Loan/SERV is an evolving suite of automated and valued-added services for the syndicated loan market, adding efficiency and helping the market grow while managing operational risk. Recent global turmoil across the capital markets has highlighted the need for accuracy and transparency across asset classes, and the syndicated loan market is no exception. Even as deal volumes have slowed in 2008 after years of double-digit growth, global syndicated loans exceeded US$2.1 trillion through the third quarter. Deals remain complex and are hindered by the current paper-based processing environment.

The Loan Market Association (LMA) in Europe and The Loans Syndication and Trading Association (LSTA) in North America have highlighted a number of issues Loan/SERV helps to address on a global basis. These include:

• Lack of unique standard identifiers. In many financial markets, unique identifiers enable market participants to identify each other and the security they’re dealing with at any given time. But the syndicated loan market has been slow to adopt unique identifiers. In the U.S., the LSTA has proposed the use of CUSIPs for syndicated loans, but CUSIP usage remains inconsistent. In Europe the LMA continues to evaluate options. No international standard identifiers exist today.
• Position recordkeeping. Each time a loan is traded or changed by some other activity such as a commitment reduction or rate reset, both agents and lenders must update their records. Currently, these changes are updated by agents and lenders independently of each other with no assurance that each has made the correct change. This can lead to accrual and payment issues that come to light only when a cash payment is due.
• "Cash breaks". If agents and lenders fail to reconcile recordkeeping differences early on, the differences will be discovered at the end of each quarter or payment period. Three days prior to payment date, agents notify lenders how much they are to receive. The three-day window does not always allow for differences to be resolved and, as a result, agents frequently make cash payments whether or not they’re correct. This leads to a large number of “cash breaks” that must be resolved after the payments have been made.
• Fax communication. The primary method of communication among agents, borrowers and lenders is by fax, resulting in hundreds of thousands of faxes going out each month to market participants. This antiquated paper-based, manual process is inefficient, time-consuming and error-prone.
• Unsettled trades. Although the use of some standard documents has facilitated trading in the secondary market, the total number of unsettled trades continues to increase, as does the time it takes to close a trade. While U.S. participants have called for a seven-day settlement cycle, the average settlement cycle is 17 days after trade date. In Europe, the market objective is a 10- day settlement cycle, but it currently averages 30 days to close a trade, with market participants often reporting delays of up to six months.
• Other issues. Many other issues remain to be dealt with in the syndicated loan market. Among them are letter of credit processing, customer documentation requirements and withholding taxes.

DTCC’s Loan/SERV platform is introducing two services this year

Loan/SERV Reconciliation Service enables agents to reconcile lender positions on individual loans every day, helping reduce “cash breaks” as well as the number of unsettled loans. This service went live in September 2008 with more than 6,600 lender of record positions posted for reconciliation.

Loan/SERV Messaging Service, to be launched in the fourth quarter of 2008, provides an automated, secure communication network hub through which agent banks can transmit standard loan messages to both lenders and borrowers. The service hub will route messages according to the recipient’s predetermined instructions, either directly into their processing system or by displaying the messages via a Web interface based on user defined workflow rules.

For More Information on Loan/SERV

In North America, contact Christopher Childs at 212.855.2331 or cchilds@dtcc.com. In Europe, the Middle East, Africa or Asia, contact Mathew Lewis at +44 (0) 207.650.1543 or MathewLewis@dtcc.com.

Loan/SERV Reconciliation Service

DTCC’s Loan/SERV Reconciliation Service automates and streamlines the processing of syndicated commercial loans by enabling agent banks and lenders to view and reconcile loan positions on a daily basis. The service, which went live in September 2008, is the first of its kind and one of a suite of services under development that will make Loan/SERV a comprehensive, integrated solution for the global loan market.

Loan/SERV Messaging Service

DTCC’s Loan/SERV Messaging Service provides a safe, secure and automated network for the transmission, receipt and online storage of industry standard loan messages, such as agent notices. The service also allows market participants who do not wish to receive messages directly into their processing systems to manage their messages online via a message hub.