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1THUNDERHEAD.COM: Trade Documentation Solutions

THUNDERHEAD.COMTrade Documentation Solutions

THUNDERHEAD.COM: Trade Documentation Solutions 2

Automating trade documentation processes has long been a challenge for financial market participants looking to increase rates of straight-through-processing (“STP”) and reduce operating costs. Emerging regulation for the over-the-counter (“OTC”) derivative markets demands even greater controls for pre- and post-trade documentation.

Thunderhead.com have responded to market demand and technology trends by developing an innovative cloud-based Software-as-a-Service (“SaaS”) model that provides their clients with a product roadmap that will reduce costs, promote greater operating efficiencies and controls and provide solutions to ongoing regulatory requirements through a utility-based workflow.

In this paper, Sapient Global Markets consider the benefits of the Thunderhead.com roadmap and explore the challenges it must overcome to achieve requisite successful product adoption.


CONTENTS

Introduction 4

Product Vision 5

Technical Feasability 9

Conclusion 10


Against a backdrop of increased regulatory scrutiny and budgetary constraints, participants in the OTC derivative market continue to seek ways to address the high cost and low automation levels associated with the paper trade documentation lifecycle.

Whilst paper volumes have decreased in the last five years (the OTC market saw a 39%1 increase in electronic trade volume between August 2006 and December 2011), overall trade volumes are still over 30,000 trades per month for G152 firms, proving that there is still a significant population of trades that require paper documentation.

In parallel to a drive for greater efficiency, global regulators are striving for more transparency within financial markets, with G20 commitments requiring a greater degree of product, process and legal standardisation for OTC derivatives. The result of these combined efforts is that, in spite of the steady climb in the level of market standardisation, firms are still faced with maintaining a greater operational support cost. This was evidenced by the 2011 ISDA Operations Benchmarking Survey which juxtaposed an increase in automated processing alongside significant growth in the ratio of Front Office to Confirmations resource3.

A scenario where paper volumes are falling and operations headcount rising suggests a critical lack of automation within the operational paper trade processing function. This observation is supported by recent figures from ISDA that show averages for both confirmation generation and matching still at 50% or below4.

With market participants under greater scrutiny to reduce their discretionary infrastructure spend (capital market firms’ budget for maintaining their own technology hardware has reduced by 47% in 20125), and regulations continuing to require further processing efficiency, organisations must consider how they can insulate themselves against additional headcount and infrastructure costs.

High costs and lack of automation for trade documentation is not a new problem and industry service providers have long considered a delivery model to provide a centralised solution to the paper workflow. Such a service could enable online collaboration for paper documentation workflow and allow participants to share the cost of ownership and maintenance of a central infrastructure. Traditionally, the upfront costs and user adoption challenges of such solutions have been a deterrent and, despite the obvious benefits, there remains no central market utility for paper trade documentation processing.

Thunderhead.com have recently announced a long-term strategy to transition its documentation and communication service to a cloud-based Software as a Service (“SaaS”) model. The evolution of the platform will follow a practical roadmap towards a central market infrastructure that would, in essence, provide its clients with a single environment to create, execute and manage all of their trade and relationship documents in a manner that meets emerging regulatory requirements, can yield greater operational efficiencies and an overall reduction in costs.

Ultimately, the success of a trade documentation SaaS offering will largely be determined by market adoption which is driven by (i) the benefits associated with the product vision and (ii) underpinned by the feasibility of the technical solution. In this document Sapient Global Markets, will consider these two specific challenges to ascertain whether the evolution of Thunderhead.com represents a legitimate and compelling solution to today’s trade documentation challenges.

INTRODUCTION


Thunderhead.com is a documentation and communication platform currently used by 14 of the G15 investment banks and large energy and commodities houses. The broadly adopted Thunderhead NOW software enables users to generate cross-asset trade documentation for both paper and electronic channels, such as DTCC / FpML, ICE and EFET. All instances of the software are locally installed and subsequently maintained on premise at the client.

Recognising the high cost and low automation levels of the paper trade workflow, Thunderhead.com is launching their ONE-Platform, a SaaS facility that will enable cross-industry document collaboration across all market participants (dealers, buy-side and legal firms). The service is intended to support the full documentation lifecycle through the drafting, negotiation and approval of trade and relationship documents.

As with the introduction of any new market utility, successful integration of the product will be dependent on securing a broad client adoption. In assessing the ability of Thunderhead.com to engage that critical mass, we have identified the following key determinants of success:

• Can it reduce costs?—will a move to the Thunderhead.com ONE-Platform reduce operational expenditures for the user?

• Will it improve operational efficiencies?—will the ONE-Platform improve operational performance for the paper documentation processing workflow?

• Can it provide a solution to regulatory requirements?—will the Thunderhead.com product roadmap provide a solution to the long-term problems of ensuring compliance with regulatory requirements around transactional and pre-trade documentation?

Can it Reduce Costs?The first step in the Thundhead.com product development will be the transition of users to a SaaS operating model. The infrastructure diagram in Figure 1 demonstrates the transition away from locally hosted instances of the Thunderhead.com platform that firms maintain into a central environment.

Since there are clear and tangible benefits associated with cloud-based technology, Thunderhead.com is targeting a move to a SaaS model as a way of achieving:

• A reduction in the total cost of ownership (“TCO”) for operating their solution of up to 20% per annum. This estimate will be dependent on the scope of implementation and usage.

• On demand capabilities provided in the SaaS model for which users are charged per-service adopted.

• A significant reduction (typically 70%+) in the time to market for the creation and management of trade documentation and an associated reduction in IT spend.

• Shared cost of application maintenance across multi-users and a removal of the need to own and operate individual hardware.

PRODUCT VISIONCan it reduce costs, introduce efficiencies and improve controls?


Will it Improve Operational Efficiency?The current bilateral negotiation process around both trade and pre-trade documentation includes a certain amount of control risk. In effect, the operational performance of firms is governed by that of their counterpart so providing access to centrally maintained and pre-built industry-standard documentation templates via a product utility could enhance the efficiency of the paper review process.

Recent studies have demonstrated a rise in the adoption of cloud technology for business operations amongst buy-side investment management companies6. The prevalence of adoption amongst these firms suggests that the buy-side counterparts recognise the benefits of cloud technology as a long term progression for financial application hosting. Additionally, the target of an improved level of business efficiency remains the key driver for a move to SaaS technology7.

Given the regulatory scrutiny that financial market firms are under, utility adoption will be largely governed by the extent

to which any central platform can provide stringent security controls around its role as a custodian of customer data.

Thunderhead.com have developed their SaaS solution in accordance with industry security best practices and the infrastructure has been architecturally designed to meet the major PCI-DSS and ISO27001 compliance standards.

Figure 2 represents the Thunderhead.com infrastructure evolution towards a central document collaboration service. In addition to the PDF generation of trade documentation, any such central collaborative environment should provide users with a trusted source record that can preserve structured data and documents in an electronic (XML) format. Thunderhead.com will deliver market infrastructure where users can collaborate on a single source of truth record and in turn, provide those users with secure access to that XML structured data so it can be seamlessly and consistently integrated into downstream collateral, pricing and risk systems.

Figure 1 – Phase 1 – Move to a SaaS Model


Central document collaboration will also enable a full audit trail from the point of inception through the entire trade document life cycle. The new collaborative service will be able to provide ongoing analytics-based visibility of the complete documentation process which should help industry users understand how templates are being used within the central system and where the market is deviating from the standard—and why.

Can it Provide a Solution to Regulatory Requirements?Industry regulators are committed to driving market standardisation and bringing transparency and accountability to capital markets. There are a number of regulatory requirements associated with the full trade documentation lifecycle:

Pre-Trade relationship DocumentsThe Dodd-Frank Act and the European Market Infrastructure Regulation (“EMIR”) requires that clearing brokers must enter into separate legal agreements with a central counterparty (“CCP”). Each CCP will require a separate set of membership documentation that users will need to negotiate. The industry is mandating a move to an electronic representation of a Standardised Collateralised Service Agreement (“SCSA”). Central maintenance of pre-agreed template documentation would provide platform users and invited clients access to standard terms definitions.

Figure 2 – Phase 2 – Move to Document Collaboration


Pre-trade or “relationship” documentation covers Legal Master Agreements (ISDA, as well as local agreements such as Rahmenvertrag, AFB, Swiss Master); Credit Support Annex and Portfolio Swap Agreements, as well as any Client On-boarding or Credit Risk documentation. As noted above, industry drivers around these documentation types would include the move to a Standardised Collateralised Service Agreement. There is scope for a central collaboration tool to support the negotiation and introduction of such standard templates. At present, upon ratification, firms are required to adopt templates and definitions independently within their own systems infrastructure. The SaaS utility could enable immediate and consistent access to that standardised documentation for all platform users.

Transactional DocumentsUnder the Dodd-Frank Act, the CFTC Pt. 75 FR 81519 (Confirmation, Portfolio Reconciliation and Portfolio Compression) all Swap Dealer (“SD”) and Major Swap Participant (“MSP”) trades are to be confirmed on T+0. Given the high transactional volume per full-time equivalent (FTE) statistics and current cross-asset performance for confirmations outstanding, firms will likely need to undertake large-scale process and/or FTE resource changes to ensure compliance.

In addition to trade confirmations, OTC transaction data can include Term Sheets, Broker Notes and Post Trade Event Documentation, such as trade increases, terminations, corporate actions and novations. Outside of the OTC space, there would be regulatory drivers associated with Securitised Documentation (including Securitised Term Sheet, Final Terms Prospectus, and Listing Documentation) and Fund Manager Documentation, (including: Key Investor Information Document (UCITS – Regulated Fund)) against which users must be compliant.

As introduced earlier, a central collaborative utility could help industry participants bring together and rationalise trade flow across operational, business and legal functionality. There are a number of avenues whereby the scope of a document collaboration tool could be expanded so as to encompass multiple business opportunities. One such example is the regulatory reporting of swap data. Regulatory bodies are striving to obtain more accurate transaction level data within an increasingly aggressive

timeframe. The Dodd-Frank Act alone introduced 29 rules to provide this transparency to the OTC market.

Under the Dodd-Frank Act (Pt.45), all SD and MSPs will need to submit confirmations to the Swap Data Repository (“SDR”) within 24 hours. Furthermore, 180 days after compliance, the CFTC has stated that all paper confirmations must be submitted electronically. For confirmation submissions, regulated participants users must submit (either directly or via a third party middleware) a PDF version of the document (with an electronic wrapper for the purpose of linking to previously electronically submitted Real Time and Primary Economic Term data) to the SDR. Those users must submit that confirmation record in a full electronic version. The central Thunderhead.com platform will generate an XML version of the trade confirmation and, as such, there is scope for the platform to transform that XML message to SDR compliant FpML (FpML version 5.3) and submit it on behalf of the reporting party to satisfy the 180 day post compliance ruling.


The use of cloud technology within the financial markets is growing in popularity as more institutions begin to recognize the flexibility and cost-cutting advantages of this alternative central data infrastructure. SaaS is a delivery model through which cloud computing can be deployed and whereby software and its associated data are centrally hosted and accessed via the web.

SaaS technology has already been successfully embedded in other market sectors. Google Docs and Salesforce.com are two examples where SaaS technology has been successfully adopted allowing firms a secure, real-time connection with their users and employees. There has been adoption within capital markets also, with industry utility providers, such as CME ClearPORT OTC Data On-demand and NYSE Euronext Capital Markets Community Platform, successfully adopting a cloud-based SaaS model. As with any technological solution, growth and adoption will always increase as more strategic opportunities emerge.

There has been a natural progression to a SaaS architecture and the benefits of this form of technology are well documented: • SaaS technology offers users on-demand application

software which provides central data storage that is accessible remotely and eliminates the need to physically install hardware.

• System capabilities can be accessed on a pay-per-use model. Users can reduce their capital expenditure requirements by only paying for actual system resource usage and tailor their use of services in line with operational budgets.

• Cloud technology enables ease and speed of deployment giving utility users access to the latest software updates in line with any amendments to market regulations and compliance.

• Multi-tenancy enables the sharing of pooled resources and costs across a number of users.

However, the adoption of SaaS technology within financial services is not without challenges: • There are concerns around the security and privacy of

data in the cloud-based environment. In an increasingly scrutinised regulatory market, any loss of data or compromise of data could lead to reputational or financial implications for the platform user.

• IT users may also be concerned about the availability of applications hosted on the cloud-based SaaS model and the impact of any system outage.

• Any SaaS environment would need to demonstrate

scalability and flexibility and adapt to client demands with respect to functionality supports. Users would need to develop interfaces to access the utility services and if the user needs to shift to another cloud-based vendor, the cost of switching interfaces could negate the advantages of moving to a SaaS model in the first place.

If financial service firms can leverage the successful integration of cloud-based SaaS technology from other market sectors, adoption of the model within this market could truly be a natural progression. Given the regulated demands and user sensitivity around data accuracy and timeliness, it is key that resilient security measures can be provided by any vendor. If this assurance around being a custodian of confidential client information can be provided, more and more organisations within the financial services market should be able to reap the benefits of speed, agility and potential cost savings that the service can provide.

TECHNICAL FEASIBILITYIs it as (or more) secure, stable and performant as my existing infrastructure?

The U.S National Institute of Standards and Technology (NIST) defi nes cloud computing as “a pay-per-use model for enabling available, convenient, on-demand network access to a shared pool of confi gurable computing resources (e.g., network, servers, storage, applications and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.”


If firms are going to insulate against the regulatory challenges of improved processing efficiencies, investment in the automation of the paper documentation workflow would seem inevitable. As efforts to standardise the financial markets continues at a pace, there is a clear need for a more streamlined and cost-effective solution. If the Thunderhead.com ONE-Platform can achieve mass user adoption, this central infrastructure utility could provide an agile and scalable solution to the current market challenges of cost, control and compliance.

Cloud-based SaaS technology is a natural progression for financial service firms to adopt and we are seeing a growing uptake of this technology within capital markets. Though providing assurance over the security of customer data will remain a principal barrier to overcome, the successful integration within other market sectors should provide a blueprint for those within the financial markets to benefit from the potential cost savings, speed and flexibility of the SaaS deployment model.

A lack of automation in the paper documentation workflow is not a new problem. However, high up-front capital expenditure and time to market have impeded the creation of a central utility solution. Thunderhead.com are targeting a significant 20% TCO reduction through a transition to a central SaaS utility and an additional 70% reduction in the time to market for the creation and management of trade documentation and templates. Central collaboration can provide a move away from the current model of processing operational, business and legal documentation in silo. In turn, this can offer improved efficiency and effectiveness of those inter-business processes and may provide an additional reduction in operational support costs.

The Thunderhead.com utility would provide a secure and stable environment on which users can collaborate on the documentation lifecycle. Access to a single version of software and standards around the paper workflow not only helps negate bilateral negotiation control risk, it also provides greater certainty around the information that firms are feeding back into their respective downstream systems.

Thunderhead.com have demonstrated flexibility within their product roadmap which could help firms in their response to regulatory challenges in the pre-trade, transaction and reporting workflows. Collaboration on the ONE-Platform will give users access to structured XML data for all trade lifecycle documentation. This automation of information access is key as firms look to respond to the regulatory demands of more accurate and more timely data provisioning.

Thunderhead.com have the opportunity to penetrate across dealer, buy-side and legal communities with this product offering. Mass adoption from those client segments can further drive down the shared cost of infrastructure maintenance but also allow the evolution of the utility to meet the growing needs of that broad client base. Engaging those clients now is vital. Shaping product development in response to client demand is key for any utility provider looking to embed themselves as market practice. Pro-actively forming industry partnerships to help foster the growth of the utility will go a long way to establishing the Thunderhead.com ONE-Platform as a recognised solution in streamlining the paper trade documentation lifecycle. To provide further details around the intended product development roadmap and the assurances around the security and scalability of the system, Thunderhead.com is inviting firms to define a tailored business case to guide their prospective use of the ONE-Platform. For more information, please contact Michael Robertson ([email protected]) and Jude Bly ([email protected]).

CONCLUSION


Footnotes1 Percentage not volume weighted – figure is electronic trade volume as a percentage of total volume across the credit,

equity and rates markets between August 2006 and December 2011

2 G15 refers to the group of 15 global investment banks that committed to a series of commitment letters to the regula-tory community that typically represents a majority portion of market activity for OTC derivatives

3 Source: 2011 ISDA OBS Survey. Interest rate derivative = 3.8 (3.3 in 2010); Credit derivatives = 3.8 (3.4 in 2010)

4 Source: 2011 ISDA OBS Survey. Average for Confirmation generation is 50%; Average for Confirmation matching is 45%

5 Source: TABB Group, Reinventing Capital Markets Infrastructure, April 2012

6 Source: Eze Castle Integration. Of 125 hedge fund and investment management firms surveyed, 79% of respondents are currently using cloud-based technology

7 Source: Forrsights Software Survey, Q4 2011. 72% of respondents suggested that “improved business agility” was the most important factor in their move to SaaS technology

About Thunderhead.comThunderhead.com is the leading provider of Capital Markets industry solutions for automating the complete trade documentation life-cycle, meeting the demanding requirements for highly complex OTC trades, including both financial and physical commodities. Used by 14 of the G15 global derivatives dealer institutions, Thunderhead.com is the de facto standard for OTC trade confirmations and term sheet generation. Thunderhead.com solutions are available as cloud-based SaaS services or as on-premise enterprise software.

Thunderhead.com is headquartered in London (UK), and services its global customer base from offices located in North America, Europe and Asia Pacific.

For more information visit thunderhead.com

About Sapient Global MarketsSapient Global Markets, a division of Sapient® (NASDAQ: SAPE), is a leading provider of services to today’s evolving financial and commodity markets. We provide a full range of capabilities to help our clients grow and enhance their businesses, create robust and transparent infrastructure, manage operating costs, and foster innovation throughout their organizations. We offer services across Advisory, Analytics, Technology, and Process, as well as unique methodologies in program management, technology development, and process outsourcing. Sapient Global Markets operates in key financial and commodity centers worldwide, including Boston, Chicago, Houston, New York, Calgary, Toronto, London, Amsterdam, Düsseldorf, Geneva, Munich, Zurich, and Singapore, as well as in large technology development and operations outsourcing centers in Bangalore, Delhi, and Noida, India.

For more information, visit sapientglobalmarkets.com.

© 2012 Sapient Corporation. Trademark Information: Sapient and the Sapient logo are trademarks or registered trademarks of Sapient Corporation or its subsidiaries in the U.S. and other countries. All other trade names are trademarks or registered trademarks of their respective holders.


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