Only 29% of par loan trades closed within the target T+7 settlement period in the Loan Syndications and Trading Association's first ever study of loan settlement times. The LSTA tracked 15,000 trades totaling $29.4 billion. Distressed settlement, with a wider target window, fared better with 55% of distressed trades settling within the T+20 guideline. Buysiders, who have been complaining about settlement since the first loan changed hands, said understaffed back offices coupled with a huge increase in trading volume are the main reasons for slow closing.
Jamey Grafing, senior v.p. of syndicated finance at FCS Commercial Finance Group, a buyer of loans, said that for credits where his firm is a new lender, it can take up to 60 days to close a trade. "The T+7 is fading from view," he said. "Closing trades was quite efficient, but with the influx of institutional traders and term loan "B," there has been a material increase in the number of trades conducted each year. It has put a ton of pressure on the system," said Grafing.
Jeff Nikora, portfolio manager at Foothill Group, said 50% of the firm's par trades do not settle within T+7. He said the longest it took to settle one trade was 276 days. Nikora complained that slow settlement times costs his firm time and money. "There is definitely costs associated with it in terms of capital and labor," he said.
Nikora said Deutsche Bank seems to have the best back office in his view, while JPMorgan and Morgan Stanley have the worst. "Citigroup used to be hands down the worst. They are most improved, on average," he said. "We have the most fails with Chase and Morgan Stanley. They are understaffed for the volume of trades they are processing." A JPMorgan spokeswoman declined comment. A Morgan Stanley spokesman and a Citigroup spokeswoman also declined to comment.
"The LSTA's T+7 is only a guideline, but it is disconcerting that I often have to wait two months to settle," said one buysider who once had a trade take 270 days to settle. "It is outrageous."
The LSTA started to look into the issue of settlement times about six months ago as part of the ongoing activities of its operations committee. One of the committee's goals is to examine how settlement times can be reduced. Elliot Ganz, general counsel of the LSTA, said the idea of addressing settlement times was prompted mostly by interest on the sellside rather than the buyside. "The sellside has to deal with institutional risk associated with drawn-out settlement times," he said.
Nikora suggested banks should increase their back office staff by 50% to improve settlement times. Another buysider suggested eliminating the need for agent banks to sign off on assignment agreements and also eliminate the need to have consent from the borrower.
Ed Hamilton, head of par loan sales and trading at Bank of America, said there are often many reasons trades are delayed. He also cited the ability of the borrower to approve or disapprove trades as one reason it takes so long. "I think we have made progress in closing trades. We are very focused on settling positions," he said. B of A was named as most prompt and efficient par closing in CIN's 2006 Best Trading Desk awards.
One buysider suggested the LSTA should levy a penalty against those responsible for not delivering loans within a certain time frame. Ganz said this would be difficult to do because it is not always evident who is to blame. "You would get into arguments about who was at fault. You can't always assume the sellside is at fault," said Ganz.
Other buysiders are more resigned to the problem. "As long as the leading trading desks operate with approximately equal efficiency, what are buyers and sellers going to do? It is not like they can go elsewhere. There is no real incentive for desks to quicken the closing of trades," said Grafing.