Download PDF

Richard Barton is Head of Product Management at AcadiaSoft. With many years of experience in Collateral Management in both the vendor and banking sector, Richard shares his insights into OTC Derivatives Agreements, the importance of digitization and how the role of contract analysis will have a significant impact on firms’ ability to meet the industry goals of LIBOR transition.

Agreements undergird much of the civilized world and, the derivatives industry is no different. While necessary, contracts can take significant effort to manage. They are lengthy, time-consuming and can cause disagreements in interpretation between parties. However, technology, particularly when paired with collaboration between parties, can help alleviate many of the challenges that contracts bring. This approach saves time and money, both for contracts under negotiation and executed contracts that need remediation as a result of changes such as the LIBOR transition to SOFR.

Many firms have no digitization process to extract the underlying contract information and operational rules required to monitor and enforce agreements. Physically or electronically stored documents require users to interpret and enter agreement details into each party’s internal system. Unilateral interpretations and disparate systems lead to disputes and operational risk.

Even if a digitization process is in place, firms must follow industry standards that define what data to obtain from contracts, otherwise different levels of recorded information will result. Each difference in interpretation and captured data levels affects all downstream processes that require these details. The downstream impact exacerbates the initial mismatch, turning contract interpretation into an unnecessary high-stakes process of manual resolution.

In contrast, when an industry data model used by a standardized digitization process for existing contracts is combined with standardized contract templates, clause libraries and negotiation platforms (such as ISDA Create) for new agreements, it results in an efficient workflow with no operational disputes. When both parties work from a uniform representation of data, it ensures that consistent data is fed to downstream processes. Without operational disputes that require time to reconcile and resolve, firm resources can be better employed on more value-added functions.

A standards-based approach combined with a centralized data extraction process draws from consolidated contract examples to build an industry memory. The data extraction process can be based on rules, machine learning, or hybrid codification methods. As each document is processed, the industry memory increases the likelihood that the extracted legal clauses match previously codified patterns. This ultimately results in a more straight-through digitization process that reduces costs and delivers information faster. By using a centralized digitization service, it also outsources the process of monitoring data exception, which further reduces cost. Outsourcing digitization services enables providers to set up stable teams of trained analysts in place of project-based teams that required a ramping up and down period. This engagement model is a much more cost-efficient approach than reviewing the exceptions manually.

A standardized contract and data model has one agreed upon format for stakeholders to follow, resulting in a more efficient workflow with fewer disagreements among counterparties. Both parties would be working from a true “golden source” of data, ensuring uniformity in the data being fed into downstream processes. A mutually agreed upon golden source will eliminate disputes and differences caused by downstream systems interpreting data differently at each firm. Using machine learning, we can create standards that interpret legal clauses the same way every time. This ensures consistency across contracts, saves time and reduces costs. Provided these standards address the complexity inherent in these agreements, the entire industry will benefit from the enhanced consistency. The standards can also be used to remediate differing interpretations of past contracts, allowing parties to have a golden record to work for future agreements.

Standard processes and outsourced services ensure future contracts do not make the current industry problems worse. For agreements already digitized and interpreted by firms, AcadiaSoft provides a way for firms to load their respective interpretations, find matching counterparty interpretations and access to a workflow to resolve any differences. This solution establishes a bilaterally agreed golden data representation for adoption in individual internal systems. The AcadiaSoft agreement workflow allows the digitizing firm to propose their representation to the counterparty for review. Once reviewed and accepted, that firm will have a common data representation for use in downstream processes, which reduces disputes.

As the transition from LIBOR to SOFR looms and contracts need remediation, contract analysis will play a significant role. Contract analysis is similar to digitization in that contracts are converted to machine-readable text. Rather than extract all data points defined by industry standards, contract analysis addresses specific questions about the data in a set of contracts. Compared to digitization, contract analysis is more ad hoc and more akin to a series of reports that address questions about the data, such as whether a contract has language regarding LIBOR that would need to be remediated to account for SOFR.

In the case of LIBOR, for firms faced with thousands of potential contracts needing remediation, manual analysis of these contracts is not feasible from a cost, labor or efficiency standpoint. If firms use service providers to conduct the contract analysis, it results in standardized remediation processes. It also reduces project timelines by avoiding the project startup mistakes commonly seen in individual initiatives.

Since engaging through AcadiaSoft is an extension of the firm’s existing contract, it reduces procurement time. Our solution gives access to more service providers, a standard engagement workflow across those providers, and a quicker startup time. Pre-installed technology within AcadiaSoft data centers reduces setup time from months to days, with no additional information security checks required.

While technology has already had a tremendous impact on the derivatives industry, standardization can unlock even more benefits for the industry. Even before the COVID-19 pandemic disrupted the industry, there was a healthy appetite for standardization across the industry. Now more than ever, there is an imminent need to reduce and eliminate reliance on paper documents and manual processes. The industry must come together swiftly to create a digitized golden source representation of their legal contracts.

Agreement Manager is a newly launched service that enables clients to benefit from a fully integrated approach to legal agreements by incorporating digitization and online negotiation providers into a common, shared and straight through workflow to allow for golden source management of agreement data.

About AcadiaSoft

AcadiaSoft, Inc. is the leading industry provider of risk and collateral management services for the non-cleared derivatives community. AcadiaPlus is an open platform that provides the sell-side, the buy-side and fund administrators with specialist applications and a third party partner ecosystem for the straight-through processing of the entire risk mitigation lifecycle. Backed by 16 major industry participants and market infrastructures, AcadiaSoft is used by a community of more than 1100 firms exchanging approximately $700B of collateral on a daily basis via its margin automation services.

AcadiaSoft® is a registered trademark of AcadiaSoft, Inc. ISDA SIMM™ is a registered trademark of ISDA.

For more information please visit us at acadiasoft.com
or email us at info@acadiasoft.com
Follow us on Twitter and LinkedIn