Source: Depository Trust & Clearing Corporation
The Depository Trust & Clearing Corporation (DTCC) announced today it will launch Loan/SERV, a new and evolving suite of services to help automate and streamline the processing of syndicated commercial loans.
Syndicated loans are complex structures involving multiple lenders for each borrower, with an agent bank acting as the liaison, transmitting information back and forth between parties. The primary loan transactions can be made in multiple currencies, may include a combination of term and revolving loans, and are routinely traded in the secondary market.
The syndicated loan market continues to grow in both complexity and volume. According to industry estimates, global syndicated lending reached US$4.5 trillion in 2007, up 13.4% from 2006 and a 32% increase over 2005.
"Today, the loan process is essentially manual and information is faxed among market participants," said Christopher Childs, vice president, DTCC Product Manager for Syndicated Loans. "This results in millions of faxes going out into the market each month. Add to this the exponential growth in loan trading volume in the secondary market and agents find themselves swamped in recordkeeping requirements. This can lead to manual errors, backlogs of unsettled trades and mistakes in payments to primary and secondary investors."
DTCC's Loan/SERV platform will start with the introduction of two services in 2008, including a Loan Commitment Position Reconciliation service, which will enable agents to reconcile lender positions on individual loans every day (for third quarter 2008). A second Loan/SERV service will be an automated, secure communication network through which agent banks can transmit standard loan messages to both lenders and borrowers (for fourth quarter 2008).
"We want market participants in the syndicated commercial loan space to know that DTCC is committing the full weight of this organization - our talent, IT experience and quick-to-market capabilities - to help create greater efficiency, certainty and reduced risk for this sector," said Donald F. Donahue, DTCC Chairman and Chief Executive Officer. "Our goal is to evolve and deliver a broad range of automated and value-added servicees in this market sector in the same manner as we did with Deriv/SERV in the over-the-counter (OTC) derivatives market.
"In three short years, we've played a leadership role in driving matching and confirmation rates in OTC credit derivatives to 85-90% from 15%, and our Trade Information Warehouse is providing that market with an automated safety net to track and service OTC derivative contracts over their lifecycle.
"We know that DTCC can deliver a similar, tangible result for the syndicated loan market, working closely with the firms that trade in these instruments," Donahue said.
DTCC's operating business model is unique because it is a user-owned and user-governed organization that operates on an "at-cost" basis. This means that as it gains economies of scale from volume growth, profits are returned to DTCC members in the form of rebates, discounts and fee reductions.
"The new reconciliation tool we'll introduce later this year will enable lenders and agents to detect errors earlier in the process and prior to cash payments occurring," said Childs. "Agents and lenders have to update their records each time a loan is traded or loan attributes change. Currently, these changes are updated by agents and lenders independently of each other.
With the growing secondary market and increasing number of investors, it's important that agents and lenders know that changes to loan commitment records are updated correctly."
Loan/SERV will use the FpMLTM (Financial products Markup Language) standard and DTCC will leverage existing technology to build the secure network for the syndicated loan market and incorporate the new standard messages to be established by the participating industry members. Messages will either be routed directly to lenders or they can obtain the information by accessing a Web-based message hub.