Summary

On 14 March 2022, the ICSDs will introduce a new DVP settlement model for new-issue syndicated notes. The changes will impact the roles of the ICSDs, lead manager and common depositary in the payment flows and settlement process of new notes. While modifications to closing documents will be minimal, drafting counsel should be aware of the 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 amendments to the closing instructions and timeline.

Background

On 30 November 2020, the ICSDs published a proposal aimed at reducing credit and liquidity risks in the settlement process of syndicated bond issues by amending the delivery-versus-payment (DVP) settlement process in the book-entries of ICSDs. Following positive feedback from the market, the ICSDs announced the implementation of a new settlement model for syndicated new issues. The implementation date for the changes is 14 March 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 depositary or common safekeeper. Notably, the new model replaces the common depositary¹ with the ICSD as the intermediary role in the payment flows of note settlements. Impacted market participants will need to adapt their systems to support the new setup as, following implementation, it will no longer be possible to close new transactions using the current DVP model.

Current Model vs. New Model

Current Model: Against payment of the note proceeds by the lead manager to the common depositary, the issuer arranges delivery of the note to the common depositary for credit to the lead manager’s dedicated account in the books of the nominated ICSD. Settlement commences upon receipt by the common depositary of the ICSD’s irrevocable commitment to pay the note proceeds to the common depositary (commonly known as the irrevocable SWIFT message or the “irrevocable”). The ICSD issues the irrevocable to the common depositary based on the cash reserves and credit lines that the lead manager has within the ICSD system. The common depositary then transfers the note proceeds to the issuer and instructs the crediting of the notes to the lead manager’s account.

New Model: The ICSD acts on behalf of the lead manager but for the benefit of the issuer under a third-party beneficiary clause that is irrevocable. Rather than the ICSD blocking the lead manager’s credit lines/cash reserves and issuing the irrevocable, the new model uses a new commissionaire account, which the lead manager holds with the ICSD. The lead manager will instruct the ICSD to deliver the note proceeds to the issuer’s order on a DVP basis. At the same time, the issuer will instruct the common depositary to deposit the notes into the commissionaire account on a free-of-payment basis.²  

Timeline of New DVP Settlement 

Once the “green light” is given:

• The issuer instructs the delivery of the authenticated global note to the common depositary, for credit to the lead manager’s commissionaire account, on a free-of-payment basis. 
• The lead manager, on behalf of the issuer, instructs the ICSD to pay the note proceeds to the issuer against (i) receipt of the common depositary’s instruction to mark up the notes to the lead manager’s commissionaire account, and (ii) receipt of 100% of the note proceeds into the commissionaire account.
• Upon the occurrence of (i) and (ii) immediately above, the ICSD makes payment of the note proceeds to the issuer’s order. 

Impact on High Yield Bond Closings

The customary form of closing instructions will largely remain the same but technical changes will be required to account for the new DVP settlement process. The new settlement instructions to the common depositary will be very similar to the free-of-payment settlement instructions given in respect of a note settlement through DTC. For example, the common depositary will be instructed to credit the notes upon the instruction being “green lighted” and not against the ICSD’s irrevocable commitment to pay. Likewise, the payment instructions and funds flow will require changes to account for the implementation of (i) the new commissionaire account structure, (ii) the ICSD’s new role in the settlement process, and (iii) the removal of the common depositary from the payment flows. 

While the ICSDs have not issued template closing instructions, ICMA has published suggested amendments to closing instructions and purchase agreements, which can be found on its website.

Analysis is ongoing in both ICSDs, and final terms have not been confirmed. Deal counsel should allow for extra time in the deal timeline to discuss the required changes with the appointed lead manager and common depositary.