The Syndicated Loan Market continues to grow in both complexity and volume. Global syndicated lending reached US$4.5 trillion in 2007, up 13.4% from 2006 and a 32% increase over 2005, according to industry estimates. The U.S .industry led the way in 2007 with US$2.1 trillion in lending – an increase of more than 20% over 2006. The U.K. market was next with US$376.3 billion in syndicated loans.

This growth comes despite the increasingly complex nature of syndicated loans, the range of players in the primary and secondary markets, and the current paper-based processing environment. But as the market continues to grow, so do the challenges faced by market participants. These include:

• Lack of unique standard identifiers -- In many financial markets, unique identifiers enable market participants to identify each other and the security they’re dealing with at any given time. But the syndicated loan market has been slow to adopt unique identifiers. In the U.S., the Loan Syndications and Trading Association (LSTA) has proposed the use of CUSIPs for syndicated loans, but CUSIP usage is still inconsistent. In Europe, the Loan Market Association (LMA) continues to evaluate options. No international standard identifiers exist today.
• Position recordkeeping -- Each time a loan is traded or changed by some other activity such as a commitment reduction or rate reset, both agents and lenders must update their records. Currently, these changes are updated by agents and lenders independently of each other with no assurance that each has made the correct change. This can lead to accrual and payment issues that come to light only when a cash payment is due.
• “Cash breaks” -- If agents and lenders fail to reconcile recordkeeping differences early on, the differences will be discovered at the end of each quarter or payment period. Three days prior to payment date, agents notify lenders how much they are to receive. The three-day window does not always allow for differences to be resolved and, as a result, agents frequently make cash payments whether or not they’re correct. This leads to a large number of “cash breaks” that must be resolved after the payments have been made.
• Fax communication -- The primary method of communication among agents, borrowers and lenders is fax, resulting in hundreds of thousands of faxes going out each month to market participants. This antiquated paper-based, manual process is inefficient, time-consuming and error-prone.
• Unsettled trades -- Although the use of some standard documents has facilitated trading in the secondary market, the total number of unsettled trades continues to increase, as does the time it takes to close a trade. While U.S. participants have called for a seven-day settlement cycle, the average settlement cycle is 17 days after trade date. In Europe, the market objective is a 10-day settlement cycle, but it currently takes an average of 30 days to close a trade.
• Other issues -- Many other issues remained to be dealt with in the syndicated loan market. Among them are letter of credit processing, customer documentation requirements and withholding taxes.

 

The Loan/SERV solution

Leading trade organizations like the LSTA and the LMA are helping to spearhead the move to standardise the syndicated loan market, and DTCC has taken a lead in developing solutions for the market.

DTCC’s Loan/SERV platform will introduce two services this year:

• Loan/SERV Reconciliation Service, which will enable agents to reconcile lender positions on individual loans every day, helping reduce “cash breaks” as well as the number of unsettled loans.
• Loan/SERV Messaging Service, which will provide an automated, secure communication network through which agent banks can transmit standard loan messages to both lenders and borrowers.

 

Solutions for the future

Loan/SERV is an evolving suite of services that DTCC will develop by working closely with the industry. The goal is to deliver a broad range of automated, value-added services to the syndicated loan market in the same way DTCC did with Deriv/SERV in the over-the-counter (OTC) derivatives market. These services will add efficiency and help the market grow while managing operational risk.

Loan/SERV Reconciliation Service

DTCC’s Loan/SERV Reconciliation Service is a Web-based service that enables syndicated loan 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 date.

Loan/SERV Messaging Service

DTCC’s Loan/SERV Messaging Service provides a safe, secure and automated network for the transmission, receipt and online storage of industry standard loan messages, such as agent notices. The 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.