While waves of technological innovation swept through one capital-market segment after another over the last quarter century, trading of syndicated loans remained mired in manual inefficiencies and plagued by weeks-long settlement cycles. Modernization initiatives launched in 2022 by bank-led joint ventures Octaura and Versana are now shifting this $1.39 trillion market into high gear.
Octaura, incubated and co-developed by Citi and Bank of America, set out to usher leveraged loan and structured credit trading onto a sleek digital platform. In June it traded 2.2% of secondary loan trades – out of a total market that the Loan Syndications & Trading Association (LSTA) calculated at $62.7 billion.
Credit Suisse, Goldman Sachs, JPMorgan, Morgan Stanley, Wells Fargo and Moody’s Analytics became co-owners of Octaura, where Brian Bejile from Citi serves as chief executive officer.
Vitaliy Kozak of Octaura
Secondary-market trading strengthens banks’ relationships with corporate borrowers, but intermediating trades is capital intensive, Octaura chief product officer Vitaliy Kozak explained. Bids wanted in competition (BWICs), submitted to potential lenders, could take upwards of 90 minutes to trade. Octaura expects to shorten that to 30 minutes, and later to 15 minutes.
“Electronic trading is meant to solve a lot of these pain points and facilitate the risk transfer from those who need to sell to those who need to buy a lot more effectively and efficiently,” Kozak said. “It helps banks use their balance sheets for other reasons.”
While Octaura was focused on the front end, Versana set its sights on data transparency as “the market’s first real-time, multi-tenant solution centralizing corporate loan data flowing directly from administrative agents’ books and records,” the company said in March 2023 when announcing that Deutsche Bank, Morgan Stanley, U.S. Bancorp and Wells Fargo had joined founding investors BofA, Citi and JPMorgan in a $40 million funding round.
“With the global capital markets in a fairly volatile state at the moment, now is the time to ensure that agent banks, lenders, fund administrators and trustees all have the needed transparency and digital tools to manage and drive the syndicated loan market forward,” Versana founding CEO Cynthia Sachs said in a blog at the time.
Versana CEO Cynthia Sachs
Versana said on September 10 that Barclays joined the investor group in its latest capital raise and became the 10th major bank committed to the platform.
Three months ago, JPMorgan achieved straight-though processing, a syndicated-loan first that Sachs termed “clear evidence of the loan market’s digital transformation, materially reducing friction for all participants.”
“That will be a huge growth engine, with more money to manage, more assets under management, and more deals for everyone,” said Sachs, who has worked previously at Bloomberg, Morgan Stanley, Natixis and BofA. “It should ultimately compress spreads and make it cheaper for borrowers to access the market.”
As other banks follow, “we hope to have close to 90% of broadly syndicated loans, more than 6,000 facilities, on our platform by year-end,” Sachs added.
The new ventures were not the first to electronify institutional loan trading. MarketAxess, which was incubated at JPMorgan in the late 1990s, became a leading fixed-income platform initially for corporate bonds, and went public in 2004, introduced loan trading in 2015. Its website claims “over $10B in executed volume,” but a spokesperson declined to provide current numbers.
Howard Cohen, formerly MarketAxess’s head of loan trading, is now vice president and head of sales at Octaura.
Octaura’s analytics and data enable traders to identify the best day and time to execute even complex trades, and ultimately to better price risk. Octaura has signed up 16 dealers and 110 buy-side customers, according to Kozak, and it is building a product that helps collateralized loan obligation managers price the risk of the less-liquid CLOs more accurately.
Kozak recalled that in his experience as a trader, “since I had less information when I traded CLOs, I would bid as wide as possible to account for all the things I didn’t know.”
“This improves information-sharing that in our view could help narrow bid/ask spreads and improve pricing and liquidity,” said a spokesperson for Wellington Management, adding that backing by broker-dealers will be key to adoption of the platforms.
“One of the truly remarkable aspects of the advancements in technology is the different angles from which the technology firms are approaching the issue,” said Sean Griffin, CEO of the LSTA. He joined the association in April after 23 years at JPMorgan, where he was a managing director and co-head of the global primary CLO business.
Among other technology providers attracted to the loan market is Coefficient Markets, which digitizes market data at its source and seamlessly connects it end-to-end, rather than emphasizing electronic execution. That includes submitting runs – bids and offers – over Bloomberg, booking and tracking trades and positions, and monitoring client inquiries. Partnering with London-based Etrading Software, the company launched its Epic product in 2021 for dealers, and Epic Mirror in October 2023 for buy-side traders and portfolio managers.
Coefficient Markets CEO Brian Callahan
“Our tools analyze liquidity data for both sides, identifying overlooked opportunities amidst the traditional analog exchange between dealers and clients,” said Coefficient Markets co-founder and CEO Brian Callahan.
Coefficient Markets is working with the LSTA to harmonize loan identifiers across multiple vendors, Callahan said, enabling systems that use different identifiers for loans to communicate reliably.
“The LSTA and Coefficient Markets are having some typical contract discussions that we are hopeful can be resolved in the very near future,” said an LSTA spokesperson.
Eyeing the buy side, StoneX Group in July announced LoanMatch, a type of anonymous dark pool touted as “an innovative online platform designed to bring increased transparency, liquidity and lower transaction costs to the loan market.” LoanMatch head Robert Lepone said it was to be broadly available in Europe by mid-September, with plans to then bring it to the U.S.
“StoneX is better suited than banks to match trades, since we don’t have the potential for conflicts by running trading positions that may conflict with a client,” Lepone said.
On the fintech startup front, Setpoint is positioning its Asset OS and Capital OS as infrastructure for various asset products, although not specifically including syndicated loans. Citi and Wells Fargo made “significant strategic investments” in a $31 million Series B funding announced in August and led by 645 Ventures.
Siepe, a software company founded in 2012, announced on August 22 a $30 million Series B as it works to “eliminate inconsistent data and processes seen across the CLO and private credit ecosystem.” The round was led by WestCap, whose founder and managing partner, Laurence Tosi, is a former Airbnb, Blackstone and Merrill Lynch executive who was also a founder/investor of Ipreo, TMC Bonds and iLevel, among others. Concurrently, Mark Schultis, a former senior vice president of IHS Markit who ran its Wall Street Office business, became president of Siepe.