Large piles of unclosed trades stocked against increasing volumes and a wave of new market players, particularly in the distressed market, have ignited a concerted effort to deal with the slow settlement times in the secondary loan arena. As it stands now, it typically takes more than 45 business days for a distressed trade to settle. That number is up from about 20 days in 1998. The increased counter-party risk associated with such delays is pushing the loan market to a point that risk management individuals are beginning to take a interest in reducing settlement times, explained Don Pollard, co-head of Credit Suisse First Boston's syndicated loan group.
The Loan Syndication and Trading Association's reignition of a distressed settlement committee and increased focus within banks is pushing ahead gripes from buysiders. The settlement backlog is caused by different factors depending on whether a trade is par or distressed, dealers explained. On the distressed side, the number of distressed players has increased by an extraordinary rate and the price volatility, emblematic of the distressed market, increases the probability that the trade will go against either party before it settles, explained one dealer. In addition, the trades tend to be worked on by outside counsel. Howard Shams, managing director of leveraged finance at CSFB, explained that the primary difference between completing a distressed trade and a par trade is an extra document, a purchase and sale agreement, associated with distressed trade.
But the par side is no bargain, either. On the par side, the number of trades has been rapidly increasing and the process is very manual, a dealer said. Eric Rosen, head of trading at J.P. Morgan and chair of the LSTA settlement committee , concurred with that sentiment. Individual investors are now completing trades for a number of their funds and, for each fund separate closing, documentation needs to be completed, he said. That, combined with the sheer increase in the volume of trades over the last 18 months, has led to the backlog, he added. Because of its lead position on so many loans, J.P. Morgan is pegged by competitors as one shop that has a hefty open-trade backlog. Rosen declined to quantify the amount of open trades at J.P. Morgan or marketwide.
Issues that continue to hold the bank market back from a smoother settlement include the need to obtain consent from the borrower before the transaction can be completed. Many market players have noted that, especially in credits with large syndications, the need to obtain consent becomes a nuisance to liquidity. Any process that would reduce the number of steps would expedite settlement, one dealer noted. Also, major agent banks may need to make their agency databases readily available for the purposes of closing trades to a third-party vendor and consent to a significant reduction in assignment fees, suggested Pollard.
But many market players are skeptical of third-party electronic settlement systems, citing concerns such as the security of the information involved. In agreement with that claim, one loan trading desk head said the bank was more inclined to add another closer to deal with any backlog than to invest in a electronic settlement system at this point in time.
Another problem with moving toward an electronic settlement system is that loan market players would have to invest in multiples of what they currently are paying and the return on that investment in monetary terms is potentially slim, Shams explained. Currently there are two vendors that are making their way into the secondary loan market -- Trade Settlement (TSI) and ClearPar. TSI is ready to go live with its web-based electronic settlement program within the month via five big industry leaders, according to Pat Loret de Mola, ceo of TSI. And ClearPar has been working with institutions such as CSFB for more than six months, noted Ellen Hefferan, ClearPar ceo. Both venders do not currently handle distressed trades, but they expressed ambitions to work towards distressed settlements in the future. "[The loan market is] still on two wheels when it should have been on four, and its about to get a jet engine," said Shams.
