An ISDA survey reveals that derivatives documentation has too many manual steps.
Grygo is the chief content officer for FTF & FTF News.
After conducting a survey on document negotiation, the International Swaps and Derivatives Association (ISDA) is making a strong case for more digitization of derivatives documentation.
ISDA officials are also arguing that firms use ISDA Create, an online platform for negotiating, producing, and executing derivatives documentation. This includes the ISDA Master Agreements, variation margin credit support annexes (VM CSAs), and initial margin (IM) documentation.
But the point is clear —the ISDA Document Negotiation Survey has revealed that document negotiation has too many manual steps.
ISDA polled 42 financial institutions — banks and broker-dealers — and found “the average time taken to negotiate key derivatives documents hasn’t fallen since 2006, with some negotiations taking longer due to resource constraints, regulatory pressures, and operational challenges,” according to the initial announcement in July.
More than 70 percent of those polled “use some form of digital automation for contract generation, negotiation, execution and/or data capture. Digital automation is used most for capturing data (54.76 percent of respondents), although some participants noted that a degree of manual intervention is also required,” according to the report.
“The most common example is manual extraction of data followed by digitally automated processing. In the contract negotiation lifecycle, digital automation is most prevalent for contract execution (30.95 percent). Fewer survey participants said they use digital automation for contract generation (21.43 percent) and negotiation (19.05 percent),” the report finds.
About half of respondents, or 47.62 percent, use the ISDA MyLibrary digital platform, and nearly a third use the ISDA Clause Library.
“The majority of ISDA Clause Library users (69.23 percent) support expansion of the ISDA Clause Library by adding additional standard-form versions of commonly negotiated provisions of certain ISDA documentation,” according to the report.
Survey participants say the reasons for the delays in the negotiation process are:
- “Counterparty responsiveness/priority classification was most frequently cited for documentation covered by the survey;”
- “Limitations in expertise and resources – both in terms of negotiation teams and internal approvers – were also highlighted by over 30 percent of respondents for causing delays;”
- “For ISDA Master Agreements, negotiations of additional termination events and credit-related issues were identified as causing delays by over 60 percent of respondents;”
- “For VM CSAs, eligible collateral was cited as the principal cause of delay by 60.00 percent of participants;” and
- “For IM CSAs, the inclusion of a third-party custodian caused most delays, with the practical challenges of setting up custodial arrangements cited by 65.79 percent and provisions governing the relationship with custodial documents highlighted by 50.00 percent of respondents.”
Overall, the automation of ISDA document negotiations “from start to finish was low,” according to the report. “Over 80 percent of survey participants are still using manual processes (ie, emails and Word/PDF documents) to negotiate detailed and complex legal agreements, including those with a significant number of optional elections, such as the IM CSA.”
The survey “truly underscores the business case for greater digitization of derivatives documentation. Firms can realize significant efficiencies and savings by embracing digital platforms, which in turn enables them to onboard new business more quickly,” says Katherine Tew Darras, general counsel for ISDA, in a prepared statement.
The full report can be found here: https://shorturl.at/vV6Sm