Symbology Efforts Back Tech Upgrades as CLOs' Demand Surges

As Waters noted in a past examination of levereaged loans and CLO technology, these specialized debt markets lag significantly behind their peers in terms of operational efficiency.

A combination of boom-and-bust cyclicality, legal complexity, and general lack of impetus in such a niche market means that trade settlement can take, on average, at least two weeks. Bigger, more bespoke deals will range into months — plural.

The industry is once again hitting the boom side of the cycle, though. Leveraged Commentary & Data, a property of S&P Capital IQ, estimates 2014's CLO issuance at $124.1 billion, which smashed the previous pre-crisis record of $97 billion in 2006. More recent March 2015 data showed $14.1 billion packaged into these obligations — also a new monthly record.

And that resurgent demand — coupled with fresh interest from buy-side firms unfamiliar with the space and its lethargy — has sent asset servicers and technologists into action.

'Better Product, Quicker'

Certainly the majority of deals done are still done by the larger CLO players and those that have had exposure to markets in past 10 years, but a good 15 percent of market entrants now are coming from a different asset class entirely, maybe from a hedge fund perspective or other alternatives space. The difficulty with trading these loans and swapping data can sometimes be very frustrating. - David Keys, US Bank

Progress has come in two pieces: internal and collective. Major custodians are embarking on seven-figure improvements to their CLO platforms, opening up new data channels to CLO managers, as well as streamlining processing and compliance requirements. Meanwhile, collective efforts around data standardization and symbology are taking flight as well, with security identifiers like Bloomberg's FIGI [Financial Instrument Global Identifiers] at the forefront.

"The industry has been struggling with underlying loan data for 15 years, and while it’s gotten significantly better the traditional players in the market — agent banks, custodians and CLO trustees, asset managers, and ultimately investors —have always struggled to link the data together," says David Keys, senior vice president and head of US CDO analytics at US Bank, which is combining a client portal refresh, called Pivot, and pilot work with Bloomberg.

"Talking the same language regarding IDs makes that quicker and means we focus on complex areas of these deals — the calculations, indentures and interpretations — and get a better product to investors quicker."

Keys says the 5,000 loans in US Bank's databases are now mapped with FIGIs, which helps the asset managers who are US Bank's primary users on Pivot, but also facilitates faster transparency downstream to end-investors.

"Pivot is a multi-million dollar investment in our CLO platform primarily aimed at our CLO asset managers and collateral managers, which gives them the ability to essentially look into our databases and look at their transactions on a daily basis, rather than traditionally relying on Excel or PDFs," he explains. "In many ways Pivot will be a collateral manager dashboard that will help them to service their CLO transactions: it transfers files securely between clients and US Bank; we provide all the data on the CLOs, the compliance data is there, so a manager can log on and see testing results daily."

Long-term, Keys and his team are also building out more advanced 'hypo testing' functionality in Pivot, so a collateral manager can add and remove securities in hypothetical scenarios to a transaction to see impact on a compliance test. "Central to all this is that we needed to have a single ID so that they can add securities to Pivot, search for those and so on, and we thought FIGI was clearly superior."

New Players with New Demands

Mark Betteridge, global product manager for syndicated loans and league tables at Bloomberg, tells Buy-Side Technology that US Bank, whose project took about a year, was a natural first partner as the largest CLO trustee in the United States. Breadth was key.

"Typically CLOs are composed of leveraged institutional term-loan tranches; they're not limited to that, but that’s the vast majority of what is in these portfolios," he says. "With FIGIs, however, we covered everything including 55,000 loans from project finance to revolvers and classic institutional leverage tranches that you more typically see. We took the view that the way to deal with this was to make sure that the loans could be very clearly identified and investors can do further analysis utilizing our loans database on the Bloomberg terminal."

Indeed, some of the new players in the CLO market are fund managers that may not have played in the syndicated loan space before, and while these investors are used to walking to a terminal and pulling up securities data, the fact that they couldn’t integrate that into their CLO process, and then move it back out, becomes difficult for many.

As Keys puts it, they would come to US Bank and its counterparts, asking, "Why can’t we treat this like our high-yield bond fund that we have with our custodians?" he says. 

"Certainly the majority of deals done are still done by the larger CLO players and those that have had exposure to markets in the past 10 years, but a good 15 percent of market entrants now are coming from a different asset class entirely, maybe from a hedge fund perspective or other alternatives spaces. The difficulty with trading these loans and swapping data can sometimes be very frustrating for them," he adds.

Hypo Testing, Auditing Benefits

To that point, FIGI for CLOs is an open-source symbology, just as it is in other asset classes, and the hope is that starting with such a large implementation will help pull the handful of other large custodial banks and buy sides in, as well as vendors. There are a number of IDs within the market, and a number of institutions use their own internal IDs for their own systems, according to Betteridge. But that can change as issuance continues to ramp up.

"We’ll certainly see our competitors closely look at initiatives like this going forward; they’ve done so as we’ve built Pivot and they're starting to invest in digital channels the way we have," Keys says. "If you consider hypothetical trade testing, that is an extremely difficult complex process to get right 100 percent of the time with CLOs, and I think trustees will continue to carry the lion’s share of that work. But giving some managers and traders at CLO shops that self-service function will greatly help them, speed up execution, settlement, and other processes."

There a lot of benefits for US Bank's operations, as well. "Most of these CLOs go through a quarterly audit as they do a deal payment, so the audit firms we work with look to a third party — usually Bloomberg — to verify the data we send them to re-calculate tests and confirm payments are correct. So by adding IDs, it will help the reconciliation process, and we’ll get efficiencies from this, too."

The Bottom Line

• As demand ramps up, updated technology in the CLO space is coming to fruition as major custodians like US Bank and providers like Bloomberg work on data standardization and digitization improvements.

• The hope is that open symbology initiatives like Bloomberg's FIGI and improvements to reconciliation and compliance processes at individual institutions will hasten what has been an historically sluggish settlement process and provide greater transparency to the buy side.