The LMA – seventeen years of developing standard documentation for international lending

DeekshaSinghThis month marks seventeen years since the Loan Market Association (“LMA”) began as an association of financial institutions, constituted to develop the secondary loan market in Europe. Primary lenders like banks and financial institutions can sell, on the secondary market, loans on their books to other financial entities. The LMA’s focus was on the syndicated loan market, that is, the market for loans that are shared by several banks and financial institutions.

The idea behind starting the LMA was to develop best practices in that area and create standard documentation for secondary market transactions. Today, the LMA plays a similar role in the primary loan market as well. The membership of the LMA expanded over time to include not just banks and financial institutions, but also law firms, and other market participants like rating agencies. With a membership that is representative of most of the European financial markets (and now the Middle East and African financial markets), the LMA has become the guardian of market practice in the syndicated loan markets. In international banking and finance, market practice stands second only to the law, and to that extent, the reach and influence of the LMA is close to that of any international law-making body.

Standard documentation for international lending

The standard form documents released by the LMA are governed by English law and they are the basic drafts used by almost all lawyers in international lending transactions. Practitioners in India however, are more likely to see drafts released by the LMA’s cousin in the Asia-Pacific region—the Asia Pacific Loan Market Association (“APLMA”). The APLMA was established in 1998, and while the standard form documents released by the APLMA are also governed by English law, they tend to be geared towards addressing the financial markets in developing countries. Of course, the LMA has also addressed the importance of developing markets in the loan markets. In fact, recently in May 2013, the LMA launched its Developing Market documents.

The primary reason that most entities in the financial markets find themselves adhering to the standard form documents recommended by either the LMA or the APLMA is that these agreements are created after consultation with different stakeholders. The boilerplate provisions in these agreements are therefore reliably conducive to the interests of all parties. This allows the parties to really focus on the key commercial points of their transaction, without being bogged down by lengthy negotiations on boilerplate provisions.

Banking-and-Finance-LawLMA recommended documentation is also constantly evolving to meet the changing needs of the loan markets. Standard form documents were changed after the global financial meltdown in 2008. Until then, the standard form agreements focused primarily on the breach of the agreement by the borrowers. However, after large financial institutions were unable to meet the commitments under numerous agreements in 2008, the LMA modified its standard form agreements. In June 2009, the LMA launched documentation to address defaults by lenders, arrangers, and other finance parties and included specific clauses to address market disruption of this nature.

Lobbyist for international finance

The LMA’s role extends beyond standard form documentation. It also acts as an important lobbyist for the interests of its members before regulators. It makes recommendations to financial regulators (particularly in the U.K. and the E.U.) on various issues that directly impact its members or the loan markets. Recently, the LMA lobbied successfully before the U.S. Securities and Exchange Commission and the Commodities Futures Trading Commission to address some unintended consequences of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010. LMA-style loan participations would not be considered swaps or security-based swaps under this law.

(Deeksha Singh is part of the faculty on