February 9, 2021 - “Money is pouring back into funds that invest in US leveraged loans for the first time in more than two years, as investors begin to position themselves for stronger economic growth and higher inflation” according to the Financial Times. These investors deserve nothing less than operational efficiency. But to significantly improve operations in the corporate loan market, strategic and tactical thinkers must collaborate and embrace change. Large scale change will only come from integrating loan market participants, structuring data management, utilizing standards rather than exceptions to process trades and avoiding unnecessary messaging and reconciliations. We detail our vision in the LSTA Loans Magazine, but recap the key takeaways below.
While internal systems that service origination, syndication, trading, settlement and agency functions are fully dependent upon one another, they also are completely disconnected. Manual processes across systems and geographies can result in disparities even within the same institution. There is a great need for a holistic operational approach that would embrace a “Market Utility”: a database or distributed ledger utilizing cloud technology that would represent a single source of truth and would create transparency over that single source of truth. Through open APIs (Application Processing Interfaces) or private nodes, standardized, structured and digitized data could be uniformly published by the Agent Bank systems to the Utility and consumed by the lenders and custodians’ respective systems. Deal and facility data, together with future loan contracts, interest and principal accruals, position information, detailed transaction data, DQ lists, etc. could be transmitted via API or node from the Agent’s platform to the Utility on a real-time basis. Using APIs, lenders and custodians could access the data and consume it into their respective platforms, again on a real-time basis. This would allow multiple systems in the market to have the exact same data thereby eliminating the need for not only time-consuming reconciliations but also for approximately 90% of messaging. This would significantly reduce the settlement freezes that accompany interest/principal payments at month and quarter ends. It would be a welcome change particularly if the market transitions from term LIBOR to a daily SOFR (as opposed to a term SOFR).
That is the vision; now we venture into the weeds! Trade details including sub-allocations, as applicable, could be submitted via APIs by the Sellers’ and Buyers’ systems to the Utility which would systemically check that the (a) Seller has the position, (b) Buyer (i) is or is not a current Lender of record, (ii) if not a Lender, is or is not on the Disqualified Lender (DQ) list, (iii) if not a Lender, is or is not an Affiliate of a Lender, (iv) needs or does not need Borrower consent and (v) is or is not KYC approved and on-boarded by its counterparty/Agent Bank. A KYC/onboarding module and “cash on transfer” module could operate either within or outside the Utility. If it is separate and apart from the Utility, both could nevertheless be built to be interoperable with it.
Suffice is to say that while there are many moving parts, it is an exciting time for new technology opportunities. For further details, please see: Is 2021 the Year to Innovate?
If you have questions, please contact ehefferan@lsta.org
