Time is of the essence
13 January 2015
The brains behind the Lombard-Genpact collateral management deal explain the many benefits of speedy processing
Image: Shutterstock
A constantly changing regulatory landscape is forcing firms on both the buy and sell sides of the collateral chain to seek out new ways of digitalising, synchronising and reporting data.
Lombard Risk and Genpact have teamed up to provide just such a solution.
Integrating Lombard Risk’s Colline system and Genpact’s CARDS software, the solution allows firms to digitise their legal collateral agreements and capture the terms and conditions across asset classes, counterparties and business silos.
While Colline is a dedicated management and optimisation system for collateral, clearing and inventories, Genpact’s Collateral Agreement and Reference Data Services software (CARDS) converts contractual collateral agreements into digital data, removing the need for manual inputting, and creating a more streamlined data processing system.
Clients’ agreements will be scanned and digitally extracted into business parameters required for efficient collateral management and optimisation before they are automatically entered into Colline, which will then use the data to process margin calls and collateral optimisation on the behalf of the client company.
Lombard Risk product director Helen Nicol says: “Having a system that converts the agreements into data that is then captured in Colline will save clients time, and will be more accurate than entering the information manually.”
“From a new client’s point of view, when a large number of collateral agreements will need to be entered, having CARDS to automate this process will be a great head start.”
Tony Freeburn, assistant vice president of financial market solutions at Genpact Headstrong Capital Markets, adds: “A digital approach to loading the agreements means that they can be approved within a very short space of time.”
Although rapid processing is the aim, as yet, it is unclear what the start-to-finish timescale will actually be.
According to Freeburn, realistically it could take as little as an hour, compared to manual input, which can take much longer.
“It depends on the complexity of the agreement,” he says. “CARDS has a comprehensive vocabulary built in, so it can analyse the agreement and if it doesn’t recognise a term or is unable to extract it, we will be notified and we will manually input it. Then, the next time that term comes up, it can just go straight through.”
“That way, we will constantly be improving, and eventually we will be notified less and less. At the moment we’re hoping to start with something like 80 percent of terms being recognised at first pass, but that obviously depends on the particular agreements.”
While common words and phrases will appear in many of the contracts, it is the differences that will initially require manual intervention. The bespoke language in collateral agreements means there are bound to be terms that the system does not recognise immediately.
“We expect CARDS to highlight what makes this agreement different to the others, while still scanning the whole document in detail and digitising the relevant parameters. This is much faster than going through it all manually,” says Freeburn.
“Many of these agreements use the same terminology since, as legal documents, there’s very little room for ambiguity by design. Even then, no two are ever the same.”
Nicol adds that, when inputting data manually, not only is the process more time-consuming, but it is also subject to human error. Automation significantly decreases this risk.
“You can’t be too stringent when it comes to regulatory content, and that legal agreement could be incredibly complicated,” she says.
“The service we offer is designed to get the relevant data to the platform. These can be 10,000-word agreements. If we can speed up the process through automation and digitisation, that will be a benefit for everyone.”
That said, the system doesn’t mean a complete removal of human input in the process. Sachin Pai, assistant vice president of financial market solutions at Genepact Headstrong Capital Markets, adds: “No tool in the market is capable of wholly accurate extraction of attributes from legal collateral documentation, essentially due to the degree of customisation.”
“Therefore, while our platform can extract attributes to a high degree, the operational service supplements it to ensure the attributes are accurate, complete and go through a configurable approval process before channelling through to Colline.”
At the height of the technological revolution, it has taken a particular push to get this development off the ground, and it is regulation that has acted as the catalyst.
Freeburn says: “Slow manual agreement processing has always been a problem because of the complexity of the agreements, and a brake on deal generation, because no trading can be authorised until the agreements have been loaded into the collateral management system.”
“The problem is being exacerbated by the changing regulations, which will shortly mean the renegotiation or replacement of virtually all open collateral agreements relating to OTC derivatives.”
“With regard to those instruments that become eligible for mandatory CCP clearing, the existing margin and collateral eligibility rules within the current agreements will have to be replaced by those relating to the relevant CCPs,” says Freeburn.
“Meanwhile, for those instruments that remain uncleared, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) proposals require that, instead of simple agreed collateralisation, both parties will have to exchange both initial and variation margin on a daily basis.”
“Various regulatory bodies could interpret these proposals differently, which means there could be different versions depending on the counterparty jurisdiction.”
As an external service, CARDS can, in theory, process any kind of contract or agreement that’s fed in to it, while Colline simply manages and consolidates data to be used as each respective company requires.
This means that as well as being applicable in various European jurisdictions, the technology could prove to be in demand globally
Nicol says: “At Lombard Risk, we have clients all over the world who have been using Colline for two-and-a-half years. We’re satisfied that we’re prepared to provide those in Australia or Dubai with the same services we provide in the UK and Europe.”
“Although there are regional regulatory and operational nuances, the core front-to-back margin processing and general strategic objectives remain the same; compliance with regulatory obligations and greater straight-through-processing.”
Regulatory changes are coming in to play all over the world, and with its international reach, adaptable base product and, now, collaboration with the CARDS technology, Lombard Risk is well placed to anticipate regulatory demands in other markets before they arise.
The system is tailored to transparency, speed and automation, ultimately making processes cheaper and easier for the end client. Meanwhile, the speed aspect brings trading closer to achieving T+2 settlements.
With the agreements automatically processed by CARDS, and consolidated by Colline, Genpact can then connect with the client to fill in any gaps in the information, and continue adding data to expand its workable vocabulary.
The regulatory environment is becoming more and more focused on fairness towards clients, and the Lombard Risk-Genpact collaboration reflects this, with a few added benefits thrown in.
Nicol affirms this ethos, stating that the two firms are working together to make the end-to-end settlement process as clear as possible, from the initial agreement, brokering the deal, right through to implementation and reporting.
“The clients can be as involved as they wish throughout the whole process,” she says. “They can help to sort out any problems that come up, and that increases transparency too.”
Lombard Risk and Genpact have teamed up to provide just such a solution.
Integrating Lombard Risk’s Colline system and Genpact’s CARDS software, the solution allows firms to digitise their legal collateral agreements and capture the terms and conditions across asset classes, counterparties and business silos.
While Colline is a dedicated management and optimisation system for collateral, clearing and inventories, Genpact’s Collateral Agreement and Reference Data Services software (CARDS) converts contractual collateral agreements into digital data, removing the need for manual inputting, and creating a more streamlined data processing system.
Clients’ agreements will be scanned and digitally extracted into business parameters required for efficient collateral management and optimisation before they are automatically entered into Colline, which will then use the data to process margin calls and collateral optimisation on the behalf of the client company.
Lombard Risk product director Helen Nicol says: “Having a system that converts the agreements into data that is then captured in Colline will save clients time, and will be more accurate than entering the information manually.”
“From a new client’s point of view, when a large number of collateral agreements will need to be entered, having CARDS to automate this process will be a great head start.”
Tony Freeburn, assistant vice president of financial market solutions at Genpact Headstrong Capital Markets, adds: “A digital approach to loading the agreements means that they can be approved within a very short space of time.”
Although rapid processing is the aim, as yet, it is unclear what the start-to-finish timescale will actually be.
According to Freeburn, realistically it could take as little as an hour, compared to manual input, which can take much longer.
“It depends on the complexity of the agreement,” he says. “CARDS has a comprehensive vocabulary built in, so it can analyse the agreement and if it doesn’t recognise a term or is unable to extract it, we will be notified and we will manually input it. Then, the next time that term comes up, it can just go straight through.”
“That way, we will constantly be improving, and eventually we will be notified less and less. At the moment we’re hoping to start with something like 80 percent of terms being recognised at first pass, but that obviously depends on the particular agreements.”
While common words and phrases will appear in many of the contracts, it is the differences that will initially require manual intervention. The bespoke language in collateral agreements means there are bound to be terms that the system does not recognise immediately.
“We expect CARDS to highlight what makes this agreement different to the others, while still scanning the whole document in detail and digitising the relevant parameters. This is much faster than going through it all manually,” says Freeburn.
“Many of these agreements use the same terminology since, as legal documents, there’s very little room for ambiguity by design. Even then, no two are ever the same.”
Nicol adds that, when inputting data manually, not only is the process more time-consuming, but it is also subject to human error. Automation significantly decreases this risk.
“You can’t be too stringent when it comes to regulatory content, and that legal agreement could be incredibly complicated,” she says.
“The service we offer is designed to get the relevant data to the platform. These can be 10,000-word agreements. If we can speed up the process through automation and digitisation, that will be a benefit for everyone.”
That said, the system doesn’t mean a complete removal of human input in the process. Sachin Pai, assistant vice president of financial market solutions at Genepact Headstrong Capital Markets, adds: “No tool in the market is capable of wholly accurate extraction of attributes from legal collateral documentation, essentially due to the degree of customisation.”
“Therefore, while our platform can extract attributes to a high degree, the operational service supplements it to ensure the attributes are accurate, complete and go through a configurable approval process before channelling through to Colline.”
At the height of the technological revolution, it has taken a particular push to get this development off the ground, and it is regulation that has acted as the catalyst.
Freeburn says: “Slow manual agreement processing has always been a problem because of the complexity of the agreements, and a brake on deal generation, because no trading can be authorised until the agreements have been loaded into the collateral management system.”
“The problem is being exacerbated by the changing regulations, which will shortly mean the renegotiation or replacement of virtually all open collateral agreements relating to OTC derivatives.”
“With regard to those instruments that become eligible for mandatory CCP clearing, the existing margin and collateral eligibility rules within the current agreements will have to be replaced by those relating to the relevant CCPs,” says Freeburn.
“Meanwhile, for those instruments that remain uncleared, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) proposals require that, instead of simple agreed collateralisation, both parties will have to exchange both initial and variation margin on a daily basis.”
“Various regulatory bodies could interpret these proposals differently, which means there could be different versions depending on the counterparty jurisdiction.”
As an external service, CARDS can, in theory, process any kind of contract or agreement that’s fed in to it, while Colline simply manages and consolidates data to be used as each respective company requires.
This means that as well as being applicable in various European jurisdictions, the technology could prove to be in demand globally
Nicol says: “At Lombard Risk, we have clients all over the world who have been using Colline for two-and-a-half years. We’re satisfied that we’re prepared to provide those in Australia or Dubai with the same services we provide in the UK and Europe.”
“Although there are regional regulatory and operational nuances, the core front-to-back margin processing and general strategic objectives remain the same; compliance with regulatory obligations and greater straight-through-processing.”
Regulatory changes are coming in to play all over the world, and with its international reach, adaptable base product and, now, collaboration with the CARDS technology, Lombard Risk is well placed to anticipate regulatory demands in other markets before they arise.
The system is tailored to transparency, speed and automation, ultimately making processes cheaper and easier for the end client. Meanwhile, the speed aspect brings trading closer to achieving T+2 settlements.
With the agreements automatically processed by CARDS, and consolidated by Colline, Genpact can then connect with the client to fill in any gaps in the information, and continue adding data to expand its workable vocabulary.
The regulatory environment is becoming more and more focused on fairness towards clients, and the Lombard Risk-Genpact collaboration reflects this, with a few added benefits thrown in.
Nicol affirms this ethos, stating that the two firms are working together to make the end-to-end settlement process as clear as possible, from the initial agreement, brokering the deal, right through to implementation and reporting.
“The clients can be as involved as they wish throughout the whole process,” she says. “They can help to sort out any problems that come up, and that increases transparency too.”
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