Coordinators of a blockchain project backed by the financial industry say they have successfully demonstrated that the distributed ledger technology can be used to syndicate, trade and make payments on leveraged loans.
The 90-minute demonstration was carried out this week by Synaps Loans LLC, Credit Suisse and the financial services consortium R3. Participating instutions included Barclays, BBVA, Danske Bank, Royal Bank of Scotland, Scotiabank, Societe Generale, U.S. Bank and Wells Fargo on the sell side; and firms such as AllianceBernstein, Eaton Vance Management, KKR and Oak Hill Advisors on the buy side.
Also participating was the custodial bank State Street Corp. and the Loan Syndications & Trading Association, a trade group for the leveraged loan and collateralized loan obligation industry.
There was no actual transaction; rather, the demo was a proof-of-concept involving a simulated end-to-end leveraged loan trade. Proponents say it validated the premise that blockchain can be used to speed up interaction in the secondary loan market, from back-office functions like settlement and documentation to agent-bank duties like managing votes on loan amendments.
"Synaps now has the majority of the functionality needed to implement blockchain technology at scale in the syndicated loan market, which enables us to move into the final stages of development,” Emmanuel Aidoo, head of the distributed ledger and blockchain effort at Credit Suisse, said in a press release. Those final stages will be to implement a platform that could carry a loan from “origination to payoff” before the challenging stage of gaining widespread market adoption, he noted.
“This was months of work,” involving more than 100 participants from 19 institutions, said Caitlin Long, president and chairman of Symbiont, said in an interview with Asset Securitization Report. “We had a large number of parties involved” in the demonstration, she added, “and we had to turn away some participants because there are only so many you can sit at the table like this.”
Symbiont, a joint venture partner with the business process services firm iPreo behind the Synaps platform, is one of several technology firms competing to recruit banks and funds to its proprietary blockchain platform.
Blockchain is the digital ledger technology behind cryptocurrency bitcoin. The blockchain formats proposed for financial services differ in that the aim is to develop the use of shared digital ledgers — or smart contracts — that can include all parties in a loan trade for simultaneous views and interactions with data. Users, for example, could verify ownership of a loan automatically without needing an agent-bank query.
Interest in applying blockchain technology for capital markets has surged in recent years. That’s particularly true in the leveraged loan market, where trades still involve large amounts of paper and can take weeks to settle. Buyers and investors are eager to speed up and automate trades. Many also want trades, which can involve several parties exchanging contract documents back and forth through agent banks, to be more transparent.
Potential for Drastic Reduction in Transaction Costs
Long said the goal of the test was to prove not just that a trade can be done over blockchain, but that it is well worth the investment in terms of time and cost savings for syndicated loan buyers and sellers. The demonstration, which involved a typical roster of syndicated loan trade participants, showed that a trade could potentially be settled in a few days, at much lower cost.
Other efforts are underway to speed up trade settlement. The LSTA recently introduced rules aimed at discouraging buyers from dragging their feet in bringing their money to the table. As a result, median settlement times have been reduced from 16 days to 11 days since 2013. But banks are still aiming for loan-trade settlements in under three days, Long said.
“We were looking to automate processing and remove all duplication and we did succeed at that,” Long said.
The test also showed how opaque, back-office practices can be eliminated to excise major hidden expenses in the loan market. One such issue is the high attorney cost involved in reviewing loan docs when a loan price falls below par into distressed levels, Long pointed out. “Firms will spend millions of dollars in legal fees to compare the documents” on changing credit-relief levels as the loan changes hands, said Long. With the test, all of these changes were documented and reviewable in real time.
Another plus to automation is easing the efforts involved in determining who owns loans, which can by syndicated among hundreds of investors at the time of issuance and change hands regularly. “Instead of all the scrambling to verify a party owns a loan before its transferred in a secondary market trade,” Long said, “all of that scrambling is now down to an automated process that is completely transparent.”
Robert Berk, senior vice president and chief operating officer at U.S. Bank Capital Markets, said in the press release that the “hugely successful” test has proven blockchain can drive “transparency and efficiency” for the syndicated loan market. “There are clear benefits to borrowers, agents, and asset managers,” he said. “This is certainly the most automated market solution we’ve seen to date.”
Long, formerly a managing director for global capital markets at Morgan Stanley, said the demonstration has been “months in the making” (she joined Symbiont last August). It’s also culminated years of her championing the blockchain technology for capital markets and structured finance while at Morgan.
The work by Symbiont, R3 CEV and Credit Suisse is among several efforts and testing projects underway to standardize, develop and/or market a blockchain servicing format for financial services. The most high-profile effort to date has been R3, which has nearly 70 banks in its fold. (It recently lost two high-profile participants, Goldman Sachs and Santander.)
Digital Asset Holdings, headed by former JPMorgan executive Blythe Masters, last year started a partnership with Accenture, PwC and the investor communications firm Broadridge to drive adoption of blockchain in the capital markets.
Research into blockchain services for securitization efforts has been kicked into gear by the Structured Finance Industry Group, which announced a partnership with the Chamber of Digital Commerce at the structured finance group's ABS Vegas industry conference in February.
The Spanish banking group BBVA is joining the Linux Foundation’s Hyperledger blockchain standards group, and some banks have put their efforts into projects that are based on competing technology stacks, as well — such as Northern Trust working with IBM and JPMorgan aligned with Microsoft.