The first R3 Corda app is live and available commercially. Finastra’s Fusion LenderComm shares information about syndicated loans. This is the first step in creating a global secondary marketplace for syndicated loans.
In March there was press coverage about another R3 Corda solution, the HQLAX security lending platform. While that included live transactions between ING and Credit Suisse, it is a pilot. So LenderComm is the first live R3 Corda app.
Finastra is a major technology player in banking. The company has a turnover of more than $2 billion, employs more than 10,000 people and counts 48 out of 50 of the largest banks as clients.
Fusion LenderComm’s pilot included BNP Paribas, BNY Mellon, HSBC, ING, State Street and Natixis which is part of the French Banque Populaire group. The active participant count is now around ten.
Frédéric Dalibard, Head of Digital for Corporate & Investment Banking at Natixis commented: “By allowing the sharing of syndicated loans position data more efficiently between loan agents and participants, Fusion LenderComm addresses a key pain point by automating the costly manual processes traditionally involved in such sharing of information.”
David E. Rutter, CEO at R3, said, “This is an enormous milestone for blockchain. As the first CorDapp to go live on Corda, Fusion LenderComm is a true example of how inefficient and time-consuming processes can be transformed through the power of blockchain technology.”
Fusion LenderComm won the Blockchain Project of the Year award at the 2018 FSTech Awards.
The problem it solves
If a large company needs a loan, likely billions of dollars, they will find a big bank. With substantial loans, even large banks can’t afford to take on the entire loan risk. So they will offer to arrange and structure the loan, but they will act as the agent to source much of the lending from other financial institutions.
The loans are very complex and dynamic. In addition to interest rate resets when market rates change, big loans tend to be divided into chunks. For example, the principal loan might include multiple fixed-term loans and a revolving credit facility.
A revolving credit facility allows the borrower to draw down a loan and repay it, and then to borrow again. At any time, each lender will need to know how much they have lent. The agent bank has that data and, until now, that’s usually communicated to the syndicate lenders using fax and email.
Given the manual communication, the data is often sent only monthly or quarterly. So there’s an extended blackout period when the lenders don’t know the details of their loan. This means there’s a painful reconciliation process between the syndicate banks and the agent bank.
But there’s an even bigger issue because the lenders often trade their proportion of the loan in the secondary market. So they need to know how much is outstanding in the revolving credit facility. A lack of information can mean that a trade doesn’t complete.
Jacqueline Morcombe, Global Solution Lead, Lending at Finastra told Ledger Insights: “There’s huge operational risk, there’s huge counterparty risk. So the whole market is creaking because of the manual non-real-time interaction that you have between agents and lenders on these complex deals.”
This is the classic blockchain problem of a single source of truth that needs to be shared amongst several participants.
Finastra has a significant market advantage because it operates a loan accounting system called Fusion Loan IQ. Customers of the product, 75 financial institutions, service nearly half of the world’s syndicated loans. For existing customers, it’s very easy to onboard.
Morcombe explained: “The syndicated loan market is a very private market and it’s incredibly important that very confidential deal borrower information that is being looked after by the agents and shared with the lenders does not go outside of that lender group. And that each lender is not supposed to see what another lender has. ”
“And this is where you get that node to node publishing. You’re not publishing something just out into the internet. You’re publishing it from the agents to each lender, their information specifically. That’s why this is such a strong business case for distributed Ledger.”
How it works
For existing Fusion Loan IQ customers there’s out of the box integration. However, they need to install a Corda node on Azure and do some testing before they can publish. Every bank needs to have a node, whether they are the agent bank or part of the syndicate.
As with all Corda applications, there’s built-in privacy, so a bank only gets to see what they are allowed to see. They don’t see details about the other banks in the syndicate.
Later this year an API will be available to allow integration of participants that don’t use Fusion Loan IQ. Users of the API will be able to both publish and consume data. Fusion LenderComm aims to be an industry-wide solution.
This first phase involved the agent bank publishing information, so that syndicated banks can log in and access the data whenever they like, and in real-time.
The second phase, later this year, will push the information to the syndicated banks. There’s no need to login to a web interface. The data will automatically appear in the secondary bank’s systems.
In the third phase, next year, the plan is to facilitate secondary trading. The trading version will include both trade discovery and settlement.