Markit and Euroclear Bank have signed a memorandum of understanding to jointly create an operational infrastructure to support the use of loans as collateral in financing transactions. In parallel, Markit and Euroclear Bank intend to collaborate on introducing a series of other services to enhance transparency, automation and trade settlement for the European leveraged loan market.
To enable the use of loans as collateral in financing transactions among trading counterparties and central banks, Markit will provide loan pricing and other market data to make it possible for Euroclear Bank to extend its pool of collateral to include loans in triparty collateral management transactions. Set to go live in 2012, the joint service will increase refinancing possibilities for loan portfolios and diversify bank funding sources, said Euroclear in a statement.
Other services planned by Markit and Euroclear Bank for the loan market include:
– the integration of Euroclear Banks delivery versus payment settlement services with Markit ClearPar and Markit Clear, Markits electronic platforms for loan trade settlement;
– a new asset servicing platform for syndicated loans that links Markits loan messaging hub for agents and lenders with Euroclear Banks expertise in event reporting and payment execution; and – the use of Markit data to expand reconciliation services available through Euroclear Banks LoanReach platform.
Joe Widner, managing director and global head of Loan Processing and Portfolio Management at Markit, commented: We are excited about partnering with Euroclear to develop innovative services and technology to improve liquidity and introduce new opportunities to the European loan market. Our shared goals are to help the market grow through new solutions such as using loans as collateral, and to reduce risks and inefficiencies by automating trade and cash settlement.
Jo Van de Velde, managing director and head of Product Management at Euroclear, added: Euroclear Banks existing LoanReach and triparty collateral management services, together with Markits loan products, will expand the pools of collateral available to our clients by including a new asset class. We are very excited to have found in Markit a partner with a unique franchise and proven track record in the syndicated loans area.
The potential to use loans as collateral in financial transactions has become an important topic this year amidst the ongoing financial crisis and pending new regulation, including EMIR and Dodd Frank, which require firms to bolster their capital ratios. And in parallel, more and more transactions are expected to have regulatory oversight, including credit derivatives, which are being brought into a central clearing framework. Thus, what we are seeing is our clients looking to be more innovative and find solutions for collateralizing exposures, said a Euroclear spokesperson. The days of unsecured lending are dead. Exemplary risk management and full exposure management are the new norm. The spokesperson added that the service could be extended to potentially accept syndicated loans outside of Europe in the future.
In September, the Depository Trust & Clearing Corporation (DTCC) and Clearstream announced a partnership to offer services for the bilateral loan and syndicated loan markets. Clearstream will begin offering DTCCs Loan/SERV Reconciliation Service in the first half of 2012. The two organizations also will develop bilateral loan services built on Loan/SERV and integrated with Clearstreams collateral management platform. The Loan/SERV Reconciliation Service will be offered to clients in EMEA and Asia, but not the DTCCs home market of the United States. The Loan/SERV Reconciliation Service will also support the processing of European bilateral loans in early 2012.
(JDC)