Technology and Transformation in the Loans Industry

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.

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Posted 25 July 2019 by David Jesson, Managing Director, Loan Platforms, S&P Global Market Intelligence

S&P Global 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.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.