Remedy Sought for Trade Documentation

Terry Flanagan

Major Wall Street dealers may have more than 10,000 trading counterparties with whom they have signed master agreements, and many end users may be counterparties with multiple dealers. This creates significant levels of legal and administrative complexity and the potential for duplication of efforts as firms attempt to comply with the new rules.

To address this situation, Markit is collaborating with Thunderhead.com, a provider of automated trade documentation, to deploy an online service for creating and negotiating ISDA master agreements and credit support annexes.

The service for ISDA documents integrates Thunderhead’s ONE for Capital Markets – software as a service that automates the production, editing and execution of capital markets documentation – with Counterparty Manager, Markit’s document management platform.

“Thunderhead has a robust tool that allows the negotiation of documentation online that many of the G-14 banks already use,” Lansing Gatrell, managing director and head of Counterparty Manager at Markit, told Markets Media. “So we said, “Let’s integrate that into Counterparty Manager so firms can log into our site and not just disseminate information but also negotiate and execute ISDA documents.”

Digitizing key documents such as ISDA master agreements, credit support annexes and master confirmation agreements reduces operational risk and enables analytics on collateral and margin requirements to support balance sheet management.

“The digitization of the capital markets industry needs to go beyond simply taking a digital copy of what exists already, and the negotiation of derivatives documentation is great example of what the future might look like across all high-value processes,” said Gert Raeves, research director at CEB TowerGroup. “Instead of reactively and imperfectly capturing a paper trail, upfront digitization allows standardization to take root much higher up the value chain.”

In the past the industry has successfully automated transactional flows like confirmation and settlement, but without upfront automation, the complexities of financial engineering and legal language will continue to be barriers to transparency and regulatory compliance.

“All operational processes are ultimately driven by the requirements of the business process, and our reliance on human expertise, workarounds and expensive para-legal services is a clear sign that the current status quo is not good enough,” said Raeves.

Markit launched the Counterparty Manager platform as a way to allow active managers to share large amounts of documentation and data with the dealers they trade with. After the passage of Dodd-Frank, Markit partnered with Isda to exchange OTC documentation.

“A lot of firms had to adhere to various ISDA protocols in order to make it compliant with Dodd-Frank,” Gatrell said. “The way that the market used to operate is simply no longer compliant in a post-Dodd-Frank world.”

The next logical step was to go from simply exchanging documents to creating them online. Markit’s orginal agreement with Thunderhead, announced last December, which covered master confirmation agreements, has been extended to cover CSAs and master agreements.

“When you think about ISDA bi-lateral contracts, master agreements, MCAs, and CSAs are the big three,” Gatrell said. “Regulations are going to be altering the nature of collateral, how it’s treated. You have various groups with ISDA under way to come up with new CSA templates. We want to be ready to launch a CSA and master negotiating tool for when those new templates come out in the second half of this year.”

He added, “We’re trying to build what we call an ecosystem of services that help an asset manager or corporate to get from, ‘I would like to start trading with this bank,’ to where they are ready to start trading with that bank across various asset classes.”

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