- Eaton Vance among money managers that support the initiative
- Plan is to create repository of loans that dealers can tap
A Blackstone Group LP-backed financial-technology firm is intensifying efforts to persuade money managers to participate in a service that would speed up trading in the $872 billion market for leveraged loans.
Ipreo Holdings LLC is trying to get the biggest investors in the market to lend out their loan holdings to dealers for a fee in an attempt to reduce a trading logjam that can extend to as much as three weeks. The company has already secured the support of Eaton Vance Corp. as it attempts to create a repository for the debt that dealers can tap into when selling a loan short. That would allow trades to go through without delay even as dealers work to source the loans from the market to close out the transactions.
“In the loan market, often a counter-party can’t settle a trade, and it creates a backup,” Lee Shaiman, co-head of credit investments at Arrowpoint Asset Management, said. “The ability to deliver the borrowed loans would be like reducing traffic on a crowded highway.”
Eaton Vance, one of the biggest loan buyers, hosted a meeting in its Boston office last month to introduce the service to other investors, according to Joe Salerno at Ipreo. The company has also been meeting with New York-based money managers this month.
“It makes sense for all parties to explore new technologies and concepts to improve settlement,” Eaton Vance money manager Craig Russ said.
Ipreo’s plan to cut the time it takes to settle a loan trade down to three days is just one of the measures being considered in order to make the market more efficient. The market has been under pressure to speed up trade settlements and has drawn scrutiny from the Securities and Exchange Commission amid growing concern that settlement delays could exacerbate losses for money managers rushing to meet redemption requests when sentiment sours.
While high-yield bond trades are settled in three or fewer days, loans can take seven times as long. “In a bond trade, the dealer has an obligation to deliver in T+3, regardless of whether the dealer is long, short or flat the bond at the time of trade,” Salerno said. “This would be impossible without a securities lending market that allows dealers to borrow the bond when necessary to meet that delivery obligation.”
Bank of New York Mellon Corp. is collaborating with Ipreo at a time when market “participants are increasingly focused on mitigating settlement risk,” according to Steven Milazzo, chief operating officer of liquidity services in the bank’s markets group.
Ipreo, which was purchased by Blackstone and Goldman Sachs Group Inc.’s merchant-banking arm for $975 million in 2014, is also attempting to loosen other administrative bottlenecks in the loan trading process. That includes targeting a practice known as blacklisting that allows borrowers to block certain lenders from buying their loans.
These blacklists have contributed to settlement delays in the past as borrowers are required to approve lenders that buy the debt, even in the secondary market. Ipreo plans to maintain a list of pre-approved investors in the hope of speeding up the process, Salerno said.
The firm is talking to dealers and private-equity firms about debuting the service on a new loan deal, although global growth concerns have slowed new loan sales as investors shun risk.
Peter Grauer, chairman of Bloomberg LP, the parent of Bloomberg News, is a member of Blackstone’s board of directors.