Standardizing Loan Notices

FpML - A Step towards Increased Efficiency and Clarity of Communication

Introduction

Commercial lenders, in particular banks in the syndicated lending arena, have to deal with a large number of notices across the facility life cycle in order to ensure effective and complete communication between various parties, like administrative agents, guarantors and participant lenders. Some prominent areas where notices play a critical role are credit risk reporting, collateral processing, pricing and valuation, reporting information related to loan servicing, credit and interest rate derivatives and forex transactions.

Effective flow of communication is essential for commercial lenders to ensure speed, accuracy, process efficiency and unambiguous reporting of information.

Bringing Standardization to Loans Notices through FpML

Most loan servicing systems provide the functionality of generation of various notices including agency notices. At present, syndication lenders are heavily dependent on traditional mechanisms for transmission of such information to concerned parties, like fax, telephonic communication and email notifications, which are essentially unstructured and unorganized. The messages are non-standardized in terms of business language and content. Further, such data is presently recorded both by agent bank and participant lenders independently, due to which real time counterparty reconciliation becomes challenging.

Particularly in the syndicated loan segment, with counterparties of syndicated deals crossing multiple geographies and most deals being complex and ‘structured to the need’, non-standardized loan notices could result in misinterpretation of messages across counterparties.

For example, a rollover notice could be interpreted in two different ways in two different geographies. The term, facility fee, is used by banks to denote either commitment fee or utilization fee. Hence, in the absence of standardized terms, it is left to the banks to interpret the term as they may understand it. Similarly, as part of a rate fixing notice, one agent bank may choose to provide information like start date and end date, while another bank may provide information like start date and tenor.

Introducing a standard transaction language can help bring in much needed efficiencies to syndicated loan communications. One such language is FpML (Financial Products Mark-up Language), the industry-standardized e-commerce language, which is drawing attention of bankers and industry associations globally. This XML based messaging standard is used for exchange of business information in the financial industry and for electronic dealing and processing of information related to financial derivative instruments. It establishes a protocol for sharing information electronically and provides a standard data content and structure to messages in order to achieve standardization.

The aim of FpML based messaging is to prescribe the following:

1. Standardized dictionary of market terms
2. Standardized data content of messages
3. Events for notice generation
4. Standardized means of communication irrespective of underlying hardware and software used by parties involved.

Using FpML based messaging standards, agent banks can achieve standardization and accuracy of communication, which will help in bringing greater efficiency required for processing loan notices which serve as the ‘key links’ between the loan participants.

This messaging standard is gaining popularity as it can be used in multiple functional areas like bonds, commodities, loans, forex and financial engineering products like derivatives, swaps, options, forwards and securities. Further, FpML is being enhanced to collaborate with FIX to allow interoperability between FIX and FpML protocols and hence achieve further standardization.

Conclusion

As the business in the banks grows, so does the need for greater standardization, transparency and efficiency.

Some of the bigger banks have already started using FpML based messaging standards for exchange of loan notices under syndicated credit agreements.

The Loan Syndications and Trading Association, LSTA has also undertaken an initiative to improve the efficiency within commercial lending business and decrease dependency on exchange of manual notifications between market participants. The Loan Market Association, LMA is also advocating automation in Europe’s syndicated lending markets, in order to bring greater clarity and efficiency.

Because of standardization coming into picture and Tier 1 banks moving in, and with the support and special interest being shown by large organizations like LSTA and LMA, it is only a matter of time that other banks – big and small – will also start moving towards standardized messaging in coming times by enhancing their existing systems to enable FpML based messages.

Hence, in order to sustain the market and to meet expectations of banks, it becomes imperative that any loan servicing system meets requirements of supporting standardized formats for loan messaging, such as FpML.

References:

http://en.wikipedia.org/wiki/FpML

http://www.fpml.org/