Euroclear Bank to Automate Syndicated Loan Settlement
Euroclear Bank has launched the industry’s first multi-currency, delivery-versus-payment (DvP) settlement service for secondary market trades in syndicated loans. Launch of the new LoanReach feature will take place in the first quarter of 2010.
The new, automated DvP settlement service fills a major efficiency gap in the syndicated loan business, reducing costs and risks for secondary market loan trading. DvP settlement means that the cash and loan components of the trade will be exchanged simultaneously, unlike currently where movements of loan positions and cash occur manually and asynchronously. DvP settlement is the industry standard for trades in most other asset classes, such as equities and bonds.
The extended LoanReach service will eliminate most of the credit and settlement risks, and substantially reduce the counterparty risks, associated with the settlement of syndicated loans. Furthermore, Euroclear Bank’s initiative aims to significantly shorten the length of the settlement cycle. Currently, syndicated loan transactions settle on a T+20-25 basis. Euroclear Bank’s service targets the benchmarks set by the Loan Market Association (LMA) and the Loan Syndications and Trading Association (LSTA) of T+10 and T+7, respectively, for conventional trades. Shorter settlement cycles will reduce counterparty default risk and increase liquidity.
“We strongly support the development of market platforms for syndicated loans,” said Martin Lelong, project director at Société Générale Corporate & Investment Banking (SGCIB). “We are particularly interested by Euroclear’s announcement, as their service offer fits very well with the specificities of the European market, which is of key importance to us: a tool working seamlessly and with all major currencies from trade matching to final settlement. We are convinced that these types of solutions will bring operational risk reductions, increased liquidity and productivity gains to the whole sector.”