Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
Our Loans Platform executive director, David Jesson explores how
the industry needs to evolve to successfully leverage both existing
and future technologies.
How does the loan industry need to adapt to make best
use of the existing technology in the market?
Over the past five years, the loan industry has seen
unprecedented growth globally and loan trading over this period has
more than doubled in volume. Institutions which scaled back
resourcing post-2008 have increasingly leaned on technology to keep
pace with growth.
The most efficient and nimble institutions adopted approaches
that allowed them to be flexible in their resourcing in order to
keep up. We saw institutions look for "quick wins" where they could
install tech with the minimum of disruption which allowed them to
create capacity.
Let's look at a simple example of this - loan reconciliation. Is
reconciliation the buzziest of technology stories in the market?
No, but automating how agents match their books with lenders
eliminates virtually all the operational white noise resulting from
the lenders' need to confirm their commitment positions. In our
experience, an agent adopting electronic loan reconciliation goes
from manually processing 100% of position queries to handling only
the 5% that are true exceptions requiring a skilled intervention.
This shift enables agents to focus their resources on more valuable
activities such as KYC, trade settlement or other client
services.
Custodian messaging is another area where automation is
replacing manual processes, saving time and reducing errors and
risk. Straightforward integration is available today to automate
payment instructions. Rather than lenders having to send emails to
custodians, the trade settlement platform can now generate
electronic messages for custodians covering notice of settlement
date, settlement amounts and wire instructions when its clients
complete trades.
What are the next generation transformative technologies
coming to the loans market
Much is spoken of "transformative technology" - some of it
applicable and some speculative. How this is interpreted will also
differ greatly from institution to institution. So let's stick to
the facts as we see them: inefficiency in the loan market,
especially inefficiencies particular to loans are unsustainable for
a healthy market that aims to self-regulate. This is true in the
best of times, but will come into high relief when dislocations
happen or when the credit cycle inevitably turns.
With greater credit risk comes greater need to have settlement
certainty. For loans, this means moving away from the de-coupled
trade settlement practices we have today where assets transfer
independently of payments. To remedy this, IHS Markit is developing
Stax, a new solution combining the automation of smart contracts,
the efficiency of tokenizing cash and the immutability of a
distributed ledger. Stax not only creates complete settlement
certainty by coupling asset transfer with cash transfer, but it
enables settlement to occur at any time of day on any day of the
year because the ledger never sleeps. Netting of payments will
become a reality and gone will be the days of sending and
reconciling multiple wires.
Beyond this, over the next five years, we can expect vanilla
processes to be administered by technology. Reconciliation of both
cash and positions will be something of the past as tools (existing
or future) are used to perform these actions.
More broadly, work will become much more collaborative. Email
will be phased out and workflow tools will be embedded with better,
more task specific communication methods, like chat. People want
the ability to discuss and solve in groups without hefty,
cumbersome email chains. Email isn't the place to resolve trade
breaks - the trade settlement platform is. Email isn't the place to
raise questions about reconciliation - the portfolio accounting
platform is. As collaboration becomes more integrated, workflow
becomes more seamless and the market more efficient.
In summary there will be changes in the way we operate and the
technology used. However, we also expect a greater demand from the
market to ensure the technology that exists today collaborates and
integrates seamlessly, irrespective of the underlying provider.
Tools such as Loan Processor, which provides two-way messaging and
workflow between all of our Loan Platform products, and downstream
lender of record platforms (WSO, ACBS, LIQ) are likely to become
common place across the industry.
This article was originally published in the LMA's 2019 London
Conference Newsletter.
Posted 25 July 2019 by David Jesson, Director, Loan Settlement
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.