March 13, 2018 - Are there global solutions to the loan markets’ operational challenges? Last Thursday, the LSTA and the LMA tackled this question in the joint annual Operations Seminar in London.
First up, primary. Tackling delays in primary syndications, Nicholas Voisey (LMA) and Deborah Neale (Clifford Chance) explained the new LMA recommendation for the settlement of primary syndications and delayed compensation. In their scenario, delayed compensation would pass to the buyer from the allocation date +27 (or in the case when KYC is completed by allocation date +4, from the allocation date +14) until the transfer date. (There are some provisions though: There must be a sole fronting underwriter, the amounts are received from the Obligor, the lenders sign the transfer certificate when requested and fund the allocation on the agreed date.) As the recommendation is a best practice, it is not legally binding. LSTA EVP Ellen Hefferan explained that the LSTA also is working on primary delayed compensation regime. While it is a work-in-progress, when implemented, it will be legally binding.
To be operationally efficient, it is necessary to have good data. And that trend may be accelerating. In February 2014, the ECB agreed to create “AnaCredit” to set up analytical credit datasets containing detailed information on individual bank loans in the euro area, harmonized across all member states. All Eurozone domiciled credit institutions will be impacted as data collection is set to begin September 2018. Pursuant to the AnaCredit Regulations, identifiers will be required for Contracts (Deals) and Instruments (Facilities). Darren Purcell of the CUSIP Service Bureau described this as an opportunity to finally embrace a standard identifier in Europe – the ISIN – and encouraged all banks to subscribe to the CUSIP service. As each CUSIP is basically 9 digits of the 12 digit ISIN, the reporting requirements of AnaCredit may bring the loan market closer to “one uniform identifier” if any technological advancement is to be made in the industry.
While CUSIPs/ISINs may be an opportunity, “Global Challenges to Operations” were explored by Gemma Lawrence –Pardow (LMA), Stephen Buckler (BAML), Steve Connolly (JPMorgan), Brian Fraser (Llyods), Rosalee Gordon (Barclays) and Julia Kingsbury (Credit Suisse). Challenge One: The median 4Q17 secondary settlement times were T+12 (LSTA) and T+33 (LMA). The LMA average settlement times for 2017 were more than double that of the LSTA, according to IHS Markit data. The largest challenge shared by constituents in Europe and the US is the KYC process. In Europe that it can take 6 months to complete this process for a new institution (which earns nothing as it waits to buy into a primary syndication). The panelists noted that we should avail ourselves of opportunities across the jurisdictions to improve KYC processes and remove replication but this is a tremendous “ask”. A Potential answer? A KYC utility supported by the banks could be an excellent use of Blockchain.
And, in fact, Blockchain could potentially do much more. Doug Laurie (Barclays), Sean Tai (IPREO), Toby Grimstone (Linklaters) and Helen Orton(Finastra) agreed that Blockchain can benefit the market as a golden source of information, accessible on a real time basis. Utilizing a smart contract to code the operational clauses of a credit agreement – e.g. transfers, interest accruals and payments and amortization – is quite possible. But there is a need for programmable readable code to verify that the code reflects the actual provisions of credit documentation (and this may be more challenging for covenants and more complicated provisions). In any event, the trade associations welcome innovation and will offer support to create standards, guidelines and best practices to assist our members including vendors. Click here for a copy of the conference slides.