Linklaters and ISDA launch derivatives automation tool to tackle regulatory requirements
MIAMI, April 25, 2018 – Linklaters has partnered with The International Swaps and Derivatives Association, Inc. (ISDA) to develop a tool that will allow firms to electronically negotiate initial margin (IM) documentation. The new platform is being built to help facilitate compliance with regulatory IM requirements as a wider universe of buy- and sell-side firms come into scope of the rules.
ISDA Create - IM will provide an efficient means for firms to negotiate IM collateral documentation with a large number of counterparties simultaneously, and to deliver the documentation electronically into firms internal systems. The tool will also make commercial data contained in the IM documentation more easily accessible, along with the metadata associated with the negotiation process. This data can then be used for risk management, resource management and other applications.
The regulatory IM requirements began phasing in from September 2016, initially for the largest dealers only. Each September, the threshold for compliance – based on an aggregate average notional amount (AANA) of non-cleared derivatives – is reset at a lower level, capturing a broader spectrum of firms. Under the global framework established by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions, the AANA will fall to €750 billion in September 2019 and €8 billion in September 2020.
“The negotiation of IM documentation can be time consuming, and with a large number of entities potentially coming into scope of the margin rules in September 2020, this will create a significant compliance burden. ISDA Create – IM is intended to help with this process by enabling firms to negotiate their IM documentation completely online in a digital format, which can then be directly consumed by the collateral management, trade reporting and other systems of the firm,” said Katherine Tew Darras, General Counsel at ISDA.
Doug Donahue, Derivatives partner at Linklaters, says: “Working with ISDA on this global industry-wide initiative is a fantastic opportunity to bring technology to bear on difficult collateral management, legal and business issues faced by some of the world’s largest and most sophisticated institutions. Up until now, the industry has struggled with how to capture and update data in an efficient, consistent and high quality manner – even within in a single institution. But this tool will remove most, if not all, of those issues across the industry, allowing market participants to do more, do it better and at a lower cost.”
He also points out that the tool will have wider applications beyond meeting the initial margin regulations requirements for uncleared derivatives. He says:
“It’s a powerful tool that that can entwine risk management elements into the everyday workflow, ensuring a level of quality control and audit control that just cannot happen to the same degree in the paper world. In addition, the technology allows you to collect very valuable resource management information that can used by market participants for everything from identifying negotiation bottlenecks to determining the size of the team necessary for a project.”
The tool is scheduled for rollout in early 2019, shortly after the publication by ISDA of its next generation IM collateral documentation. ISDA has also mandated Linklaters to act as its global counsel in connection with the industry consultation and drafting of its next generation IM collateral documentation.
Benefits of the tool:
- It will allow firms to automate the creation and delivery of IM documentation, and negotiate and execute IM documentation with multiple counterparties simultaneously. This is all done online while providing flexibility to take one or more of these steps offline if required.
- The system allows standard elections to be made, but also allows firms to customize on a party-by-party basis. There are no restrictions on what parties may agree on a bilateral basis on the platform.
- The system automatically reconciles both standard elections and bespoke provisions exchanged, and flags the differences in an efficient and easy-to-read way.
- It allows parties to embed their standard workflow by allowing approvals of deviations from preferred elections to be requested and recorded through the platform, providing an audit trail.
- The data on the platform is stored digitally, and can be pulled into a firm’s internal systems for storage and/or further use.
- The platform will: i) make the negotiation process more efficient and less time consuming from start to finish; ii) provide powerful commercial, risk management and resource management functions, data and analytics; and iii) remove the need for any post-execution transfer of data from negotiated documentation into internal systems and the chance for error during such a data transfer.
- The platform is being built with the ability to evolve over time as market needs change.
- Other ISDA documents in complementary areas may be added in the future as required by users.
The technology that drives the tool is designed by Nakhoda, Linklaters’ flagship technology and AI platform. Its intelligent design is based around converting linguistic legal data into an enabler for rapid and informed decision-making. It is guided by a sharp focus on fusing emerging technologies with deep legal expertise.
Partha Mudgil, COO of Nakhoda at Linklaters, says:
“This Initial Margin tool is an example of how we are using our legal knowledge alongside Nakhoda to identify opportunities for automation and to design a bespoke and transformative product that helps drive efficiencies and enable data-based insights for our clients.”