FI410 Unit 3 Loan Settlement Use Case Evaluation Example

Where the Eleven Days Go: A Unit 3 Use Case Evaluation of a Ledger for Syndicated Loan Settlement

[Student Name]

Purdue University Global

FI410: Blockchain for the Financial Industry

Unit 3 Use Case Evaluation

[Instructor Name]

[Date]

The agent bank, its lenders, the costs and every figure are composite; the articles cited are real.

The Setting

A syndicated loan is a single loan funded by many lenders. The agent bank keeps the register of who holds how much of each loan, collects the borrower's payments and passes them to lenders in proportion to their holdings. When a lender sells part of its share to another institution, the trade must be settled: the buyer pays, the seller's holding falls, the buyer's rises and the agent updates its register so that the next interest payment goes to the right party.

Unlike stocks or bonds, loans settle slowly. At this agent bank the median secondary trade takes eleven business days from trade date to settlement. During that time the buyer has agreed to the trade but does not hold the loan, the seller has sold but still receives payments, and both must track who is owed what when the trade finally closes.

Dividing the Eleven Days

The evaluation began by sampling 400 trades settled over the past year and timing each step. The median trade breaks down as follows.

Assignment signatures: 4.5 days. Buyer and seller each sign an assignment agreement. Signatures move by email and PDF between legal teams, and documents are often returned for corrections.

Borrower consent: 3 days. Many credit agreements require the borrower to consent to a new lender. The agent sends a request, and the borrower's treasury team replies when it gets to it.

Lender onboarding: 2 days. If the buyer is new to the loan, the agent must complete identity and tax checks before admitting it.

Funding: 1 day. The buyer wires the purchase price after all documents are complete.

Register update: 0.5 day. The agent's operations team enters the trade into the register and confirms holdings to both parties.

Separately, about 2 percent of lender holdings each month show a position break: the lender's own records disagree with the agent's register, usually because a trade, a paydown or an amendment was recorded on different dates. Each break takes staff time to investigate.

A shared ledger speeds only the half day of register updates and the monthly position breaks, while the ten and a half days of signatures, consent, onboarding and funding are spent waiting on people and contracts that a ledger does not change.

What a Ledger Would Change

The ledger option would put the register on a permissioned shared ledger run by the agent and its lenders. Each lender would see its own holdings exactly as the agent sees them, updated the moment a trade is recorded. Smart contracts could compute interest allocations automatically.

That would nearly eliminate position breaks, since there would be one record rather than 341. It would shorten register updates. Research on blockchain economics suggests that the main gains come from reducing the cost of verifying that records agree, which is exactly what position breaks represent (Catalini & Gans, 2020).

It would not shorten signatures, consent or onboarding unless those processes were also redesigned, and redesigning them does not require a ledger. A digital signature platform works with or without a shared record. A borrower who is slow to answer a consent request is slow whatever technology carries the request.

The Costs

Ledger option. Vendor estimates put the build at about $3.2 million, plus a node for each participating lender at roughly $40,000 a year. Lenders would have to integrate their own systems with the ledger. Since most lenders deal with dozens of agent banks, each running different systems, few would invest in a node for one agent's loans. Without broad participation, the ledger would largely duplicate the agent's existing register.

Portal option. An upgraded agent portal would add electronic signatures with built-in completeness checks, a consent queue that sends borrowers reminders and tracks response times, pre-onboarding for lenders likely to buy into loans, and an automated daily holdings file for each lender. Estimated cost: about $900,000, with no new investment required of lenders beyond downloading their file.

Comparing Expected Results

Using the sampled trades, the evaluation estimates what each option would do to the median.

The portal's e-signing and correction checks would cut the signature stage from 4.5 days to about 1.5. Consent reminders and a default deemed-consent period where credit agreements allow it could cut consent from 3 days to about 1.5. Pre-onboarding would remove most of the 2 days for frequent buyers. Funding and register updates would stay about the same. The projected median falls to about five days. Daily holdings files would cut position breaks by roughly half.

The ledger would cut register time to near zero and position breaks to near zero for participating lenders, but leave the median near ten and a half days unless the same process changes were made alongside it.

Risks of Each Option

The portal carries ordinary project risk: borrowers may ignore reminders, and some credit agreements do not allow deemed consent, so the consent stage may shrink less than projected. The ledger carries larger risks. A smart contract that allocates interest incorrectly would pay hundreds of lenders the wrong amounts at once, and the agent would remain legally responsible. If only a few lenders joined, the agent would run two registers, the ledger and its existing one, and reconcile them, adding a new source of breaks rather than removing one.

Why Distributed Ledgers Get Proposed Here

Syndicated lending looks like an ideal ledger use case: many parties, a shared record and frequent disputes about who holds what. Economists studying blockchains note that the technology is most valuable where it changes who must be trusted and how agreement is reached (Cong & He, 2019). But in this market the agent is already trusted by every lender, by contract, to keep the register. A shared ledger would replace a trusted keeper that no one wants replaced, which is the situation where a conventional database usually does as well (Halaburda, 2018).

When the Answer Would Change

If several large agent banks agreed to run their registers on one shared ledger, lenders would face a single integration for most of their holdings, and the case would improve sharply. If regulators or the market moved to a standard digital loan record, the ledger might also carry signatures and consents. Neither condition exists today.

Recommendation

Build the portal. It addresses where the eleven days actually go, costs about a quarter of the ledger and asks nothing of lenders. Revisit the ledger option if an industry-wide registry gains members.

References

Catalini, C., & Gans, J. S. (2020). Some simple economics of the blockchain. Communications of the ACM, 63(7), 80-90. https://doi.org/10.1145/3359552

Cong, L. W., & He, Z. (2019). Blockchain disruption and smart contracts. The Review of Financial Studies, 32(5), 1754-1797. https://doi.org/10.1093/rfs/hhz007

Halaburda, H. (2018). Blockchain revolution without the blockchain? Communications of the ACM, 61(7), 27-29. https://doi.org/10.1145/3225619