Increasing costs and inefficiencies will impede the growth of the global syndicated loan market unless steps are taken to automate and streamline syndicated loan processing, according to a white paper issued today by The Depository Trust & Clearing Corporation (DTCC).
The paper, entitled "Transforming the Syndicated Loan Market," discusses the growth of the syndicated loan market, challenges facing this global industry and proposed solutions for automating and streamlining syndicated loan processing. Although current market conditions have significantly slowed syndicated lending in 2008, the market retains strong growth potential for both the short– and long–term.
A syndicated loan is a loan provided by a group of lenders usually arranged and administered by a third–party banking agent whose responsibilities include the transmission of information and cash between parties. A single syndicated loan typically involves dozens of lenders, and sometimes thousands.
The global syndicated loan market grew dramatically in recent years, according to the paper, and totaled more than $4.5 trillion in 2007, an increase of 13% over 2006 and 32% over 2005, according to data compiled by Thomson Reuters. The U.S. was the largest market with $2.1 trillion in loan activity, followed by the United Kingdom with $376.3 billion in syndicated lending.
Despite this expansive growth, however, "the syndicated loan market remains hampered by manual processes and outdated communications," the paper states.
Agents and lenders each maintain their own loan records and register changes independently of one another one. So "when a syndicated loan, or portion of it, is sold into the secondary market, as commonly occurs, position reconcilement between borrower, lenders and loan agent becomes ever more complicated - and more susceptible to mistakes in recordkeeping," the paper states. "Differences between the records of the loan agents and those of the lenders can result in profit and loss"¦corrections and incorrect cash payments."
"If current trends persist, the cost of position reconcilement will increase, communications will lag behind the rest of the marketplace and syndicated loan processing will grow increasingly antiquated relative to the broader industry," the paper states.
DTCC, working closely with an advisory committee of leading global banks including The Bank of New York Mellon, Barclays Capital, Citi, Deutsche Bank and The Royal Bank of Scotland, is developing a comprehensive solution for the syndicated loan market called Loan/SERV, a suite of high–speed, user–friendly products that help solve the problems in syndicated loan processing.
In 2008, DTCC will introduce two Loan/SERV products, said Christopher Childs, DTCC vice president, Global Loans Product Management. The first, a Loan Commitment Position Reconciliation services, is a Web–based service that enables agents and lenders to reconcile loan commitments and transactions on individual loans. This allows both the agent and lender to view and reconcile their loan positions on a daily basis rather than periodically or after a scheduled payment. This service will be available in the third quarter of 2008.
Childs said that a second service, scheduled for release in the fourth quarter of 2008, is the Loan/SERV Messaging Service, which will provide a safe, secure and automated network for the transmission, receipt and online storage of industry standard loan messages. This service also allows market participants who do not wish to receive messages directly into their processing systems to manage their messages online via a message hub.
According to the white paper, the Loan/SERV suite of services will benefit the industry in several ways. It will:
- Bring standardized loan–servicing language to the marketplace by adopting FpMLTM (Financial products Markup Language), the e–commerce electronic language with widely–proven success in over–the–counter derivatives trading. Loan/SERV also leaves room for users to opt out of FpML in favor of simpler Web–based communications. (FpML is a trademark of the International Swaps and Derivatives Association.)
- Reduce position breaks, which occur when position changes and other vital information is not synchronized between parties. Automation that Loan/SERV is developing will track and report position changes daily, providing greater transparency with up–to–date information for all parties.
- Reduce cash breaks, or delays in payment, by providing opportunities on a timely basis to resolve position breaks that can lead to incorrect cash movement.
- Reduce fax–based communications. The industry continues to rely on faxes as its primary communication method. Loan/SERV replaces faxes with electronic communications using the industry–prescribed FpML standard messages.
Loan/SERV is a service offering of DTCC Solutions, LLC, a subsidiary of DTCC. (Transforming the Syndicated Loan Market can be accessed at www.dtcc.com, under Thought Leadership, White Papers.)
About DTCC
The Depository Trust & Clearing Corporation (DTCC), through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage–backed securities, money market instruments and over–the–counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with financial firms and third parties who market these products. DTCC´s depository provides custody and asset servicing for more than 3.5 million securities issues from the United States and 110 other countries and territories, valued at $40 trillion. Last year, DTCC settled more than $1.8 quadrillion in securities transactions. DTCC has operating facilities in multiple locations in the United States and overseas. For more information on DTCC, visit www.dtcc.com.
