While many market participants in the securities lending market have reaped some of the efficiencies and risk mitigation benefits delivered by the use of systems and data for some time, their highly experienced documentation and legal teams are still constrained by manual processes that have remained fundamentally unchanged for decades.
The result is not only wasted time and resources but a lack of vital control: day to day securities lending operations are not governed by carefully negotiated contract terms and organizations are still compelled to use outdated methods to provide the required information to regulators, such as under SFTR.
That is all set to change with the introduction of the ‘ISLA Clause Library & Taxonomy’. Introducing standards is an important step in the digitization journey, which builds on the Global Master Securities Lending Agreement (GMSLA) preprint forms to improve efficiency, reduce the time spent by negotiators and lawyers in the drafting, negotiation and execution of master trading agreements – and provide a new platform for the use of securities lending data that will transform resource optimization, regulatory compliance and risk mitigation.
Andrew Dyson, chief exec of the International Securities Lending Association (ISLA) and Akber Datoo, CEO at D2 Legal Technology (D2LT) explain the changes ahead in the digitization journey.
Increasingly sophisticated data, systems and technology underpin every aspect of financial trading. Yet the legal agreements that define business relationships are still created in isolation – stored, at best, on separate document management platforms; at worst, hidden away in individual filing cabinets or MS Outlook folders. There is no integration with the rest of the business (despite the impact these documents have to a number of stakeholders), with no link to the systems used to manage pricing, risk, the transfer of securities, and cash movements.
In addition to the implications on operational processes and risk management, this manual approach compels experienced negotiators and lawyers to spend far too much time on tedious document creation rather than valuable contract negotiation. Institutions are failing to truly align agreements with day to day activity. With the ever expanding regulatory burden, the lack of rapid access to consumable contract information has become a serious operational drain and risk management challenge.
Digitization is imperative. This is vital and valuable corporate information – automating document creation and management will provide a platform for better monitoring the rights and obligations of parties to a contract. But that cannot be cohesively achieved without standards – for one, there are at least two parties to any trading relationship.
Today, while the GMSLA is the standard master agreement for governing securities lending transactions, every market participant uses its own interpretations, and its own house style, so identical outcomes are expressed in very different ways across the industry. Without standards, it is impossible to capture, compare or share data. Progress on the digital journey demands the creation and widespread adoption of trusted standards.
The role of industry bodies such as ISLA has evolved in recent years – and the creation and ownership of standards has become a key requirement to support industry change. In a recent survey asking 105 ISLA members for the key legal developments and enhancements they would like ISLA to develop for the industry, 80% called for a clause library. Institutions recognize the need for a standard approach to contracts to support the digitization of the GMSLA, because of the opportunities this can bring.
Now published, the new ISLA Clause Library & Taxonomy is a key step in the digitization journey, providing institutions with a standard approach to mapping contract terms. Adoption is simple – whether firms are simply writing contracts using MS Office and sharing via email or using contract lifecycle management (CLM) tools. Firms can identify, rationalise and align GMSLA document templates to the ISLA Clause Library & Taxonomy – essentially swapping existing clause libraries for the new standard.
The operational implications are significant – especially for those with ‘one to many’ relationships. With no need to spend endless hours negotiating broadly the same point with multiple different borrowers, the efficiency gains will be huge. Plus, of course, negotiators can massively reduce the time spent creating documents, releasing more time to focus on negotiation of material terms and added value activity.
However, a standard, digitized approach to document creation and storage is just the start – the next stage is to proactively use that easily consumable data to optimize resources such as capital, liquidity and collateral. The ISLA Clause Library & Taxonomy provides the platform for new efficiencies, allowing firms to embrace document generation and negotiation platform tools. With template management, workflow, approvals and execution facilities, as well as metrics and reporting to help make the documentation process faster and far more efficient.
In addition, with legal agreement terms collated through the negotiation process, they can be automatically provided on execution to collateral, liquidity, risk and operations teams, ensuring the core components of each contract are not only available to all but the key requirements are automatically embedded within day-to-day activities.
With a structured data representation of the agreement, systems can not only be searched to provide a rapid check of agreed obligations and rights, but responses are automatically enforced through direct integration with operational systems and platforms. For the first time, vital legal agreements will no longer be buried but actually used to support business optimization decisions in real time and conducting “what-if” analysis – and that is incredibly exciting.
There is still more business value to be unlocked in the digital journey. In 2022, we hope to see the integration of the ISLA Clause Library & Taxonomy with its Common Domain Model (CDM). In addition to improving the management of legacy contracts that have been created over the past two decades, firms will also have access to a standardized representation of legacy contracts within a legal agreement data model.
This change will also pave the way for the use of data extraction tools with Artificial Intelligence (AI) and Natural Language Processing (NLP) capabilities, allowing institutions to optimize resources such as capital, liquidity and collateral – as well as simplify regulatory reporting and day to day operations.
An integrated Clause Library and CDM will also provide the building blocks for regulators to impose far more rigour over the compliance process with regulations such as Securities Financing Transactions Regulation (SFTR) and EMIR – without overburdening institutions. Rather than demanding a list of information required, regulators will simply be able to provide a piece of code that can be uploaded by the institution and automatically search out and provide the data, in the correct format – digital regulatory reporting.
For institutions, no more wading through complex compliance documentation; or embarking upon expensive and resource demanding projects. For regulators, the ability to update and expand compliance demands far more frequently in response to changing risks.
Digitization is overdue but ISLA legal agreement standards will deliver fundamental change. The future is truly bright – and the best is yet to come. It is now time for firms to embrace the ISLA Clause Library & Taxonomy as part of that journey.