Making inroads into automated settlement for bank—or syndicated—loans trading has proven difficult for technology providers, with bespoke contractual terms and complex documentation often at issue. Still, there are gains to be made.
Market data provider Markit has, in one example just announced today, updated its electronic trade settlement service with enhanced functionality related to assignment and acceptance agreement (A&A) questions, which are required for transfer of loan asset ownership.
Pop-Ups
Those optional queries, inclusion of which Markit estimates to have more than tripled—from 9.5 percent of all loans in 2009 to 31 percent today—will now be automatically updated within Markit's current ClearPar system with answers electronically provided by parties to the trade directly, rather than manually inputed through Markit's loan operations personnel. The questions, which appear in a pop-up format, will also be integrated into the vendor's new end-to-end MarkitClear loans trading and accounting platform, which is in the late stages of development.
Whether A&A's will top out [at the current percentage] is anyone's guess, but as they are, these are causing headaches for some of our customers, so for us it's about finding a tech solution, rather than forcing them to hire more ops staff. We spent a few months gathering requirements, and handed those off to our team of dedicated ClearPar IT developers, who we think are pretty unique in the space, and know it quite well. -Scott Kostyra, Markit
In bank loans trading, A&A agreements typically follow signing of a formal purchase and sale agreement, or PSA. While PSAs have a standard format developed by the Loan Syndication and Trading Association (LSTA), A&As must reflect the specific terms of assignment, as stipulated by the parties' credit agreement. But, more importantly, they are also generally the crucial document within a bank loan trade that the agent signs to consummate the transaction, and therefore it isn't difficult to see why complicating the A&A process holds up the broader settlement process in whole.
"The questions concern legal requirements around the prospective lender, whether they are an affiliate of the borrower, and buying back of the debt. 'Yes' or 'no' will produce different stipulations in the A&A agreement," says Markit managing director Scott Kostyra. "The previous process wasn't terribly efficient, so our goal was to turn it back to the clients, allowing them to take action directly. Whether these A&A's will top out [at the current percentage] is anyone's guess, but as they are, these are causing headaches for some of our customers. For us, it was about building a technology solution, rather than forcing them to hire more ops staff as they have in the past. We spent a few months gathering requirements, and handed those off to our team of dedicated ClearPar IT developers, who we think are pretty unique in the space, and know it quite well," he says.
Bottlenecks
Kostyra points out that A&A is far from the only piece of the loans settlement puzzle, and not all of them are readymade for automation. These products average more than two weeks to settle, and often will take even longer, and a survey of three buy-side firms in sibling publication Waters showed earlier this year that future expectations for standard bank loans land around T+7. But two early adopters of the A&A solution—T. Rowe Price and MJX Asset Management—say this improvement will help push the industry toward that goal.
"A&A questions weren't an issue just a couple of years ago, but have more recently started to introduce additional steps and delays into the settlement process, which was all due to the lack of a solution to integrate them directly," says Mindy Campbell, who managers bank debt operations for T. Rowe Price. Likewise, Pierre Botrouni, CFO and head of operations at MJX Asset Management, says the upgrade is a step in the right direction. "This provides buyers and sellers with the ability to handle the process without any third-party intervention, by displaying questions in such a way that users can view all of them simultaneously while tracking their responses for multiple entities," he explains.
The Bottom Line
- Little steps that respond to the evolving loans market are just part of a larger strategy Markit and others have pursued to achieve "cleaner flow," as Kostyra puts it, all the way downstream.
- For example, a future area of focus is with the agent banks. "They're really seeing a lot of volumes now, with a lot more transactions filtering through to them," Kostyra says. "The asset class is unique, and never one where you can remove human intervention entirely, but certainly reduce it. The point is to alleviate bottlenecks one at a time, wherever they may be."
