The quest for internal standardization in the Syndicated Loans market
The syndicated loan market has proven to be quite resilient during 2018, despite the trade war between the U.S. and China, and the correlation with U.S. interest rates; the effects of Brexit; and the impact of emerging markets like Turkey and Latin America.
In recent months we have seen the initial use of new technologies in syndicated loans such as blockchain but the adoption will be progressive.
However, firms are facing an important problem, which is the integration of their syndicated loans internal systems. In addition, firms are exposing loan data to clients through APIs in order to provide additional value to them. With the adoption of more solutions in the marketplace to perform specific functions combined with the existing legacy systems and data publication through APIs, the need for internal data integration increases.
The use of open standards enhances interoperability between the internal messaging model and external parties and partners. In terms of open standards covering syndicated loans and trade finance, Financial products Markup Language (FpML) is the most extensive in terms of coverage for loan objects and related business events. FpML includes syndicated loans coverage since version 4.4.
When firms start looking for internal standardization, FpML seems an excellent candidate to use it as basis for their internal messaging. Some of the drivers to use FpML are:
Off-the-shelf definitions for business objects such as deals, facilities, loan contracts, notification messages, and events.
Availability of sample messages that can be used as templates.
Business validation rules, specific for syndicated loans, on top of the schema.
Existing vendor implementations using FpML.
Proven standard, wide adoption, specially in the derivatives market.
The Main Challenges
Some of the main challenges firms face when starting an internal messaging project are:
Message selection: what the most appropriate messages are for internal notifications
Object alignment: do the concepts of deal, facility, and loan contract align with the data models being used within the firm?
Combination of business events: what are the combinations of business events between facilities and loan contract that make sense from a business perspective? For example, a revolver facility with a borrowing event. The borrowing generates a subsequent repayment event.
How do we link related objects and events?
High level mapping between the FpML objects (deal, facility, loan contracts) / events and the corresponding systems objects;
Message selection based on use cases on data requirements
Low level mapping between the systems and the relevant internal messaging formats;
Development of extensions as necessary in line with the architectural guidelines of FpML;
Development of tools to allow internal validation of those extensions and to minimise the potential for bugs during the development phase
Development of messaging samples, including the developed extensions, based on real-use cases and data;
Conversion to other formats such as JSON;
Development of messaging documentation to facilitate successful implementation of the open standards by the project teams