TowerGroup Take-Aways

• Traditional investment managers in the United States invest in syndicated commercial bank loans as an alternative to high-yield fixed-income instruments because the loans have a lower risk profile and relatively stable returns.
• Since 2006, volumes in US bank loan transactions have skyrocketed and the increase in faxed communication between agents and lenders has resulted in a mean settlement period of 17 days.
• The key post-trade operations associated with bank loans as an asset class are characterized by manual workarounds, inefficient legacy systems, and reactive responses by back-office staff.
• Post-trade operations involve a range of technology from bank loan specialists in trade closing and agent reconciliations, industry utilities, market data companies, and portfolio accounting vendors that have expanded into bank loans.
• Investment managers should investigate the IT tools available for internal straight-through processing and pressure their service providers and counterparties to collaborate in lowering the operational risks associated with bank loans.

Report Coverage

In their eternal search for diversification and performance returns, investment managers embraced trading in syndicated commercial bank loans as an alternative to fixed-income instruments. They soon found that strategy poses yet another new set of obstacles to navigate. Although the market for bank loan securities has declined from the record high volumes of 2007, particularly in collateralized loan obligation (CLO) and collateralized debt obligation (CDO) structures, asset managers continue to run dedicated bank loan funds and add bank loans as positions to diversify portfolios. Inefficiencies in the post-trade process necessitate manual work in the back office to price, account for, and reconcile the positions. No one vendor solution addresses all aspects of post-trade processing. This TowerGroup Research Note focuses on the key business drivers and operational challenges and the changes needed in the post-trade processing model for bank loan securities in order to achieve a passing semblance of straight-through processing (STP).