New Fed Survey Shows Increased Market Demand for Third-Party Custodial Arrangements

For the past few months, a working group of the LSTA’s Trade Practices and Forms Committee has been debating changes to the form of Collateral Annex.  Sellers of loans on the secondary market use this form when their inability to obtain agent or borrower consent to a pending sale of loans requires them to close the sale on a participation basis.  The purpose of the form is to collateralize any ongoing funding obligations the purchasers may have.  The realities of transacting in a post-Lehman world have contributed to an increasingly vociferous call by buysiders for seller segregation, or third-party custody, of any cash collateral posted by purchasers under the Annex.

The Federal Reserve has now published the results of a survey that appears to support the buysiders’ position that market practice in this area is under pressure to change.  The Fed’s Senior Credit Officer Opinion Survey on Dealer Financing Terms, released on March 29, 2012, includes the following special question:

“How has the intensity of efforts by your institution’s clients to negotiate arrangements for the custody by third parties of collateral and margin posted to  your institution changed over the past six months?”1

More than two-thirds of all respondents reported an increase in the intensity of their efforts during this period, with at least two dealers reporting that such efforts had increased considerably. The survey went on to note that:

“[C]ash collateral reinvestment practices are said to have changed significantly, including through application of more-stringent investment guidelines for cash collateral by beneficial owners . . .”2

With attention on the segregation and custody of collateral heightened this past week as the MF Global drama played out further before a Congressional committee, it remains to be seen whether the traditional resistance of secondary loan market dealers to buyside collateral-protection measures will finally begin to erode.

Further information and analysis on the issues at the center of the Collateral Annex debate are slated to appear in an upcoming issue of our firm’s periodic newsletter, which focuses on key documentation issues affecting distressed investing.


  1. Division of Research and Statistics, Board of Governors of the Federal Reserve System, Senior Credit Officer Opinion Survey on Dealer Financing Terms 6 (2012), available at
  2. Id. at 6-7
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