Why the securities lending industry is on the cusp of an amazing opportunity
26 October 2021
The introduction of the ‘ISLA Clause Library & Taxonomy’ marks an important step in the securities lending market’s digitisation journey, explains Andrew Dyson, chief executive, International Securities Lending Association (ISLA) and Akber Datoo, CEO, D2 Legal Technology (D2LT)
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The introduction of the ‘ISLA Clause Library & Taxonomy’ marks an important step in the securities lending market’s digitisation journey. Introducing standards that build on the Global Master Securities Lending Agreement (GMSLA) preprint forms will improve efficiency and reduce the time spent by negotiators and lawyers in the drafting, negotiation and execution of master trading agreements. Moreover, it provides a business outcomes approach to securities lending relationships, as well as focusing on data representations of such commercial terms that will transform resource optimisation, regulatory compliance and risk mitigation.
Outdated Methods
Modernising the management of contracts is long overdue. While many market participants in the securities lending market have increased efficiency and mitigated risk over many years — benefits resulting from the use of systems and data — their highly experienced documentation and legal teams remain shackled by manual processes that have remained fundamentally unchanged for decades.
The legal agreements that define securities lending relationships are still created in isolation. There is no integration with the rest of the business, despite the impact these documents have to a number of stakeholders, and there is no link to the systems used to manage pricing, risk, the transfer of securities and cash movements.
The result is not only wasted time and resources, but a fundamental lack of control. Day-to-day operations remain ungoverned by the contract terms that have been carefully negotiated, leaving organisations relying on outdated methods to provide the required information to regulators, such as under the Securities Financing Transactions Regulation (SFTR).
With the ever-expanding regulatory burden, this lack of rapid access to consumable contract information has become a serious operational drain and risk management challenge.
Digitisation is imperative. This is vital corporate information – automating the creation and automation of documentation will provide a platform for better monitoring the rights and obligations of parties to a contract.
But standards are key. 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, meaning identical outcomes are expressed in very different ways by different parties 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 ISLA Clause Library & Taxonomy
Industry bodies, such as ISLA, have assumed a new role in recent years – supporting industry change by driving forward the creation and ownership of such standards. Moreover, this is a change that is advocated by members. Indeed, 80 per cent of respondents called for a clause library in a recent survey of over a hundred ISLA members for the key legal developments and enhancements they would like ISLA to develop for the industry. Institutions recognise the opportunities that a standard approach to contracts can bring to support the digitisation of the GMSLA and the industry more broadly.
Published in September 2021, the new ISLA Clause Library & Taxonomy is a key step in this digitisation journey, providing institutions with a standard approach to mapping contract terms. Adoption is simple. Firms can identify, rationalise and align GMSLA document templates to the ISLA Clause Library & Taxonomy – essentially swapping existing organically grown MS Word documents of legalese and inconsistent drafting styles for a new standardised approach.
The operational implications are significant – especially for those with ‘one to many’ relationships. There will be significant efficiency gains, with the endless hours currently spent negotiating broadly the same point with multiple different borrowers unlocked. 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.
Optimised resources
However, a standard, digitised approach to document creation and storage is just the beginning of the digitisation journey. The ISLA Clause Library & Taxonomy is a springboard to unlock new efficiencies by embracing 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.
The next stage is to proactively use that now easily consumable data to optimise resources such as capital, liquidity and collateral. 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 (or literally in desk drawers or imaged-based pdfs), but actually used to support business optimisation decisions in real-time and conducting “what-if” analysis — an incredibly exciting development.
Conclusion
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 two decades’ worth of legacy contracts, firms will also have access to a standardised 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 optimise 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 SFTR and the European Market Infrastructure Regulation (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, there will be no more wading through complex compliance documentation or embarking upon expensive and resource-demanding projects. For regulators, this will provide the ability to update and expand compliance demands far more frequently in response to changing risks.
Digitisation is overdue, but ISLA legal agreement standards will deliver fundamental change. It is now time for firms to embrace the ISLA Clause Library & Taxonomy as part of that journey.
Outdated Methods
Modernising the management of contracts is long overdue. While many market participants in the securities lending market have increased efficiency and mitigated risk over many years — benefits resulting from the use of systems and data — their highly experienced documentation and legal teams remain shackled by manual processes that have remained fundamentally unchanged for decades.
The legal agreements that define securities lending relationships are still created in isolation. There is no integration with the rest of the business, despite the impact these documents have to a number of stakeholders, and there is no link to the systems used to manage pricing, risk, the transfer of securities and cash movements.
The result is not only wasted time and resources, but a fundamental lack of control. Day-to-day operations remain ungoverned by the contract terms that have been carefully negotiated, leaving organisations relying on outdated methods to provide the required information to regulators, such as under the Securities Financing Transactions Regulation (SFTR).
With the ever-expanding regulatory burden, this lack of rapid access to consumable contract information has become a serious operational drain and risk management challenge.
Digitisation is imperative. This is vital corporate information – automating the creation and automation of documentation will provide a platform for better monitoring the rights and obligations of parties to a contract.
But standards are key. 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, meaning identical outcomes are expressed in very different ways by different parties 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 ISLA Clause Library & Taxonomy
Industry bodies, such as ISLA, have assumed a new role in recent years – supporting industry change by driving forward the creation and ownership of such standards. Moreover, this is a change that is advocated by members. Indeed, 80 per cent of respondents called for a clause library in a recent survey of over a hundred ISLA members for the key legal developments and enhancements they would like ISLA to develop for the industry. Institutions recognise the opportunities that a standard approach to contracts can bring to support the digitisation of the GMSLA and the industry more broadly.
Published in September 2021, the new ISLA Clause Library & Taxonomy is a key step in this digitisation journey, providing institutions with a standard approach to mapping contract terms. Adoption is simple. Firms can identify, rationalise and align GMSLA document templates to the ISLA Clause Library & Taxonomy – essentially swapping existing organically grown MS Word documents of legalese and inconsistent drafting styles for a new standardised approach.
The operational implications are significant – especially for those with ‘one to many’ relationships. There will be significant efficiency gains, with the endless hours currently spent negotiating broadly the same point with multiple different borrowers unlocked. 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.
Optimised resources
However, a standard, digitised approach to document creation and storage is just the beginning of the digitisation journey. The ISLA Clause Library & Taxonomy is a springboard to unlock new efficiencies by embracing 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.
The next stage is to proactively use that now easily consumable data to optimise resources such as capital, liquidity and collateral. 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 (or literally in desk drawers or imaged-based pdfs), but actually used to support business optimisation decisions in real-time and conducting “what-if” analysis — an incredibly exciting development.
Conclusion
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 two decades’ worth of legacy contracts, firms will also have access to a standardised 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 optimise 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 SFTR and the European Market Infrastructure Regulation (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, there will be no more wading through complex compliance documentation or embarking upon expensive and resource-demanding projects. For regulators, this will provide the ability to update and expand compliance demands far more frequently in response to changing risks.
Digitisation is overdue, but ISLA legal agreement standards will deliver fundamental change. It is now time for firms to embrace the ISLA Clause Library & Taxonomy as part of that journey.
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