Document Digitisation and Digital Transformation: The Derivatives...

Document Digitisation and Digital Transformation:

The Derivatives Technology Agenda

Clive AnsellHead of Market Infrastructure and TechnologyISDA

Akber DatooManaging DirectorD2 Legal TechnologyA

2019 D2 Legal Technology

ISDA® is a registered trademark of the International Swaps and Derivatives Association, Inc.

Workflow tools, ref data sources and code components to drive consistency

ISDA Documentation

ISDA - Delivering Safe, Efficient Markets.


Markets

Often bespoke contracts, clauses, business processes, and data

Many standard legal templates, definitions and best practices for contracts and processes

FpML establishes the electronic protocol for sharing information on, and dealing in swaps, derivatives and structured products.

CSAnalytics

netalytics

ISDA CDM™ is a blueprint for how derivatives are traded and managed across their lifecycle. A single, common digital representation of derivatives trade events.

Data and process standards

2

What is ISDA’s strategy?


•Analysis of ISDA documentation library in context of potential for smart contracts/ automation and publication of Guidelines documents

•ISDA Clause Library project

•Revision of ISDA Definitions (e.g. 2019 Rates Definitions)

•Publication of new documentation templates (e.g. CSAs for non-cleared margin)

Analyse & Standardise

•Develop ISDA CDM to cover standard clauses and processes found in both ISDA documentation and market practices

•Enhance ISDA Create to cover more templates allowing negotiation and storage in digital form (i.e. ISDA CDM format)

•FpML data dictionary and model updated to contain updated definition and documentation terms for use in messaging and ISDA CDM

Digitise

•Publish ISDA CDM in many languages to allow components to be used consistently in all implementations

•Provide ISDA documentation library in many digital formats

•Provide access to ISDA resources and reference data via APIs

Distribute

Building the Foundations for Change -The Next Generation of Industry Standards:

3

ISDA Clause Taxonomy

3rd October 2019

INTRODUCTION

• Legal Documentation is undergoing transformation prompted by business needs, regulatory demands and management of operational risk. It is seeking to take advantage

of technology enablers that are available.

• Nowhere is this more apparent than in the derivatives market.

• The evolution of the derivatives market has been transformed through the innovative creation of the Master Agreement in 1987, which was modified and enhanced in 1992 and 2002.

• Today is the time to optimise the agreements, and create the “ISDA 2020”, leveraging technology which should enable us to better work in terms of business outcomes of the contracts and the details of the contractual obligations contained therein. Through the medium of legal data, this allows stakeholders impacted by the agreements, to optimise business decisions, respond to regulatory reporting requirements and successful operational management.

• The ISDA Clause Taxonomy is, in our view, a foundational building block to, with the industry participation, unlocking this potential.

• This presentation will outline:A. Strategic Legal Technology initiatives;B. ISDA Clause Taxonomy – application and progress; C. Potential use cases of ISDA Clause Taxonomy;D. Conclusion.

A. Strategic

Initiatives

B. ISDA

Clause

Taxonomy

C. Potential

Use Cases

D.

Conclusion

5CONFIDENTIAL2019 D2 Legal Technology

2019 – Whitepapers & Member POCs

Smart Contracts

Automatable and enforceable agreements – enforceable either by legal

enforcement of rights of via tamper-proof execution of computer code.

Main use case in trade (confirmations) > Collateral > Master Agreement.

Requires link to Business Outcomes via CDM and Clause Taxonomy

A. WHAT ARE THE COMPONENTS OF THE LEGAL TECHNOLOGY STRATEGY

CommonDomainModel

ISDACreate

SmartDerivativesContracts

ISDA Clause Taxonomy

ISDA MA01ISDA

MA02ISDA MA03

Ph.1.1 – comp. 12/18 (5 cl)Ph 1.2 – comp. 05/19 (12 cl)Ph.1.3 – start 06/19 (30+ cl)

Present: v2.0 (released March 2019)

CDM

Common Domain Model is a blueprint for how derivatives

are traded and managed across the lifecycle. These

transactions sit under the ISDA Master Agreement (and

any related collateral arrangements).

This connectivity is critical to its success & achieved

through “business outcomes” focus of the Clause

Taxonomy.

Feb 2019 Initial Margin rolled out

L-2019/E-2020 ISDA Master Agreement

2020+ Bilateral Regulatory Agreements

2020+ Legal Opinions

Doc Generation Tools/Negotiation/Management

Applications e.g. ISDA Create, MarginXchange, Exari

require clause language (ideally, standardised via a

clause taxonomy), such as the

ISDA Clause Taxonomy to achieve standardisation of

language and business processes.

The success of these relevant tools is predicated on

using pre defined terms i.e. the clause taxonomy.

A. Strategic

Initiatives

B. ISDA

Clause

Taxonomy

C. Potential

Use Cases

D.

Conclusion

62019 D2 Legal Technology

https://www.exari.com/

B1. THE CLAUSE TAXONOMY ANATOMY

Termination Currency

Clause Taxonomy for:

Business Outcome

Business Outcome

Business Outcome

Business Outcome

TerminationCurrency

Automatic Early Termination


Business Outcome

Business Outcome

Business Outcome

Business Outcome


Credit Event Upon Merger


Business Outcome

Business Outcome

Business Outcome

Business Outcome

Credit EventUpon Merger

Payment Netting


Business Outcome

Business Outcome

Business Outcome

Business Outcome

PaymentNetting

Set Off


Business Outcome

Business Outcome

Business Outcome

Business Outcome

Set off




Payment Netting

Set Off

Institutions have historically negotiated ISDA Master agreements adopting their “house style”. Accordingly, language has diverged

and yet in many cases the intended business outcome is intended to be identical. This programme is evaluating variants by

reference to their business outcome. A Proof of Concept was done in 2018 for 5 clauses and now a further 11 clauses have been

completed, the remainder are work in progress.

A. Strategic

Initiatives

B. ISDA

Clause

Taxonomy

C. Potential

Use Cases

D.

Conclusion


B2. CLAUSE TAXONOMY

ISDA Master Agreements

V1

V2

V3

V4

V2 V3 V4

V2 V3 V4



ClausesClause Variants

(by Business Outcome)

V1 V2 V3 V4

Credit Event Upon Merger V1

Payment Netting V1

V1 V2 V3 V4

ISDA MA04

V1

ISDA MA01

ISDA MA02

ISDA MA03

V4

V1

V2

V4

V4

V1

V3

V1

V2

V3

V3

V4

V3

V1

V2

V2

V2

V4

V3

8

• This process should enable you to derive the component parts of the ISDA Master

agreements.

• V1 Termination Currency + V2 Automatic Early termination + V3 Payment netting, etc.

A. Strategic

Initiatives

B. ISDA

Clause

Taxonomy

C. Potential

Use Cases

D.

Conclusion

Set off

V1 V2 V3

V2

V3

V1 V1

V4

V3

V2

V1

V4

V4

V4V3

V3

V2

V2

CONFIDENTIAL2019 D2 Legal Technology

Legacy Contracts & Agreements

New Contracts & Agreements

Recategorise




Payment Netting

Set Off

Business Outcome

Business Outcome

Business Outcome

Business Outcome

ISDAMA32

Business Outcome

Business Outcome

Business Outcome

Business Outcome

Business Outcome

ISDAMA12

Business Outcome

Recategorised LegacyContracts & Agreements

DataAnalytics

Legal Agreement Review Tools

Regulatory Reporting

Legal Agreement Data Models

Efficient Outcomes

Driven Negotiation

ISDA Create

Regulatory/ Market Change Management

Aligning Business

Processes

Firms need to accept that a rationalised contract framework with more harmonised data and finite variants, is a launchpad to more efficient and safe markets – hanging on to the” house

view “will perpetuate historical challenges.

B3. VALUE OF THE CLAUSE TAXONOMY A. Strategic

Initiatives

B. ISDA

Clause

Taxonomy

C. Potential

Use Cases

D.

Conclusion


B4. AN EXAMPLE - TERMINATION CURRENCY CLAUSE

FreelyAvailable

Condition?

Stated CCY per Party, Fallback CCY if two Affected Parties

Stated CCY, Fallback CCY if Stated CCY Not Freely Available

Stated CCY

CCY Selected by Non-defaulting Party/non Affected Party, Fallback if two Affected Parties cannot agree




FreelyAvailable

Condition?

FreelyAvailable

Condition?

TerminationCCY is Party

Specific?

Pre-agreed single termination

CCY?

No

Yes

No

Yes

TransactionCurrency

Condition?

Variant 4

Variant 2

Variant 1

Variant 3


Business Outcome

Business Outcome

Business Outcome

Business Outcome

TerminationCurrency

A. Strategic

Initiatives

B. ISDA

Clause

Taxonomy

C. Potential

Use Cases

D.

Conclusion


B5. ISDA CLAUSE LIBRARYA CLAUSE LIBRARY IS FOUNDATIONAL TO SAFE, EFFICIENT MARKETS

June 2018RFP issued for Clause Library

September 2018Vendor engaged to deliver initial 5 clauses, taxonomy

and strategy paper

Oct 2018 to Jan 2019Initial 5 clauses analysed

Strategy Paper and Taxonomy completed

Q1 / Q2 2019Productionisation of

clause analysis

ISDA Master Agreement


Phase 1.1Initial 5 clauses

300Legal Tech

WG Members

40+Working Groups

>

50,000Clauses

Analysed

126Member samples provided

36Member entities

attending

>3000Agreements

Reviewed


2019Completion of ISDA Master

Agreement Clause Library and integration into member toolkits

Key insights from initial phase and Strategy Paper:• Members have

recognised the value and potential benefits of structured data

• Recognition that the benefits of a reduced list of variants could outweigh the benefits of optionality that banks have historically prioritised “the house view”

• Opportunity to connect with ISDA Create, risk and operational toolkits


A. Strategic

Initiatives

B. ISDA

Clause

Taxonomy

C. Potential

Use Cases

D.

Conclusion

Collateral

Funding & Liquidity

Risk

Legal

Trading

Data Analytics

Change Management

Common Domain Model

Document Creation • Template management

• Approval management• Negotiation• Storage

Data Consumption/

Operationalisation

• Optimise business• Regulatory

reporting• Risk and

operational management

• Use of the Clause Taxonomy to manage Regulatory and Market Change.

• Ability to assess portfolio implications of key document variants.

• E.g. How many agreements have “Termination Currency” variant 1 vs variant 2. What does this mean?

• Client Onboarding

• Optimise Business Decisions

• Regulatory reporting, QFC and BRRD

• Market Stability

Smart Contracts /

DLT

Clause Taxonomy

Dashboard

Document enhancement may be required to effect changes.

C1. CLAUSE TAXONOMY - “A UNIVERSAL SOCKET’’A. Strategic

Initiatives

B. ISDA

Clause

Taxonomy

C. Potential

Use Cases

D.

Conclusion


+

+

Ban

krup

tcyV

ariant 1

Netting Engine

Product Type

CP Type

CP Jurisdiction

Legal Opinions

Netting Outcome

Documentation certainty provided by Clause Taxonomy• One of the core clauses that will be

prioritized in the next phase is Bankruptcy

• For netting analysis, a combination of clauses including Bankruptcy need to be evaluated

• Provided that key components of the agreement are in a predetermined format , then this aspect of netting analysis can be streamlined

Simplifying netting analysis

• Netting analysis relies on a number of relevant components.

• The Clause Taxonomy will help to provide documentation certainty

• In future, it is reasonable to assume that a local legal opinion could provide an opinion based on ISDA 92 that has Variant 1 language

Why bother?

• Organizations are often inefficient in their netting analysis

• This approach can avoid analysis of each contract

• Reduces operational risk• If variables change, you can

potentially analyse implications more effectively

C2. THE POTENTIAL IMPACT OF THE CLAUSE TAXONOMY

op BANKRUPTCY / NETTING

A. Strategic

Initiatives

B. ISDA

Clause

Taxonomy

C. Potential

Use Cases

D.

Conclusion



Credit Downgrade• These Additional Termination Events

are amongst the most negotiated clauses in the contract with many variants.

• Our hypothesis, however, is that the desired outcomes are very few and can be codified effectively through a tabular format.

Example• Here are described 3 potential

variants that are currently widely employed.

Why Bother?• The downstream operational impact

of structured data can be immense• Much more efficient negotiation• Easier digestibility with broad

stakeholder group• Less Operational risk

Bank Client

S & P Moody's S & P Moody’s

<BBB-

<Baa3 <BBB- <Baa3

Bank Client

S & P Moody’s

<BBB- <Baa3

Bank Client

S & P

<BBB-

Variant 1

Bilateral/below BBB-/two agencies

Variant 2

Unilateral/below BBB-/two agencies

Variant 3

Unilateral/below BBB-/one agency

Liquidity

RISK

Funding

Legal

RegulatoryReporting

XVA

An

alytics

C3. THE POTENTIAL IMPACT OF THE CLAUSE TAXONOMY –

ATE CREDIT DOWNGRADE

A. Strategic

Initiatives

B. ISDA

Clause

Taxonomy

C. Potential

Use cases

D.

Conclusion



• Historically it has been difficult (and very manual) for firms to manage legal data systematically.

• The ISDA Clause Taxonomy is a foundational building block towards a broader strategic agenda which can take

legal data and integrate into business workflow.

• Its success is predicated on member participation.

• This member participation should comprise multi-disciplinary skillsets (e.g. Legal, Docs, XVA, Business, IT, etc.).

• The Clause Taxonomy is a “Universal Socket” that can enable streamlined front to back processes.

• Successful implementation can enable enhanced:

• Document generation;

• Document tracking;

• Negotiation;

• Business Decision-making and Reporting

• Business Process and Change Management;

• Data Analytics; and

• Transparency

D1. CONCLUSION

A. Strategic

Initiatives

B. ISDA

Clause

Taxonomy

C. Potential

use cases

D.

Conclusion


• How could this initiative potentially impact the

multidisciplinary roles across the organisation

including:

• Legal, Business, Collateral, XVA,

COO, IT, Compliance, Documentation

etc.?

• What other use cases for this structured data could

be envisaged?

• How could this drive for more structured data impact

in–flight strategic initiatives?

• Is it realistic to conclude that the industry will

coalesce around core variants and then adopt

across front to back workflow?

• If this virtual “2020 ISDA” is completed in 2020, how

long could it take to plumb into the Legal

documentation ecosystem and begin to derive

benefits?

• Has you got all the right stakeholders engaged in the

programme?

D2. QUESTIONS TO CONSIDER

A. Strategic

Initiatives

B. ISDA

Clause

Taxonomy

C. Potential

use cases

D.

Conclusion


Akber Datoo

Managing Director

+44 (0)203 070 2266

[email protected]

Peter Newton

Chief Operating Officer

+44 (0)7879 873899

[email protected]

D2LTCONTACT US

Jason Pugh

Managing Director

+44 (0)7792 006740

[email protected]

Larry Dobosh

US Lead

+914 525 5605

[email protected]

17

Rachel Scanlon

APAC Lead

+61 449 955 044

[email protected]

mailto:[email protected]





ISDA CDM™

Clive AnsellHead of Market Infrastructure and TechnologyISDA


https://www.isda.org/2018/11/22/isda-cdm-factsheet/

Why the ISDA CDM™ ?

ISDA CDM is a machine-readable and machine-executable data model for derivatives products, processes and calculations.

The objective of ISDA CDM is to standardise how derivatives are traded and managed through their lifecycle.Reducing costs associated with current manual processes, especially in:• trade affirmation and trade management,• collateral management,• regulatory reporting,• reconciliations,• exercises and settlements,• portfolio compression,• novation and transfers.

ISDA CDM is provided in several languages to aid deployment on many new and existing technology platforms.

• Derivatives market participants are looking at ways to reduce costs and improve the efficiency of back-office processes.

• An opportunity exists to create standards that support innovation and promote the adoption of new technologies.

• ISDA has a 30-year track record in developing industry standards.

Opportunity

• Over time, each firm has established its own systems and its own unique set of representations for data, events and processes that occur during the life of a trade.

• This has no commercial advantage. On the contrary, it results in firms continually reconciling their trades – a big drain on resources. It also curtails the potential for greater automation, resulting in increased operational risk.

• New technologies offer the potential for greater automation and efficiency, reducing complexity and costs. But effective automation can only be built on standardisation…

Catalyst


19

https://www.isda.org/2018/11/22/isda-cdm-factsheet/

ISDA CDM 1.0

•Products:

•Vanilla CDS and interest rates swaps and option

•Calculation code:

•One day-count fraction for interest calculation

•Events:

•11 basic lifecycle events

ISDA CDM 2.0

• Products:

• A complete representation of interest rate and credit derivatives products and an initial representation of equity swap products

• Calculation code:

• A complete representation of the most commonly used ISDA-defined day-count fractions, and the fixed amount and floating amount calculations, represented as machine executable ISDA definitions.

• Events:

• A representation of a comprehensive set of 20+ lifecycle events on derivatives products, such as allocation and clearing, with associated lineage features for traceability purposes.

• An initial representation of the ISDA Credit Support Annex for initial margin.

• A comprehensive set of examples, implementation components (including apps to convert external data to CDM form, calculate interest amounts and establish lineage between sets of events), and documentation. These all facilitate CDM on-boarding by market participants and technology firms.

The ISDA CDM 2.0 is the full version of the ISDA Common Domain Model for interest rate and credit derivatives, made available to market participants and technology providers to adopt, implement and deploy in their own projects.

This version of the CDM is open to all market participants under an open license, allowing firms to use the model without charge. (Available here: https://portal.cdm.rosetta-technology.io/#/login)

What is the ISDA CDM™ 2.0 ?


20

https://portal.cdm.rosetta-technology.io/#/login

https://portal.cdm.rosetta-technology.io/#/login

• ISDA CDM enables interoperability between systems/services, removing burden of setting up connections to different systems/entities, laying groundwork for STP.

• E.g. collateral management:A CSA shared with two collateral management systems, in different parts of the collateral process. If data + processes are defined in ISDA CDM, it allows for portability and easy interchange of information.

Enhance interoperability & straight through processing

• ISDA CDM promotes transparency and alignment between regulatorsand market participants.

• E.g. regulatory obligations, such as reporting* or stress testing, could be met by specifying via code that certain CDM components or data should be collected in a certain way. This will drastically improve fidelity and integrity of regulatory outcomes.

Deliver better regulatory oversight

• ISDA CDM will speed up development of new solutions for the market by allowing providers to focus on what they specialize in – the technology – rather than requiring them to interpret and represent market events and processes individually. The resulting technology solution will also be interoperable with other offerings which are using ISDA CDM.

Creates an environment for innovation in financial markets

What can the ISDA CDM™ do?


21

Bank

Co

nsisten

t Ind

ustry

Imp

leme

ntatio

n o

f LifecycleClient

New trade

Increase

Reset

Maturity

LIFECYCLE

Venue

ClientBank

Venue

New trade

Increase

Reset

Maturity

LIFECYCLE

Each

par

ty c

aptu

res

and

pro

cess

es

the

trad

e a

nd

life

cycl

e in

th

eir

ow

n w

ay

ISDA CDM drives efficiency and reduces reconciliation in trade lifecycle


22

Map of Trading Scenarios

Reporting Sample per Scenario

Dealer X

Dealer Y

Every industry participant left to implement their own version based on interpretation of artefacts

Loss of inter-operability between solutions

Pervasive reconciliation issues and other operational inefficiencies

INDUSTRY PARTICIPANTSImplement their own solutions based on individual interpretations

Vendor Z

Example Artefacts:

REGULATORS & TRADE ASSOCIATIONSPublish rules and develop best practices

Resulting in fragmented and inconsistent implementations & operational Inefficiencies

How does the market implement regulation today?


23

INDUSTRY PARTICIPANTSImplement the same code in their solutions

REGULATORS & TRADE ASSOCIATIONS

Directly operational output (software)

Eliminates reconciliation issues by promoting a single interpretation of regulation as code

Enables inter-operability of solutions

Map of Trading Scenarios

Reporting Sample per Scenario

Example Artefacts:

Dealer X

Dealer Y

Vendor Z

Co

nsisten

t Ind

ustry Im

plem

en

tation

sHow can the market implement regulation with ISDA CDM?

Digital Regulatory Reporting (DRR)


24

Guidelines outlined under BCBS/IOSCO and Basel III were translated by each regulatory regime spearheading collateral management as a key function in capital markets for both bilateral and cleared OTC. Compliance has increased processing volumes significantly and will continue to do so, the need for automation in collateral management processing. The industry is faced with many challenges which has led to fragmented implementations and operational inefficiencies.

Let’s focus on challenges in collateral management today


Broker/ Dealers

Buy Side

Vendors

Every industry participant left to implement their own version

Loss of inter-operability between solutions

Pervasive reconciliation issues and other operational inefficiencies

INDUSTRY PARTICIPANTS

Calculation DependenciesMargin MonitoringMargin Allocation

DocumentationCollateral Segregation

Establishing Custody AccountsEligibility Schedules

Risk ControlOptimisation

Regulatory Compliance Reconciliation

Dispute ManagementEfficient Settlement

Custodians

25

Let’s focus on CDM Collateral management work to date


Counterparty X

Counterparty Y

Custodian

Common Domain Modelfoundations for

“ Standardised Digital Documents”

CSA represented in a standard format in collateral systems

Enable solutions inter-operability Eliminate reconciliation issues Interoperabilty

ISDA CSA IM 2016 Japanese Law

ISDA CSA IM 2016 New York Law

ISDA CSA VM 2016 New York Law

ISDA CSA IM 2016 English Law

Co

nsisten

t Ind

ustry R

epresen

tation

ISDA Collateral Documentation is currently in place within CDM, each documentation type is represented by a standard set of data points. ISDA is currently working with the industry with STP from digital document negotiation platforms into collateralmanagement platforms using standardised formats.

Vendors

26

ISDA would like to know from membership your views and ideas to develop the CDM further to assist in collateral management challenges and priorities?

What is next for ISDA CDM™ Collateral initiatives?


Additional ISDA collateral documentation

Collateral eligibility asset type expansion

Margin call workflows

Custodian documentation

Custodian checklists / KYC processes

MTM an IM Dispute reconciliation standards

Collateral instruction and settlement efficiencies

Broader scope of documentation improved negotiation time

Improved end to end margin call and substitution workflows

Adherence to regulatory requirements and deadlines

Settlement across multiple platforms

Improved dispute management

Timely and efficient settlement

ISDA can see potential collateral related developments in CDM focusing on the following:

27

Already planned additional enhancements include:

o A full model for data and processes within collateral agreements, which will integrate the ISDA CDM with ISDA Create and other collateral services. ISDA Create is a new platform that allows users to negotiate and execute ISDA documentation online.

o An expansion in product scope to cover:• Forwards and the foreign exchange asset class,• Equity asset class (equity/portfolio swap products initially),• Securities for collateral exchange and financing transactions,• Basic commodity products (contingent on use cases).

o Further integration of ISDA CDM with technology providers working on solutions for financial markets.

o Implementation of other reporting rules to demonstrate power of ISDA CDM to improve data quality and remove interpretation risk in regulatory implementations.

What next for ISDA CDM™ ?


28

https://www.isda.org/2019/01/31/isda-and-linklaters-launch-full-version-of-isda-create-im/

Where to find out more

• Major upcoming events:

• DerivHack 2019 (Oct 16th and 17th in NYC, LDN & SGP)(contestants using ISDA CDM to tackle use cases for securities and collateral)

• ISDA Technology Forum (Nov 6th)(panel on post trade tech + CDM Implementers)

• Singapore Fintech Festival 2019 (Nov 11th -13th)(live demos from firms who have used CDM)

• Contact ISDA:• Clive Ansell – Head of Market Infrastructure and

Technology• Ian Sloyan – Director, Market Infrastructure and

Technology• Ciarán McGonagle - Assistant General Counsel

• Please direct questions/ comments to ISDA via the ISDA Market Infrastructure and Technology mailbox [email protected]


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Document Digitisation and Digital Transformation: The Derivatives...

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Transcript of Document Digitisation and Digital Transformation: The Derivatives...