On March 14, 2022, ICSDs will introduce a new DVP settlement model for new issue syndicated bonds. The changes will have an impact on the roles of the ICSDs, lead manager and common depositary in the payment flows and the settlement process for new banknotes. Although changes to closing documents are minimal, drafting attorneys should be aware of changes to the settlement process to facilitate a smooth closing. This alert (i) describes the differences between the current model and the new model and (ii) suggests changes to the closing instructions and schedule.
On November 30, 2020, ICSDs published a proposal to reduce credit and liquidity risk in the settlement process for syndicated bond issues by modifying the delivery-versus-payment (DVP) settlement process in ICSDs’ book-entry accounts. Following positive market feedback, ICSDs announced the implementation of a new settlement model for new syndicated issues. The implementation date for the changes is March 14, 2022.
The new model will affect syndicated bonds and medium-term notes that are issued through an ICSD on a DVP basis and deposited with a common depository or common custodian. In particular, the new model replaces the common depository1 with the ICSD as an intermediary in the payment flows of ticket settlements. Affected market participants will need to adapt their systems to support the new setup as, after implementation, it will no longer be possible to enter into new transactions using the current DVP model.
Current model vs new model
Current model: Against payment of the proceeds of the note by the lead manager to the common depository, the issuer arranges for delivery of the note to the common depositary for credit to the lead manager’s dedicated account on the books of the appointed ICSD. Settlement commences upon receipt by the common depositary of the ICSD’s irrevocable commitment to pay the proceeds of the note to the common depositary (commonly referred to as an irrevocable or “irrevocable” SWIFT message). The ICSD delivers the irrevocable to the common depositary based on the cash reserves and credit lines available to the lead arranger within the ICSD system. The common depositary then transfers the proceeds of the notes to the issuer and directs the crediting of the notes to the account of the lead manager.
New model: The ICSD acts on behalf of the lead manager but for the benefit of the issuer under an irrevocable third-party beneficiary clause. Rather than the ICSD blocking the lead arranger’s credit lines/cash reserves and issue the irrevocable, the new model uses a new commissionaire account, which the lead arranger holds with the ICSD. The lead manager will instruct ICSD to deliver the proceeds of the note to the order of the issuer on a DVP basis. At the same time, the issuer will instruct the common depositary to deposit the notes free of payment in the agent’s account.2
Chronology of the new DVP regulation
Once the “green light” is given:
- The issuer orders the delivery of the authenticated global note to the common depository, to the credit of the commission account of the lead arranger, free of payment.
- The lead manager, on behalf of the issuer, instructs ICSD to pay the proceeds of the notes to the issuer against (i) receipt of the common depositary’s instruction to mark up the notes in the commission agent account lead arranger, and (ii) receipt of 100% of the ticket proceeds into the agent’s account.
- Upon the occurrence of (i) and (ii) immediately above, ICSD will make payment of the Note proceeds to the order of the Issuer.
Impact on High Yield Bond Closings
The usual form of closing instructions will remain largely the same, but technical changes will be required to accommodate the new DVP settlement process. The new Common Depository settlement instructions will be very similar to the cashless settlement instructions given for the settlement of a Note through DTC. For example, the common depository will be instructed to credit the notes as soon as the instruction is ‘green lighted’ and not against the ICSD’s irrevocable commitment to pay. Similarly, payment instructions and funds flows will require changes to accommodate the implementation of (i) the new commissionaire account structure, (ii) the new role of ICSD in the settlement process and (iii) the removal of the common depository from the payment stream.
Although ICSDs have not issued model closing instructions, ICMA has issued proposed changes to closing instructions and purchase agreements, which can be viewed on its website.
Analysis is ongoing in both ICSDs and final terms have not been confirmed. Transaction Counsel should allow additional time in the transaction schedule to discuss the required changes with the designated lead manager and common depositary.
1 All references herein to a common depository are also references to a common custodian, where applicable.
2 That is to say without the generation of an irrevocable payment commitment on the part of the ICSD.