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Loan-Settlement Fees Cut After Traders Resist Move

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 loans.

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.

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Settlement Time

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 presentation.

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 organization.

Counterparty Risk

"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 risk involved.

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.

'Wrong Direction'

"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 three days.

"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 ClearPar.

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."