Arguments about what constituted a credit event, and so would trigger a settlement, ended up in the courts, and processing backlogs piled up as the market grew so rapidly. Now the problems have shifted to equity derivatives, commodity derivatives and, especially, secondary loans.
With the new-found interest among hedge funds and institutional investors in participating in the loan market, volumes of transactions have grown dramatically and there are reports that settlement times have yawned to an extraordinary T+60. Regulators are now urging the banks to fix things up – otherwise some loans will be repaid before they are settled.
“All these markets are coping with dramatic increases in volume but the processes that enable efficient clearing and settlement in more mature markets are not in place yet,” says Chris Bowles, head of wholesale banking at Ernst and Young in London. “Infrastructures have not kept pace and market standards and conventions are still evolving.”
