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2019 was mostly a quiet year for distressed trades booked on
ClearPar, our loan settlement solution, with low activity and
clients pondering whether the long-awaited turn of the
cycle would arrive - not when. But a cycle is a cycle,
after all, and by the end of Q4 2019 the LSTA had announced more
shift dates than the previous year combined. By early 2020, volumes
of distressed loan trades on ClearPar had increased dramatically,
leading to a 58% increase in Q1 over the previous quarter, and an
81% increase YOY. Signs of a major market shift, amidst global
challenges brought on by the COVID-19 pandemic, were starting to
appear.
The evidence tells us a storm is coming, but its size and
duration remain to be determined. In 2007, one year before the
start of the financial crisis, global allocations on ClearPar
totaled 243,000. The market was different then - significantly
smaller in notional traded ($663 billion), with far fewer market
players and, importantly, fewer legal entities trading and holding
leveraged loans. ClearPar itself was in its relative infancy, and
the automation and system-to-system integration capabilities that
exist today were not in place.
And yet.
Consider 2019, when global allocations settled on ClearPar
totaled 1.3 million and settled notional reached $1.3 trillion. The
number of entities holding positions that may shift to distressed
documents is bound to be significantly higher than in 2007, meaning
that the next turn will encompass not only more master trades, but
more allocations per trade, and more pressure to manage risk
properly.
The question many market participants are asking themselves now
is: do we really think we can (or should) do things the way we did
them during the last crisis? Are we ready to rely on vast
quantities of email, spreadsheets and PDFs of LSTA Distressed
Purchase and Sale Agreements (PSAs) as we support increasing
volumes?
In a word, no. There is too much risk associated with manual
processes, and thankfully, the market has come a long way towards
digitization and automation. We now have an integrated, real-time,
audited inventory on ClearPar. We now produce PSAs instantly for
however many allocations are needed per trade. We now automate the
administrative details that populate the PSAs, freeing up precious
time for counsel and closers to manage risk and focus on value-add
tasks.
Since 2019, when Deutsche Bank used the new ClearPar
functionality to settle a distressed trade in just nine days, we
have had a chance to stress and improve our system in preparation
to support our clients in a growing distressed trading cycle. On
live trades, ClearPar has uncovered and corrected inventory
discrepancies that our clients were keeping manually; it has
generated hundreds of PSAs in minutes; and it has identified
exceptions within upstreams and allowed users to resolve them using
our clearing methodology.
Perhaps most importantly, as we consider how dispersed our users
are in the current environment, counterparties and attorneys
interact directly via the platform in a way that is transparent and
auditable. Now that our clients are working from home, the value of
a centralized system for storing structured data and evidencing
workflow actions is even more apparent.
We helped the industry weather the storm that hit a decade ago
and we are even better placed to support again today.
To learn more about ClearPar for distressed loan trade
settlement, click
here.
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
