Secondary loan settlement must standardise

Author: Danielle Myles | Published: 16 Sep 2014
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The outdated settlement system used in Europe’s secondary loan market must standardise and improve if it is to compete with the bond market, bankers have warned.

It’s impeding the region’s leveraged loan market at a time when regulators are trying to unlock capital flows, and must be pushed up banks’ agenda.

The paper-based settlement process has contributed to the European secondary loan market’s reputation as the biggest inefficient trading market globally. Panellists at the Loan Market Association’s (LMA) syndicated loan conference, held in London last week, lamented the lack of progress on what is now a longstanding problem.

"Settlement needs to be a far more of an issue and made much more of a priority than it has to-date," said Martin Horne, managing director at Babson Capital Europe. "I would welcome standardisation and hope those running these banks and departments give it the attention it deserves as it is reducing liquidity."


  • Settlement processes is one of the biggest hindrances to liquidity in Europe’s secondary loan market;
  • The paper-based system suffers from a lack of standardisation and external scrutiny, which can lead to severe delays in loan trades;
  • Growing competition from the bond markets, which are significantly more efficient, means issuers will increasingly take into account settlement timelines when sizing tranches.

Indeed, a lack of standardisation and market-wide requirements for agencies is one of the market’s major gripes. Settlement businesses can be set up and run to their own internal standards with little regulatory scrutiny of their practices.

Stricter oversight and collaboration regarding these timelines would significantly improve confidence and liquidity in the secondary market.

"Anyone who manages a large amount of institutional loans will be aware of situations where they have traded on a loan and six months later it hasn’t settled," said Horne. "These are practices we should be running out of our market."

Settlement needs to be a far more of an issue and made much more of a priority

It is situations like this which, some panellists believe, justify the introduction of changes whereby agents are held accountable for transfer delays.

Growing competition from Europe’s bond markets – which benefit from an electronic transfer system – should be another catalyst for standardised settlement processes.

"To fully benefit from the accelerating trend towards institutional investors, the market must streamline its processes," said Charlie Bennett, Credit Suisse’s co-head of loan sales and trading, leveraged finance. "This will be vital to scale up the European loan market to its full potential."

Today, most issuers size their tranches in different markets based on pricing and demand. But as competition between the bank and bond markets continues to grow, loan settlement timelines and processes could increasingly impact investor demand, and in turn, become bigger considerations for issuers.

"There is little doubt that addressing these settlement issues will become more important as the market develops," added Bennett.

Follow the US lead
The US secondary loan market also settles via a paper-based system, but its processing times are significantly shorter than in Europe.

Craig Scordellis, senior portfolio manager at CQS, urged delegates to look at the US’s success regarding standardisation. "That was through lobbying, banks working with institutions, and educating the regulators."

"If we can work together I think we can make a lot of progress on settlement issues in Europe," Scordellis said.

However panellists also highlighted the settlement hurdles created by the EU’s fragmented regulatory and tax framework. There are also confidentiality issues under European law that create transfer restrictions that do not exist in the US.

See also

White lists hit secondary loan liquidity

Fixing Europe’s funding model