JP Morgan’s goal of STP in loans materializes on Versana’s platform

Spend any amount of time discussing the loan market with those who have spent more than a decade inside it, and they are likely to highlight its lack of modernization. For a market that saw US institutional loan issuance rise to $307 billion in the first quarter of 2024—more than quadrupling the $72 billion issued in Q1 of 2023—the technology powering those workflows is minimal compared to other markets, as fax and email have remained king in relaying important information.

But those dark days look to be coming to an end.

This summer, in a testament to the industry’s efforts to move loan markets in a more digital direction, JP Morgan announced it had achieved straight-through processing using Versana’s loan data platform. STP is not new, and is already commonplace operationally for mature asset classes like securities and bonds, but other asset classes, such as loans, are playing a game of catch up.

Joseph Ferraiolo, head of debt capital markets operations and merchant bank policy at JP Morgan, tells WatersTechnology that achieving real-time information delivery via STP will have a positive impact on the liquidity that flows through the market. “As things move faster, there’s a production of liquidity that leads to faster trades, someone buying and selling—which drives a more efficient market,” he says.

Cynthia Sachs, Versana’s CEO, describes achieving STP as the initial foundational end goal to attract lenders and administration agents to join the platform. “We want to come up with the times and be in 2024, use technology, and digitally do similar processes and take a lot of the manual work out, which other asset classes have done,” she says. “Now that that’s done, we can build upon it.”

Consortium-born Versana is just one of the names in the loan market looking to make the market more efficient. Launched in late 2022, Versana is a cloud-based, software-as-a-service (SaaS) data platform that aims to provide both the buy and sell side with a centralized golden source of data that would normally be kept in siloed systems. Born from a consortium operating under the name Project Sloan, it included loan heavyweights Bank of America, Citi, Credit Suisse, and JP Morgan.

In 2018, both Bank of America and JP Morgan were having conversations behind closed doors about how to modernize the loan market. Those conversations became collaborative and eventually coalesced around data.

Compared to high-yield bonds or securities, there is no centralized depository or settlement function in loans. Agent banks like BofA, JPM, and Citi hold their own golden record of data. When a new issue loan comes to market in the primary market, the data from that loan sits in the loan agreement. The agent banks then manually input that data into their systems and send it to data providers, typically by fax.

Evolutionary leap

The only constant is change, and in the loan market, this couldn’t be more true. In loans, a handful of factors can be changing at once—such as interest payments, paydowns, and spread changes, among others—enforcing a need for straight-through communication across lenders and admin agents.

The primary complicating factor to achieving STP data delivery was a lack of standardization. With 40 to 50 admin agents, the formats of data can vary. As an example, one agent may format the name of a borrower with 50 characters while another may only use 12. Formats can also change and vary depending on the type of notice being issued. Multiply 20 to 25 event types by the number of agents, and loan market participants can now find themselves navigating hundreds of different formats.

“In today’s process, the admin agent puts the data in their ledger, it runs through the system, data comes over, and what gets sent out is either email or faxes from that agent,” Ferraiolo says. “The faxes either go to a delivery center, get scraped, or manually inputted.”

The manual process involves re-keying of information, and needs to have a human in the loop to check that information is being taken down correctly—for example, differentiating between a value and a percentage, or establishing how many decimal places are in a number. With manual processes, aside from accuracy and data quality, time is also of the essence.

David Kamp, Versana’s chief technology officer, previously told WatersTechnology that one of the consortium’s goals was to make the process as frictionless as possible—“[we want it to be] easy to pull data in, put it in a canonical format, secure it, and then push the data out to those who have entitlements to it.”

The platform uses event processing and data pipelines to validate and move data through the system, as well as smart contract technology from Digital Asset. It also sits on PostgresSQL, an open-source database.

For JP Morgan, that process is now more seamless and time-saving. “Our technology reaches into Versana, makes the digital connection and extracts that information and puts it into our system,” Ferraiolo says. “Our system then has a process with formulas, and then accepts it. All digital, all technology with individuals providing the intelligence; it no longer needs a manual touch point at the admin agent.”

Private market woes

In a private market filled with confidential information, privacy is paramount. Versana was designed to be permission-based, and smart contracts ensure users only access data relevant to them.

This is one of the reasons that technological evolution in the loans market has been slower than that of the securities and the wider fixed-income markets. “In a private market,” Ferraiolo says, “it’s very complex for some private companies or smaller companies, to innovate changes in that market, because they’re not as transparent to see how data is moving through those systems.”

In public markets, like securities, public exchanges such as the New York Stock Exchange and Nasdaq are examples of organizations who make that data flow more transparent. In a private market like loans, the intelligence is held by banks.

Versana is not the only example of banks in the loan market sitting down together to provide a solution. Project Octopus, a consortium that included Bank of America, Citi, Credit Suisse, Goldman Sachs, JP Morgan, Morgan Stanley and Wells Fargo, set out with a goal of combining their trading efforts to create an electronic trading platform. It launched as Octaura in 2022 and has been able to capture strong adoption numbers in the market. Earlier examples are also present; in the early 2000s, Markit created ClearPar, an electronic loan trade settlement system, with participation from major banks.

Market growth has also impacted modernization. The loan market was set up in the late 1990s, and back then, the deals and number of participants were smaller. Email and fax were able to handle the information flow. But as the number of deals has grown, along with the number of lenders and agent banks—as well as new market participants, such Wilmington Trust and Delaware Trust, which have also become participants and need to get information to the right parties—the tech has needed an overhaul.

“That individual needs an aggregator among all those agents to bring the data together, [and send that] back to myself as a portfolio manager trader; I want to see my aggregated stats,” Ferraiolo says. That’s a need and push to get technology and delivery of information back into the hands of the owner of the paper faster from multiple sources/agents. So yes, you have a lot of new technology, inspiration, and people exploring it, not across just the banking community, but across the lenders and trustees, which leads to faster selection, innovation, and focus.”