Blockchain set to transform loan trading and collateral markets

September 10, 2017

By: Peter Lee
Published on: Monday, August 21, 2017

After breakthrough proofs of concept in the spring, two large projects are now quietly moving forward into pilot production that could see blockchain technology transform wholesale markets at the core of the global financial system.

Synaps, a joint venture between Ipreo and Symbiont, used the latter’s smart contact technology in an experiment in the first quarter of the year with a group of 19 banks and asset managers drawn together by Credit Suisse that focused on servicing and settlement in the $1 trillion secondary market for US loans. The syndicated loan market remains a crucial source of funding to many companies, while higher capital regulations have reduced banks appetite to provide loans. The success of this proof of concept has now raised the prospect of three-day settlement bringing many new investors into what has hitherto been regulated as a less-liquid asset class that has traditionally operated on 16- to 20-day settlement times. Emmanuel Aidoo, Credit Suisse Emmanuel Aidoo, head of the distributed ledger and blockchain effort at Credit Suisse, approached many of those 19 participants to discuss various pain points in loan trading over the 12 months leading up to the proof of concept. He gives Euromoney the latest update, saying: “We are working to put a few dozen smaller loan transactions, where we or other participating banks are the agent, onto a distributed ledger platform using smart contracts in production next year.” The motivation is clear. “It will save in operating expenses and also potentially free up capital held against loan exposures on balance sheets,” says Aidoo. To work, any such platform will need many sell-side and buy-side participants. With the distributed ledger technology now proven, most effort is now being devoted to the funding and governance of a network that will eventually compete with Markit and Loan IQ, which dominate US loan secondary trading and servicing today. Aidoo remains confident. Agent banks exert a lot of control in the secondary loan market over where assets trade, where the associated data sits and how customers receive it. And when two organizations trade a loan, they can choose between them where it settles. Credit Suisse believes that the cost for participants in managing on blockchain the whole life-cycle of a syndicated loan from origination through trading to pay-off could fall by up to 50%. Savings might come from reduced trade reconciliation cost through the use of a golden source of books and records, lower fees paid to third-party servicers and elimination of associated jobs handling settlement. While the existing platforms charge $125 per trade, a commercial DLT platform might charge half that with the added benefit of reduced reconciliation checking and clean data delivered in electronic form rather than via fax as it generally still is today. More intriguingly, a three-day settlement window in syndicated loans would reduce the difference between loans and bonds. “Many investors, including mutual funds and institutional asset managers, might be attracted to loans that are senior to bonds in the capital structure, but they are put off by how long loan trades take to settle,” says Aidoo. “Managers of US 401(k) plans, for example, often carry additional cash on the balance sheet against possible redemptions, which need to be settled within a three-day window, creating a drag on the balance sheet. Helping loans get to a T+3 settlement cycle would open the market up to more investors.”

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