Block trade agreement could cut pressure for buy-side

A model agreement for block trades, created by the Association of Financial Markets in Europe, could help reduce the workload of buy-side traders.

A model agreement for block trades, created by the Association of Financial Markets in Europe (AFME), could help reduce the workload of buy-side traders.

The model agreement, which covers block sales of shares by banks to buy-siders at a discount, has taken 18 months to create and AFME hopes it work will smooth the path to block trading and save vital time for buy-siders.

Bill Ferrari, managing director of AFME’s equity capital markets and corporate finance division, said: “The situation with block trades has been very difficult, often being delayed when it comes to drafting the trade agreements. But traders want to get things done as soon as possible to minimise information leakage.”

Block trade transactions are often time-compressed and major concerns for parties involved include achieving best price, minimal expenses and speed to market, according to AFME.

Most banks already have their own standard agreements, but these could vary significantly between different organisations and so, for buy-siders, this would mean having to deal with lots of paperwork and needing to know the key differences between different agreements in order to negotiate the terms of the sale.

“We spoke to a lot of banks to see how their agreements are currently structured and create an agreement that features the most common terms,” Ferrari added. “We also worked extensively with numerous law firms to ensure the model agreement is legally sound.”

Adrian Fitzpatrick, head of dealing at Edinburgh-based asset manager Kames Capital, said: “One of the big problems we face with block trades is they tend to happen at the end of the trading day and this can mean traders having to work until late into the evening to sort out the paperwork.”

He added that the legal aspects and listing requirements surrounding the trade tend to be most time consuming aspect and so is hopeful that AFME’s model agreement could help facilitate quicker turnarounds and ensuring traders can go home in the evening.

He also hopes it could improve pricing: “It means everyone will be singing from the same hymn sheet so it may even help pricing with less questions.”

The model agreement is designed for block equity trades and has been drafted for trades in any jurisdiction, though it does contain some UK-specific clauses. Its fee clause accommodates simple commission arrangements.

For transactions involving a less standard structure, the model agreement can be modified to accommodate features such as upside sharing and more complex fee arrangements.

Ferrari said the new agreement is not intended to restrict the way parties negotiate, but to provide user-friendly wording and standard terms to “enable negotiation to focus on key commercial terms.”

Model agreements for block trades with and without a backstop can be downloaded from AFME’s website.