The Importance of Centralized Legal Data Management for Financial Organizations

INTRODUCTION

Legal documentation forms the backbone of financial markets, encompassing contracts with service providers, clients, and trading partners. These binding contracts are essential for promoting transparency, reducing risk, and protecting the rights of the involved parties.

Trading documentation, which includes both legal and operational data, significantly impacts various internal stakeholders and external entities such as counterparties, custodians, and Central Counterparties (CCPs). All these parties have a vested interest in maintaining clean and accurate data. However, the industry commonly fails to capture and operationalize this data properly, necessitating change.

Moreover, many firms have maintained relationships and corresponding documents for years, if not decades. These documents have evolved significantly over time, creating management and maintenance challenges, particularly regarding data lineage and correct dispersion and usage of the data. The combination of the breadth of legal data, its fluidity over time, and the duration of these relationships results in a large and complex surface area

to manage.

This paper outlines the significant business benefits of centralizing legal data into a single repository. By harnessing technologies like Acadia’s Agreement Manager (AM), organizations can reduce risk, mitigate loss, streamline processes, improve efficiency, and manage costs, offering a promising solution to current challenges.

1) WHAT ARE THE RISKS OF DISPARATE LEGAL DATA?

Organizations should not store legal data in disparate systems for multiple reasons, but often, this is the case, and there is no golden source of legal data. What are some of the key reasons to avoid falling into

this trap?

Economic: Trading can be complex and often requires data from various systems and infrastructures. When agreement data is scattered across these systems, ensuring that all are updated with the latest and most relevant information becomes challenging. Data that is not captured, inaccurate, amended, or expired can lead to errors in trade pricing and discounting, directly impacting the trading desk’s P&L, as well as affecting funding, liquidity, and valuation.

Risk Management and Decision Making: Disparate systems make it challenging to obtain a unified view of agreement data across the organization. This lack of visibility limits the ability to generate accurate and comprehensive reports, hindering critical insights and strategic decision-making.

Manual data transfer and synchronization efforts increase the risk of errors and inconsistencies. Anyone who has experienced a financial crisis (or even a minor shock) while working in a financial services firm can attest that management’s requests for information increase dramatically, and the expected response time shortens significantly. This often leads to manual data manipulation and reporting.

Operational Integration: Operations should work from the same legal data used within trading, risk, and other departments within the firm. Inaccurate legal data in the operating environment is likely to increase the volume of disputes and discrepancies, potentially leading to supervisory and capital impacts. Relying on multiple legal data sources increases operational risk and the potential for loss.

Governance: Ensuring consistent data governance practices is challenging without a centralized system. Without a golden source of legal data, enforcing data standards and definitions can be difficult, and document organization is likely to be haphazard. Tracking amendments and maintaining a clear audit trail for data modifications remains difficult and elusive without digitization.

Costs: Storing agreement data in multiple systems increases costs due to the need for individual maintenance and updates for each system. This leads to redundant data entry, multiple reconciliations across systems, and increased administrative overhead. Additionally, users may need to navigate multiple systems, requiring extra training and support, which creates tensions across the technology stack. Furthermore, managing agreement data in multiple systems heightens the risk of security breaches and data leaks, making it more challenging to enforce consistent security protocols and regulatory compliance across all platforms.

2) IS THERE A REGULATORY DIRECTIVE?

It is essential to note that regulatory compliance requirements vary significantly across industries and jurisdictions. However, while there may not be a prescriptive text for the industry to follow, regulators are taking a keen interest in what financial firms include in legal documentation and how they are managing that data.

In the last couple of years, supervisory reviews in the UK have highlighted some of the significant cross-firm deficiencies. Following the Archegos default in 2021, reviews highlighted fragmentation across business units and locations, where the adoption of different standards in areas such as margining, documentation, and contractual terms led to disjointed ownership of risk, fragmented operational arrangements, and inconsistent approaches to risk monitoring.

In 2023, there was a 1Fixed Income financing thematic review from the Bank of England, which found several shortcomings in firms’ counterparty risk management processes and margining arrangements that should be remedied. The move to understanding risks within all ‘relevant trading businesses’ (we interpret this as all trading businesses) is front and center in the UK, pointing to the often-interconnected aspects of trading arrangements across markets. The SEC and the CFTC, as part of their own reviews after the collapse of Archegos, have also emphasized the need for better transparency and data management, including the legal agreements that govern complex financial instruments.

Naturally, jurisdictional supervisors have a sustained focus on the G-SIB (Global Systemically Important Banks) community, but this always goes in tandem with the global outlook that coordination bodies such as BCBS-IOSCO (The Basel Committee on Banking Supervision and the International Organization of Securities Commissions) and the FSB (Financial Stability Board) want, which is to strengthen

financial stability.

BCBS-IOSCO published 2a paper in January 2024 which focused on various challenges concerning VM and IM, which included a focus on counterparty credit risk ‘The timeliness of updates, along with properly

1 Letter from Nathanaël Benjamin and David Bailey – Fixed income financing thematic review.

2 Basel Committee on Banking Supervision Board of the International Organization of Securities Commissions Streamlining VM processes and IM responsiveness of margin models in noncentrally cleared markets

validated data, robust valuation processes and appropriate governance systems for ensuring mutual understanding of counterparty exposure’, they went onto say that ‘firms themselves remain accountable for the terms agreed upon with their counterparties and are responsible for any necessary enhancements to their risk control frameworks to ensure sound and comprehensive risk management practices and compliance with regulatory requirements’.

Most recently, the FSB issued 3a paper aimed at NBFIs (Non-Bank Financial Institutions) to review liquidity management practices and their impact on collateral, margin, and risk during stress events. The paper consistently references data being used to support liquidity metrics and capabilities in stress events, where collateral is a key consideration.

3) WHAT DOES THIS MEAN FOR THE BUY-SIDE?

Over the last fifteen years, the evolution of margin and collateral across the market has required the buy-side to become more sophisticated in terms of how they think about collateral in relation to pricing, funding, and liquidity. Understanding how derivatives can be executed, where, and with whom is all part of the pre-trade considerations that are being employed to ensure that the economics are clear and understood up front, executing the right trade at the right price, with the right counterpart.

Buy-side firms often benefit from agility when utilizing and improving data. Where alpha generation is concerned, being fast and first has always been the case. More recently, the metrics that lead to cost inefficiency are on the radar and more critical than ever. We have listed three themes that we think buy-side firms should consider when it comes to legal data.

1) Data Consolidation: Consolidating legal data from various sources and systems to ensure accurate pricing, risk, reporting and decision-making.

2) Data Analysis and Insights: Leveraging advanced data analytics to deliver alpha opportunities. Extending this approach will enable them to enhance returns further, especially in relation to margin costs.

3) Data Management: Establishing robust data governance frameworks to ensure data integrity, accuracy, and compliance with regulatory requirements.

Maintaining the status quo hampers efficiency and agility within and across business functions and the wider industry. Buy-side firms can benefit from centralizing legal agreement data and improving the data quality to enhance profitability, risk management, operational capabilities, and decision-making. Even if the buy-side has a smaller challenge relative to a G-SIB, they are by no means immune to the challenges of managing legal agreement data themselves while also ensuring that the banks/brokers they transact with are correctly representing and using this shared legal agreement data (minimizing the aforementioned risks of incorrect pricing, valuation, disputes, etc.).

4) WHAT ARE FIRMS DOING TO TACKLE THE ISSUE?

Progressive, forward-looking firms are tackling the legal data issue head-on. Many have recognized that having a golden source of legal data across trading businesses is essential for pricing, risk management, and collateral management. While this has long been understood, we are now witnessing the evolution of legal data being gold-plated, further enhancing its value and reliability.

As with all data projects, building a robust data model is a critical starting point. Understanding the complexity of your trading businesses and the intricacies of standardized or bespoke documentation

is paramount.

3 Financial Stability Board: Liquidity Preparedness for Margin and Collateral Calls: Consultation report

Over the past decade, most organizations have adopted a higher degree of common standards, such as standard legal agreement templates and standard codes and identifiers. However, these standards are often not fully adopted or comprehensive. Moreover, most firms have transacted in markets for much longer and must still support legacy arrangements.

Most data projects can be categorized into digitizing old legacy documentation or executing new documentation within a more digital framework. For legacy documentation, digitization providers with varying degrees of Optical Character Recognition (OCR) sophistication are working to build capabilities that use scanned copies to translate documentation into a data model. These tools represent a significant advance from fully manual digitization but still often struggle with language nuances, bespoke documentation, and complex tables. Most vendors are exploring how machine learning and AI can improve data quality and reduce the human effort required to digitize large amounts of legal documentation or perform data quality analysis.

For new documentation, tools are available to enable the negotiation and execution of documents within a more natively digital framework. These tools are expected to grow in use, but the legal profession has been resistant to changing the way documentation is written, negotiated, and executed. Regardless of the type of data project, all require consistency across data libraries and definitions, including the data capture process, coverage model, and data accuracy.

These systems promise proper organization, classification, and storage, ensuring the ability to interrogate data sets and access and retrieve documents as needed. Purchasing a system with a well-constructed and organized data model and partnering with a vendor that has sufficient expertise can significantly accelerate progress for almost any firm.

5) WHAT ARE THE BENEFITS OF ACADIA AGREEMENT MANAGER (AM)

Agreement Manager offers a range of key benefits to organizations. It is an event-based modern technology embedded within an operationally resilient and trusted market infrastructure. It enables the centralization and standardization of legal agreement data, producing an authoritative record through common standards within a single workflow and cost-effective user interface. It is agnostic to the data source (e.g., digitization providers, collateral management systems, legal negotiation tools) and enhances an organization’s ability to understand, manage, and utilize legal agreement data by seamlessly delivering it across trading, XVA, risk, legal, collateral, and treasury departments. This centralized source of truth enables users to quickly respond to market events and allows for faster analysis and decision-making.

Golden Data: Agreement Manager allows for proactive data reconciliation, creating a golden data source either between two sources within an organization or across two organizations. This ensures accurate and reliable data, reduces disputes, and mitigates risk due to mismatched clauses, amendments, or disparate interpretations.

Efficiency and Cost Reduction: Introducing a standard shared workflow like Agreement Manager simplifies the maintenance of an efficient repository, significantly reducing the time, effort, and costs associated with recording, generating, and governing legal agreement data. Centralization of data also reduces the need for reconciliation between data consumers. Agreement Manager improves the speed at which data flows into collateral systems, enhances accuracy, and helps the community reduce financial and operational risk. This ensures adherence to regulatory requirements and facilitates efficient decision-making.

Risk Management: Improved access to legal agreements, the ability to interrogate legal agreement data, uncover previously incorrectly codified agreements, understand where agreement data is being delivered,

and visualize agreement data using Data Exploration (DX) dashboards all greatly enhance the risk management environment.

Digitized Access: Agreement Manager provides a centralized and modern user interface that allows users to view digitized terms alongside the original PDF document while maintaining the lineage of contractual agreements from the original document through multiple amendments. This facilitates easy access and visibility into agreement details, enhances organizational structure, streamlines collaboration, and improves communication across the community.

6) CALL TO ACTION:

In conclusion, this white paper has highlighted the critical importance of centralizing legal data in financial organizations and large corporations to improve efficiency, risk management, and regulatory compliance. By avoiding the pitfalls of disparate and disconnected systems and leveraging technologies like Agreement Manager, organizations can enhance decision-making processes, reduce operational complexities, and mitigate regulatory risks.

As we look towards the future of financial markets and regulatory directives, a unified approach to managing legal data is not just a competitive advantage but a necessity. Regulatory bodies increasingly emphasize the need for firms to streamline their data management processes to ensure sound risk and liquidity management practices across the organization.

The benefits of consolidating legal agreement data, deriving actionable insights, and establishing robust data governance frameworks cannot be overstated. The time to act is now to improve data integrity and accuracy, which will ultimately lead to enhanced profitability and operational capabilities within the industry.

As progressive firms continue to address legal data issues and evolve their data management strategies, adopting solutions like Agreement Manager becomes paramount. The proven benefits of such centralized systems offer organizations a competitive edge in a rapidly changing

market environment.

Given the evolving landscape of financial markets and regulatory scrutiny, it is prudent to recommend that financial organizations and large corporations prioritize the centralization of legal data through solutions like Agreement Manager. By taking proactive steps to streamline data management processes, organizations can enhance operational efficiency, mitigate risks, and stay ahead in an increasingly complex and competitive industry. Embracing centralized legal data management is not just a best practice but a strategic imperative in today’s dynamic financial ecosystem.

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