In partnership with Risk.net, specialists from AcadiaSoft, Linklaters, and the International Swaps and Derivatives Association (Isda) weighed in on the digitisation of derivatives documentation for a virtual roundtable discussion. Recent innovations, aimed at meeting initial margin (IM) requirements, solve a number of problems for market participants, including data overload, interoperability and common terminology
- John Pucciarelli, Director of strategic initiatives, AcadiaSoft
- Doug Donahue, Partner, Finance, Linklaters
- Andrew Kayiira, Director of product development, Isda
Between phases five and six of the global IM regulatory requirements roll-out, around 1,800 relationships will be above the $50 million IM exchange threshold and will therefore need to repaper their documentation in 2020 and 2021. This represents an unprecedented undertaking in the over-the-counter derivatives market. This urgent need to comply with IM requirements means new technological solutions are a necessity. At the same time, it presents an opportunity to move the broader industry forward from a technology perspective, with the goals of eliminating existing inefficiencies, standardising workflows and reducing costs, among others.
An estimated 80% of all collateral disputes are the result of incorrect or inconsistent credit support annexes (CSAs) or agreement data from the margin call process. Isda and Linklaters have partnered to build and bring Isda Create to market, and are now working with AcadiaSoft to enhance its connection to AgreementManager, delivering a solution that offers golden source copies of digitised agreement data that flows directly from a digital negotiation platform seamlessly through to a central repository of CSA data and down into a collateral management process – which virtually eliminates disputes arising from incorrect agreement data and mismatched contractual terms.
What led to the development of these solutions?
Andrew Kayiira, Isda: Isda is focused on providing the market with a broad set of solutions to facilitate the safe and efficient processing of derivatives transactions. Having sound legal documentation that complies with global regulations is critical to that, which is why we partnered with Linklaters to develop Isda Create – an online documentation negotiation platform. The first step in this process was the release of an IM module to help firms prepare for phases five and six of the IM requirements. As the solution develops, Isda will look to add additional documents to the platform. Following discussions with Isda members, Isda decided to establish a connection with a utility provider that was open to all market participants, leveraging the legal data from Isda Create for margin processing. AcadiaSoft represented such a utility solution. Isda members have repeatedly asked us to connect to AcadiaSoft, as many of them will be using its services for this regulatory exercise.
John Pucciarelli, AcadiaSoft: At the core of AcadiaSoft is a vast network of best-of-breed service providers, all contributing to the AcadiaSoft ecosystem for end-to-end risk and collateral services. Isda Create is an integral part of the AgreementManager network, and we see this partnership as unique and part of the future value-add for clients as we move towards agreement negotiation management and operational process with one connection. AcadiaSoft AgreementManager is poised to solve one of the largest drivers of margin call disputes by virtually eliminating the need to reconcile agreement data independently stored between counterparties by creating one source of the truth.
Doug Donahue, Linklaters: We have individually recognised an opportunity to bring independent industry-adopted technology solutions to market to serve as market-wide utilities, and have seen a further opportunity to work together to enhance our respective offerings. These market-wide utilities will provide a single place for market participants to complete one or more of the many steps in the lifecycle of a trading relationship. Furthermore, we believe that by making our respective products interoperable, we will accelerate the industry’s progression towards common data models and standards.
What does a typical negotiation look like currently, and how can enhanced digitisation relieve pain points in this process?
Doug Donahue: A negotiation today is an amalgamation of data and information exchanged in different ways – whether over the phone, via email or through instant messaging – and stored in a variety of places. The many ways in which we communicate and store data leads to incorrect, incomplete or difficult-to-access data, which increases cost and creates inefficiencies that prevent us from using our valuable data. By standardising the process around how market participants negotiate their documentation – while leaving them free to choose whatever commercial terms they can agree upon – we can provide market participants with a complete dataset that is 100% accurate. It is also worth noting that data that could never be gathered in today’s world will also be available to market participants without any additional cost or effort required on their part. For example, by negotiating on Isda Create, market participants will quickly and easily be able to search their entire portfolio of negotiations conducted on Isda Create to determine whether they have previously agreed to specific commercial terms, who has internally approved those terms in the past, and how long it took to obtain those approvals. While these data enhancements are obviously very important to large sell-side entities due to the sheer number of negotiations they undertake on a regular basis, it is also key to end-users who have limited time and financial resources to otherwise track this data.
Andrew Kayiira: Isda Create makes the negotiation process easier in a number of ways. The platform itself enables users to easily view the various elections and provisions that would typically be negotiated between counterparties. Isda Create provides some standardised drop-down values, but allows for customisation as well, enabling users to maintain elections specific to certain relationships. In parallel, a comparative, full text version of the agreement is available, which is common to legal practitioners when reviewing a standard document. This was intended to make the transition from paper to digital as painless as possible for our legal user base. The elections shown on the left of the screen are dynamically tied to the full view of the document on the right, so any change to an election is reflected in text on the document in real-time – almost how a lawyer would see amendments being made in Microsoft Word today.
John Pucciarelli: The negotiation process is not where the lifecycle of a legal document ends. How that document is represented in collateral management systems is a crucial aspect of the process. Having a golden source record of agreement data that is agreed by both parties and represented in one source of the truth is a leap forward for the industry that we believe will transform the entire process and ensure that digitisation of legal agreements lives up to its promise.
How do these platforms allow for further reduction in inefficiencies?
Andrew Kayiira: Isda Create was designed to allow users to begin negotiations using industry baseline forms. The platform auto-reconciles terms if they match, and identifies any discrepancies where the parties do not agree. The auto-reconciliation feature expedites the negotiation process by ensuring both firms are able to drill down on provisions that either match or do not, instead of having to review a free-form document. In addition, the digitisation of documentation allows users to obtain data and analytics from the legal metadata, which were previously unavailable for use by legal, operations, risk and business units. This is achieved without lawyers having to do any additional work – they simply complete the negotiation and the data is captured automatically on their behalf.
Doug Donahue: These platforms will bring immense efficiencies to the market, allowing participants to focus on substantive commercial issues while having a complete dataset created for them in the background. I firmly believe these platforms will transform all of this data from a burden – due to the additional expense of tracking it – into an asset, as it will be produced and organised automatically in the background, allowing market participants to mine huge amounts of data that can be used to gain efficiencies and improve their businesses.
John Pucciarelli: The current agreement onboarding process is relatively burdensome, manual and error-prone. AcadiaSoft narrows the divide between the future state of digitised documentation agreed on an online platform and documents that are negotiated offline in a more traditional way. AcadiaSoft AgreementManager bridges the gap between legacy onboarding and the future state of documentation negotiation. Ultimately, we need to move the needle far enough that inefficiencies are near eliminated. Getting there will require buy-in and standards from the industry, and we believe it will lead to zero to near-zero touch straight-through processing.
What does the future hold for these platforms?
Andrew Kayiira: We are listening to our membership on what types of documentation would derive the most benefit from a digital solution to help expedite the negotiation of contracts. Our initial focus has been on Isda-published documents such as the Isda Master Agreement. Isda is working with the industry to integrate a clause library and legal taxonomy into Isda Create to further accelerate the negotiation of more sophisticated umbrella relationship agreements. In addition, we are working to enhance current functionality to ensure phase-five and phase-six IM negotiations are achieved in the most efficient way possible – by including the negotiation of legal agreements with custodians, for example. Looking beyond Isda documents, we have been in discussion with other trade associations and, based on industry feedback, are looking to add non-Isda documentation to Isda Create.
John Pucciarelli: Firms will want a centralised workflow solution to house and operationalise all their legal trading agreements such as a repurchase agreement, the Master Securities Forward Transaction Agreement, a CSA, a central securities depository and securities lending agreements. They will then have one central place to make amendments and add new documents, and one data representation for both counterparties flowing from that source to their collateral management systems seamlessly and efficiently, and this is where AgreementManager comes into play. In addition, market developments, such as the move from interbank offered rates to risk-free rates, can then be centrally amended in a digitised format automatically, ensuring no disruption to interest calculations embedded in a legal agreement. AcadiaSoft also sees a future of the utilisation of data analytics to trigger the documentation negotiation process. Through variation margin agreements that already exist in AcadiaSoft and an IM monitoring process, we can potentially see clients approaching the $50 million threshold and the need to trigger the documentation negotiation process.
Doug Donahue: This is just the beginning. We are building the foundation for market-wide utilities that can be applied to any document type in any market. Based on market feedback, we know market participants will want the standard workflow we have built to be applied to other asset classes and markets, so their teams have consistency and familiarity with the process. As the platforms expand, we will bring a common workflow, common data standards and the resulting interoperability to more of the market at each step, increasing the utility and efficiency that the platforms can bring to the markets.
1. Isda (January 2019), Isda and Linklaters launch full version of Isda Create – IM
2. Linklaters, Isda Create – The new way to negotiate and execute derivatives documentation
3. AcadiSoft, Agreement negotiation – Changing the dynamics
4. AcadiaSoft, AgreementManager – Revolutionizing collateral agreement workflow.
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