Syndicated Loan Market Moves Toward Blockchain
A consortium of agent banks, fund managers, and service providers who look to cut the settlement time of syndicated loan transactions from weeks to days via the use of a distributed ledger and a market-specific smart contract, has reached a major milestone.
“By connecting a network of agent banks through blockchain, we can achieve a faster and more certain settlements in the loan market,” said Emmanuel Aidoo, head of the distributed ledger and blockchain efforts at Credit Suisse, in a statement.
“The syndicated loan industry is probably one of the most manual businesses within Wall Street,” added Ron Papanek, global head of product at Symbiont. “The whole industry sends about 25 million faxes to confirm trades and convey information between parties.”
The project, which began in October 2015 at the bequest of Credit Suisse, has grown to include participation from fellow R3 consortium members BBVA, Danske Bank, Royal Bank of Scotland, Scotia Bank, Société Générale, State Street, US Bank, and Wells Fargo. AllianceBernstein, Eaton Vance Management, KKR, and Oak Hill Advisor are participating in the proof-of-concept as well.
“Everyone of the participants in the proof of concept is involved in the syndicated loan market and recognizes a range of operational difficulties that they have had for years,” he said. They’re looking to address some of these operational issues and improve the efficiencies in the industry as a whole. They’re looking to define the future state of the syndicated loan business.”
Over the past 12 months, the proof-of-concept has addressed the origination, primary distribution, and asset servicing on syndicated loans.
“What we have initially been focusing on is the creation of the loans from the deal to the facility to the specific fundings and rollovers,” said Papanek. “We also are managing the notifications and the payments associated with syndicated loans.”
All that remains for the project is to develop support for the secondary trading market.
Regarding performance, Symbiont has not yet tested the syndicated-loan platform’s throughput; it has tested the underlying distributed ledger platform, which can support approximately 80,000 transactions per second.
However, Papanek draws a fine line between transactions and trade settlements.
Updating the distributed ledger is relatively instantaneous and can be done in milliseconds, he explained. The actual settlement of a syndicated loan transaction, which currently takes roughly 21 days, includes the transfer of cash and payment.
Those working on the proof-of-concept also are still working on automating that particular portion of a syndicated loan’s life cycle.
“We are currently transferring wire instructions on the ledger, and anticipate transferring digital cash tokens at some point in the future,” said Papanek.
He would eventually like to reduce the cash transfer window initially to seven days and then eventually to three days.
The proof-of-concept mimics certain syndicated loans and processes in parallel.
“We’re going through the workflows and refining them,” said Papanek. “The idea would be that it would run side-by-side and eventually replace the current process.”
In the meantime, he’s sanguine about receiving regulatory approval for the distributed ledger based process since syndicated loans are not securities.
“We’re not subject to the same regulatory guidelines,” he explained. “What we are doing is incorporating a new record-keeping methodology. We are not changing the nature of the agreements. All we are doing is facilitating the workflow and transfer of these assets.”
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