Trillion-Dollar Leveraged Loan Market Has a Low-Tech Risk

Imagine a trillion-dollar business that runs on phone calls and faxes and routinely ties up money for months while investors receive no interest. That’s how it goes in the market for leveraged loans—those made to highly indebted companies with low credit ratings. At a time when securities trading of all kinds is increasingly automated and subject to greater scrutiny by regulators, leveraged loans trade 1980s-style, in a clubby world where the biggest Wall Street banks set the rules.

The antiquated structure of the market poses a growing threat to the financial system at a time when investors expect to get their money with a click of a button. As the market ballooned from $35 billion in 1997 to more than $1 trillion, technology didn’t keep pace. The time it takes to complete a transaction lengthened to an average 23.4 days as of March from 17.8 days in 2007, according to data from the Loan Syndications and Trading Association, an industry lobbying group. Investors need approval from the corporation that borrowed the money before they can trade loans among themselves. Clerks must manually change documents to reflect any new ownership. “There’s a high amount of faxing going on still,” says Virginie O’Shea, a senior analyst at bank research firm Aite Group. “People don’t realize that fax machines are still around in this day and age, but they are.”