Markit has teamed up with the Depository Trust & Clearing Corp. (DTCC) to boost the secondary market for leveraged loans by providing simultaneous transfer of cash and loan assets.
The service, dubbed Cash on Transfer, went live this week after a four-month pilot that included BNY Mellon, Citi, JPMorgan, MJX Asset Management and Sankaty Advisors, according to a statement released today.
Currently, when loans change hands, there is no assurance that cash will settle at the same time the agent banks record a change of ownership. This leaves the seller at risk of no longer being the lender of record of the loan without ensuring that cash payment has been received.
Cash on Transfer links the buyer, seller, agent bank, trade processing platform and counterparty accounts, allowing for cash and legal ownership of the asset to move simultaneously on the agreed trade settlement date.
“An additional important benefit of Cash on Transfer is that it provides for net funding on all trade-related payments, reducing the total amount of cash moved by all counterparties,” said
Mathew Keshav Lewis, DTCC vice president, global loans product management, said in the statement. “For example, if a bank is selling ten loans for $100 million and buying 12 loans for $130 million, the net funding would be $30 million, and the bank would make one single payment of $30 million.
“By paying DTCC one netted figure, rather than multiple counterparties, Cash on Transfer simplifies the settlement process, reduces fees involved with multiple payments and boosts a company’s overall capital efficiency and cash utilization. Given that large lenders may be settling significant trade volume each day, this streamlines the process and represents substantial savings,” Lewis said.
Here’s how it works: using Markit’s ClearPath loan trade processing platform, the buyer, seller and agent bank agree on a date for the trade to settle. ClearPar sends the settlement information to DTCC.
On the scheduled settlement date, DTCC authorizes BNY Mellon, the paying agent for Cash on Transfer, to pay the seller. ClearPar then electronically applies the agent’s signature to the assignment agreement, which officially transfers ownership of the loan.
Cash on Transfer will initially support U.S. dollar trades and will expand over the next year to support cash settlement in 50 currencies.