Is the syndicated loans market ready for distributed ledger technology?

ABSTRACT

The syndicated loan market has a centralised nature dominated by intermediaries. Such a structure not only requires manual labour and back-office workloads, but it is also prone to human error and fraud. Distributed ledger technology (DLT) and smart contracts are promising tools to overcome the factors which adversely affect the efficiency of the current and classical business model in the primary and secondary market of syndicated loans. DLT eliminates the need for intermediaries; provides transparency, accuracy, and authenticity; lowers transaction costs; makes it easier to comply with Know Your Customer obligations; and provides efficiency in the secondary market for syndicated loans. However, existing legal rules and institutions fail to create a predictable and legally safe environment for the spread of DLT in the syndicated loans market. Therefore, proper regulation is required for the widespread use of DLT technology in the syndicated loan market.

KEYWORDS:

• Syndicated loans
• blockchain
• distributed ledger technology
• smart contracts
• regulation

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

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2 For detailed information about this transaction, see L Gonzalez-Echenique, ‘Blockchain: The Future of Syndicated Lending?’ [2019] Butterworths Journal of International Banking and Financial Law 326, 326.

3 L Noonan, ‘Banks complete first syndicated loan on blockchain’ (Financial Tımes, 6 November 2018) <https://www.ft.com/content/2b12d338-e1d1-11e8-a6e5-792428919cee> accessed 28 January 2023.

4 P Martino, Blockchain and Banking: How Technological Innovations Are Shaping the Banking Industry (Springer 2021) 41.

5 K Simons, ‘Why Do Banks Syndicate Loans?’ [1993] New England Economic Review 45, 45; A Fight, Syndicated Lending (Elsevier 2004) 1; J Ho, ‘Chapter 2 – Basic Principles of Syndicated Lending: Financing Through the Risk Spectrum’ in A Shutter (ed), A Practitioner’s Guide to Syndicated Lending (Sweet & Maxwell 2017) 9.

6 Fight (n 5) 2.

7 W Wild, ‘The Economic Basis of Syndicated Lending’ (PhD thesis, Queensland University of Technology 2004) 1; CE Aster and MA Attaway, ‘Syndicated Construction Loans, Defaulting Lenders, and Equitable Remedies’ [2016] Texas Tech Law Review 853, 859.

8 DZ Nirenberg, ‘International Loan Syndications: The Next Security’ [1984] Columbia Journal of Transnational Law 155, 159.

9 ME Jones, ‘Bankers Beware: The Risks of Syndicated Credits’ [1999] North Carolina Banking Institute 169, 173.

10 ibid 173.

11 PR Pollock, ‘Notes Issued in Syndicated Loans – A New Test to Define Securities’ [1977] The Business Lawyer 537, 538.

12 Wild (n 7) 25; GA Goodman, ‘Special Problems of Syndicated Loans’ (Dentons, 14 April 2014) 4 <https://www.dentons.com/en/insights/articles/2014/april/14/special-problems-of-syndicated-loans> accessed 28 January 2023.

13 MHughes, ‘Transferability in Syndicated Lending’ [2007] Law and Financial Markets Review 21, 21.

14 Wild (n 7) at 25.

15 D Petrov, ‘A New Digital Age in Finance: Blockchain and Smart Contracts’ [2020] Horizons: International Scientific Journal 7, 9.

16 I Callaghan, ‘Chapter 10 – Making the Loan: the Theory and Mechanics of Syndicated Lending’ in Shutter (n 5) 189.

17 Simons (n 5) 45; LB Gutcho, ‘Syndicated Lending: Lead Banks and Syndicate Members’ [1994] International Business Lawyer 131, at 131; Jones (n 9) 177; SA Dennis and DJ Mullineaux, ‘Syndicated Loans’ [2000] Journal of Financial Intermediation 404, at 408; V Ivashina and Z Sun, ‘Institutional stock trading on loan market information’ [2011] Journal of Financial Economics 284, 284.

18 Nirenberg (n 8) 161; Goodman (n 12) 2.

19 Simons (n 5) at 45; Dennis and Mullineaux (n 17) at 407; Jones (n 9) 177.

20 Aster and Attaway (n 7) at 858.

21 Simons (n 5) at 46.

22 Fight (n 5) 8.

23 Nirenberg (n 8) 161.

24 Loan Market Association, ‘LMA releases results of its members' survey: outlook for the syndicated loan market in 2021’ <https://www.lma.eu.com/news-publications/press-releases?id=185> accessed 17 June 2023.

25 Petrov (n 1) 88.

26 Petrov (n 15) 9. Despite their close relationship, blockchain and distributed ledger are different concepts. Actually, blockchain is a type of distributed ledger. It refers to the technological data structure that stores and exchanges data packed in different blocks that are interconnected in a digital chain. It uses encryption and complex mathematical algorithms to provide irreversible and synchronized records. Petrov (n 1) 88.

27 Petrov (n 15) 10.

28 ibid. 9.

29 M Buitenhek, ‘Understanding and Applying Blockchain Technology in Banking: Evolution or Revolution?’ [2016] Journal of Digital Banking 111, 117; Martino (n 4) 41.

30 M Merike and A Steyn, ‘Implementing Smart Contracts in the Syndicated Loan Market: An Issue of Adoption’ [2019] IEEE Computer Society 39, 40.

31 Petrov (n 15) 11.

32 World Economic Forum, ‘The Future of Financial İnfrastructure’ (World Economic Forum, August 2016) 70 <https://www3.weforum.org/docs/WEF_The_future_of_financial_infrastructure.pdf> accessed 29 January 2023.

33 Deloitte, ‘Blockchain in Banking: While the Interest is Huge, Challenges Remain for Large Scale Adoption’ (18 April 2017) 24 <https://www2.deloitte.com/content/dam/Deloitte/in/Documents/strategy/in-strategy-innovation-blockchain-in-banking-noexp.pdf> accessed 29 January 2023; D Petrov, ‘Blockchain Technology – A Bank Lending (R)evolution: The Case of Syndicated Loans’, New Challenges of Economic and Business Development – 2018: Productivity and Economic Growth: 10th International Scientific Conference 500, 504 <https://dspace.lu.lv/dspace/bitstream/handle/7/48890/Proceedings_NCEBD_2018.pdf?sequence=1#page=501> accessed 29 January 2023.

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35 Petrov (n 33) 504; Deloitte, ‘Over the Horizon: Blockchain and the Future of Financial Infrastructure’ 10 <https://www2.deloitte.com/ch/en/pages/risk/articles/over-the-horizon-blockchain-and-the-future-of-financial-infrastructure.html> accessed 29 January 2023.

36 SA Rutenberg and RW Wenner, ‘Blockchain Technology: A Syndicated Loan Revolution?’ [2017] Financial Technology (FinTech) and Regulation, at 4; MH Sazu and S Akter Jahan, ‘Impact of Blockchain-enabled Analytics as a Tool to Revolutionize the Banking İndustry’ [2022] Data Science in Finance and Economics 275, 281.

37 G Padmanabhan and K Komma, ‘Reinventing Syndicated Loan Processing with Distributed Ledger Technology’ [2016] TCS Whitepaper; Buitenhek (n 29) 117.

38 Genpact, ‘Impact of Distributed Ledger Technology on Syndicated Loans’ 5 <https://www.genpact.com/downloadable-content/insight/impact-of-distributed-ledger-technology-on-syndicated-loans.pdf> accessed 29 January 2023.

39 M Casey and others, ‘The Impact of Blockchain Technology on Finance: A Catalyst for Change’ at 20 <https://www.sipotra.it/wp-content/uploads/2018/07/The-Impact-of-Blockchain-Technology-on-Finance-A-Catalyst-for-Change.pdf> accessed 29 January 2023.

40 D Shearer, ‘Trade Finance and Distributed Ledger Technologies’ [2018] Butterworths Journal of International Banking and Financial Law 99, 99.

41 Rutenberg and Wenner (n 36) 3.

42 Genpact (n 38) 6; Petrov (n 15) 9–10.

43 Petrov (n 15) 10.

44 U Ravindran and P Raghu Vamsi, ‘A Secure Blockchain based Finance Application’ IC3 '21: 2021 Thirteenth International Conference on Contemporary Computing (IC3-2021), August 2021 99, at 105.

45 Petrov (n 15) 11.

46 Petrov (n 33) 502.

47 Ravindran and Vamsi (n 44) 105; Sazu and Akter Jahan (n 36) 282.

48 Deloitte (n 33) 25.

49 Noonan (n 3).

50 Petrov (n 15) 9.

51 Martino (n 4) 44.

52 Sazu and Jahan (n 36) 280.

53 Deloitte (n 36) 10.

54 Rutenberg and Wenner (n 36) 4.

55 Ravindran and Vamsi (n 44) 105; Martino (n 4) 45.

56 Martino (n 4) 45.

57 For differences between travel rule and KYC, see KYC-Chain, ‘KYC Vs Travel Rule Compliance: What’s the Difference?’, <https://kyc-chain.com/kyc-vs-travel-rule-compliance-whats-the-difference/#:~:text=Put%20simply%2C%20KYC%20involves%20gathering,an%20FI%20or%20VASP%20facilitates> accessed 17 June 2023.

58 Clifford Chance, ‘The Digital Future of Syndicated Loans’ (June 2021) 4 <https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2021/06/the-digital-future-of-syndicated-loans.pdf> accessed 28 January 2023.

59 On tokenization of the loan, see Gonzalez-Echenique (n 2) 326ff.

60 Clifford Chance (n 58) 9.

61 Gonzalez-Echenique (n 2) 327.

62 Petrov (n 33) 508.

63 Clifford Chance (n 58) 9.

64 Petrov (n 1) 90.

65 Sazu and Jahan, (n 36) 285.

66 Martino (n 4) 46.

67 Clifford Chance (n 58) 3–4.

68 ibid 4.

69 Sazu and Jahan (n 36) 285.

70 Petrov (n 1) 90.

71 Genpact (n 38) 8.

72 Stephen J Obie, ‘Blockchain and the Syndicated Loan Market – a Closer Look’ [2017] Butterworths Journal of International Banking and Financial Law 711, 712.

73 Fry-Paul (n 34).

74 Clifford Chance (n 58) at 6.

75 World Economic Forum (n 32) 71.

76 Casey and others (n 39) 22.

77 Martino (n 4) 44.

78 Martino (n 4) 45.

79 Clifford Chance (n 58) at 8.

80 ibid.

81 Petrov (n 1) 90.

82 Buitenhek (n 29) 119.

83 Martino (n 4) 46.

84 Petrov (n 1) 90.