trading counterparty at different stages of the trading process. With respect to borrower confidential information, the LSTA Guidelines state that a party should never trade on the basis of such information unless (i) the party received the information without breaching any duty to the borrower and (ii) the party reasonably believes that its counterparty possesses the same borrower confidential information. An obvious corollary to this rule is that a party possessing borrower confidential information may trade with a party lacking such information if the borrower confidential information is disclosed to the second party prior to the trade (without breaching any applicable confidentiality obligation or duty). The LSTA Guidelines go on to state that other exceptions may be made to the general restriction on trading on borrower confidential information if the exceptions are “consistent with the general philosophy of the Code of Conduct.”

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