Traders Resist Move to Charge Loan-Settlement Fees
December 1, 2011
(Bloomberg) -- ClearPar, the automated loan- processing business
that settles most trades in the $500 billion U.S. market, reduced a
newly imposed fee by 37 percent after some customers complained and
stopped using the service.
ClearPar, owned by London-based Markit Group Ltd., will lower
its settlement fee to $19 per trade starting today, according to
its website. The transactions had been free to investors since the
company's founding more than 10 years ago until Oct. 3, when it
began charging $30 to clear a trade.
Some loan managers protested the fees, which may cost the
largest $100,000 or more a year, by asking investment banks to
handle the process manually, slowing settlement times, or by using
a smaller competitor. The resistance comes even as ClearPar
dominates the market, with banks funneling trades into a system
partially owned by many of those same institutions.
"Most sell-side banks direct all electronic loan settlement to
ClearPar, creating an effective monopoly," Andrew Sveen, head loan
trader at Eaton Vance Corp. in Boston, said in an interview. "We
agreed to the new ClearPar fee arrangement out of necessity." The
firm oversees $177.8 billion, including $23.6 billion in leveraged
Markit said it put the fee in place to recoup a large investment
it made in its loan-settlement system, according to a March 3
presentation posted on its website.
"The efficiency, speed and added functionality made possible by
Markit for the loan market far outweighs the nominal cost,
particularly when one considers the benefits gained by reducing
settlement times," the company says on its website. ClearPar
continues to charge a fee to banks for using the service. Alex
Paidas, a Markit spokesman, declined to comment.
For entire article please see www.bloomberg.com
ClearPar says on its website that its goal is to settle loans in
three days. The average settlement time for par, or performing,
loans on the system was 19 days, according to a second March 3
Under guidelines from the Loan Syndications and Trading
Association, all performing or so-called par loans should settle in
seven days and in 20 days for distressed loans "Settlement issues
in secondary loans have been a front burner topic for at least 10
years," Jonathan Calder, co- founder and managing partner at North
Sea Partners LLC, an investment banking firm that provides advisory
services, said in a telephone interview.
In the last quarter, the mean settlement time for performing
loans was 18 days, according to the LSTA's third- quarter trading
and settlement study. The mean settlement time for distressed loans
was 67 days, according to the study by the New York-based trade
"However you break it down, it's frustrating that the loan market
has been unable to make significant progress on trade settlements
and as a result the counterparty risk issue continues to loom
large," said Calder, who previously ran fixed-income credit sales
at Citigroup and served as chairman of the LSTA's board, where he
helped develop rules for loan settlements.
Counterparty risk can be an issue for loans especially in a
volatile market when prices can move significantly while a trade is
outstanding. The longer a loan trade is unsettled, the larger the
Under ClearPar's new fee system, if an investor buys $3 million
of a loan and wants to put $1 million into three separate
collateralized loan obligations, it would be charged $19 per each
CLO, for a total of $57 for the transaction. That amount will
increase if settlement times decrease.
"We have been looking to reduce transaction costs in the loan
market, that is the point of technology," Barry Zamore, head loan
trader at Credit Suisse Group AG, said in a telephone interview.
"ClearPar made closing loans a less manual process. We were looking
to reduce fees to do loan trades, not increase fees."
Before the the majority of the loan-settlement process ran through
ClearPar, banks had large back offices that manually closed, or
settled, trades. Loans are different than other asset classes that
have a set settlement period.
Stocks generally clear and settle within three days through the
National Securities Clearing Corp., a subsidiary of the Depository
Trust & Clearing Corp. Bond trades also typically close in
"Closing loans on paper is impractical," Eaton Vance's Sveen
said. "Charging a fee for a back-office function that has always
been free seems like a step in the wrong direction."
Since the new fee was imposed, Trade Settlement Inc.,
another automated loan-settlement company, has handled a number of
trades that would have previously been completed by
Set up in 2000 by former Merrill Lynch & Co. banker
Pat Loret de Mola, managers are asking banks to use TSI because it
doesn't charge a buy-side fee. The pickup in business has been
"very significant," Loret de Mola said.
"What this has done is raised market awareness to have
two electronic-settlement providers in the market, not just one,"
she said in a telephone interview. "When you have a single dominant
player, they have complete pricing power."