WHITE PAPER

Implementing a Derivatives Contract Data Management Solution – 7 Key factors to watch out for

This white paper highlights seven key factors that need to be considered while making the business case for derivatives data management in a financial services enterprise.

October 10, 2015

Copyright © 2015 Innodata docGenix LLC. All Rights Reserved.

Synopsys

Key Factors to Consider Before Implementation of Derivative Contract Management Solution

Scope of Contract Coverage

Number of Contracts

Data Points

Amendments and Umbrella Agreements

Protocols

Integration with Internal Systems

Reports and Data Searching

Recap & Conclusion

Derivative Contract Management with docGenix

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CONTENTS

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SYNOPSYS

Everyone agrees that having a sound derivatives contract data management program today in a

financial firm is not just desirable, it's essential. But what should it be comprised of? In this paper, we

review seven basic principles that firms should consider.

KEY FACTORS TO CONSIDER BEFORE IMPLEMENTATION OF DERIVATIVES CONTRACT DATA MANAGEMENT SOLUTION

First of all, not one size fits all. In some cases, a

spreadsheet listing contracts may be sufficient; in

other cases, sophisticated software applications are

needed. What is ideal will depend on such factors as

the size of the firm, the type of contracts involved, the

number of contracts, and the data points the firm

wants to have ready access to. If you just want to

keep track of non-disclosure or confidentiality

agreements (NDAs), which are fairly simple

compared to other types of contracts, a simple

spreadsheet may suffice. ISDA Masters may involve

a large number of data points, but the number can

vary depending on the firm's risk management and

compliance needs. If you have only a handful of such

agreements, and the number of counterparties are

small, a software or platform solution may not be

needed.

ISDA Masters may involve a large number of data

points, but the numbers can vary depending on the

firm's tolerance to risk and compliance needs. If you

have only a handful of such agreements, and the

number of counterparties are small, a software or

platform solution may be overkill. However, such

cases are restricted truly to a “handful” of whatever

that number might be in practice. Once a certain

threshold is reached, it is impossible to efficiently

retrieve documents and their data demanded by risk

management and compliance. So, what is needed for

such cases?

SCOPE OF CONTRACT COVERAGE

The need to define the scope of a derivatives contract data management system so that it solves your key business issues.

NUMBER OF DOCUMENTS

Quantification of the derivatives

contracts that need to be managed

AMENDMENTS & UMBRELLA

AGREEMENTS

Manage dynamic market conditions

and varying contracts

DATA POINTS

Identification of key data points that need to be

captured

PROTOCOLS

Comply with various industry protocols and

guidelines

INTEGRATION WITH INTERNAL RISKS SYSTEMS

REPORTS & ANALYSIS

Figure 1. The key factors that need to be addressed while making a business case for derivatives data management in a financial enterprise

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The first principle to consider is the scope of

contract coverage. Document management seems

to be more developed for contracts like ISDA Master

Agreements and their related Credit Support

Annexes (CSA). Risk management and compliance

concerns dictate that such contracts be included.

This is especially true because the number of

potential data points for such contracts is significant.

However, once one mentions ISDA Masters, other

kinds of contracts come to mind. For example,

foreign exchange and currency option transactions

are also covered by other industry-standard masters

such as the International Foreign Exchange Master

Agreement (IFEMA) and its successors Foreign

Exchange and Options Master Agreement (FEOMA)

and International Foreign Exchange and Currency

Option Master Agreement (IFXCO). Repurchase and

securities lending transactions are also covered by

the various master published by the Securities

Industry and Financial Markets Association (SIFMA).

And outside the U.S., there are masters such as the

Deutsche Rahmenvertrag (DRV), the French FBF

Master Agreement, and European Financial Market

Lawyers Group (EFMLG) Masters. Needless to say,

the use and number of contracts to consider can be

overwhelming, but having a clear inventory and

prioritizing contract types is essential for a

successful deployment.

Lastly, you might want to consider contracts outside

the realm of derivatives like NDAs, or rights

management and intellectual property contracts;

especially deals with heavily negotiated contracts

that protect the use of media and other assets. The

exposure, risk and cost associated with the use and

rights of media asset can be cumbersome and

complex.

It is best to have a plan, and it isn't necessary to

start with everything all at once. If contemplating an

external provider to help with this process, consider

the flexibility of the vendor's solution for future

development.

Scope of Contract Coverage

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Once you have settled on the scope of contract or

document coverage, you must determine how many

of those documents you have. This task can be

daunting for financial firms with numerous locations

and departments. Some firms are more centralized

than others, making this task easier. Regulators

these days seem to be thinking holistically and

globally, and risk management requires that you

reach a complete solution. We recommend a global

solution if possible, but we also recognize that

priorities may dictate a solution that focuses only on

larger markets.

In this regard, there is also the issue of new vs. old

counterparties. It is much easier to apply a new

process to new counterparties, but this does not do

you much good with your “legacy” agreements. One

way to make the problem more manageable is to

divide the legacy contract population up into “active”

vs. “inactive” contracts. For Example, the latter might

involve contracts where there have not been any

transactions for a certain period of time, like six

months to a year. This level of focus prioritizes the

active vs. the inactive contracts, which can either be

disregarded until used or loaded after the active

contracts are finished.

Number of Contracts

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One goal in having a contract management system

is simply to have electronic versions of the

documents that are easily accessed. We assume

this to be a minimum requirement. When mining the

data, you need to have rich search capabilities.

Searches can be done on the text itself but it is also

desirable to focus on particular bits of data. These

bits are called data points and can be very granular.Data points can come from outside the four corners

of the contract, as well as, from within it. In the

former case, called metadata, data such as contract

number, persons at the firm involved with the

counterparty, Legal Entity Identifier (LEI), etc. might

be desired.

From our experience, the most common and most

important categories for ISDA Master Agreements

are events of default, additional termination events,

addresses for notices, credit support, eligible

collateral types, and governing law. You may wish to

restrict your efforts to basics like these or you can

include many other details. We have seen clients

who want anywhere from 200 to over 1200 data

points collected from ISDA Master Agreements. It is

important to think through what you want at the

beginning of the process. A good system will give

you the flexibility to add data points at any point in

time, but the deployment will be more successful if

your firm thinks through these data points upfront.

At the same time you should work with developers

or vendors that can be flexible in accommodating

future changes, such as, the natural evolution of

documentation or regulatory requirements. The

vendor should also understand the different versions

of text that equate to the same data point, something

we call “normalization.”

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Data Points

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Two special topics are worth mentioning,

amendments and umbrella agreements.

Amendments and other changes during the lifetime

of an agreement make the task of contract

management more challenging.

Parties to agreements and their needs are not static;

name changes take place, mergers and

consolidations are completed, and parties negotiate

changes to their contracts. Your process must take

such factors into account or it will not be effective.

Name changes are fairly straight forward when there

is a formal amendment, but often they take place

without an amendment. Legally, no amendment is

required, but you need to keep track of both the old

and the new name.

There are various ways of doing this outside of a

formal amendment. For Example, you can get a

name change certificate that would be added to your

system as a “de facto” amendment. When this is not

possible, there are more informal ways of

managing this such as using data from public

sources, or even emails from the counterparty, or

from an internal party that is knowledgeable such as

a relationship manager. In any event, we

recommend a document be created that serves as

the evidence of the name change and in this case, it

does not necessarily need to be a formal

amendment.

When considering a developer or vendor make sure

the solution can deal with Amendments that change

the business terms of a contract. Presenting an

amended and restated view of the contract itself is

doable, but it is somewhat labor-intensive and

therefore expensive. A compromise, which really is a

minimum standard, is that the data be presented on

an amended and restated basis. For example,

including the contract's data points as affected by all

amendments but also showing the text in the original

contract and any relevant amendment changes

affecting that particular data point.

Umbrella agreements are contracts with an

intermediary, such as an investment manager,

where the intermediary acts as the agent on behalf

of multiple counterparties under that agreement. If

liability is several rather than joint, as it usually is,

such counterparties may be of any kind. However,

they typically are funds, pensions, and the like. In

this case, such an agreement is really multiple

agreements; one between “Party A” with each fund

or other entity (each a “Party B”) covered by the

umbrella agreement. Umbrella agreements are quite

a challenge. Even though only one document may

be involved, your system must take into account the

separate agreement with each counterparty, which

may number into the hundreds. Often, a unique

numbering system that is searchable by both

counterparty and intermediary becomes necessary.

Even if all the counterparties have the same terms,

which we do not see often, each one has its own

separate risk index.

What we said above with respect to amendments

applies, as well, to umbrella agreements. Parties are

added and subtracted via amendments, and this is

an issue that must be carefully planned. Your

developer or vendor must have a mechanism for

dealing with the addition and subtraction of Parties,

and it should be done via a paper trail. Some very

active intermediaries can create funds every day,

and a well-thought out way of making the

amendment process practical should be adopted.

We have found that some clients adopt the method

of providing for “open-ended” umbrellas where new

funds represented by an intermediary are

automatically covered. The paper trail to reflect the

addition and deletion of fund names and special

terms is undertaken via an internal email from a

responsible person to the individual or group

responsible for documentation management.

Amendments and Umbrella Agreements

Another special factor that needs thought is ISDA's

method of contract formation and amendment via

Protocols. For example, the Protocol developed for

the CFTC's swaps trading relationship

documentation (STRD) rules provides for parties to

submit letters and questionnaires to ISDA answering

certain questions. The answer to each question will

be a data point. In some cases, via a matching

process, new agreements or amendments are

created without any direct hard copy agreement

being in effect between the parties. Although this

mechanism is just as effective legally, your contract

data management system needs to take into

account the creation of new agreements and

amendments.

One solution we have developed with a client is to

create “virtual” agreements between the client and

its matches. A PDF of the answers to the Protocol

questionnaire is loaded as the agreement or

amendment in the system, and the answers are

recorded as data points to the new agreement or to

the old agreement as amended by this mechanism.

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Protocols

Integration with Internal Systems

The last point raises two issues that have not been

fleshed out so far; the difference between a contract

data management system that is a mere repository

as a library of agreements and the data in them, and

a system that takes into account these agreements

and also links them to transactions actually executed

for business and risk management purposes. For

example, it may be desirable to link the library to a

system that has internal identification numbers used

with transactions in order to conclude whether the

agreements are enforceable netting agreements

permitting a counterparty's line to be used on a net

rather than on a gross basis. If these two are linked,

usage under a counterparty's line can be more

accurately reflected. Related, is the desire to link

collateral management systems to transactions

actually executed and the terms of the relevant

document. This would eliminate the need to enter

the document terms separately and would reduce

the likelihood of error. We call such links

“integration” of the internal risk management

systems with the contract data management

application.

When considering an outside vendor it is useful to

know whether the vendor can accommodate such

integration. Smaller firms may do with just a library

of agreements while larger ones are likely to benefit

from integration. In other words, do you just need to

purchase a contract management application, or do

you also need a service provider that can integrate

with other downstream systems?

Reports and Data Searching

It is clear so far that the solution considered should

be a repository or library of your executed contracts

with the ability to search by text and data points, and

that it also may require integration with internal

systems. Another key feature that seems essential is

report generation. Reports may be generated from

specific searches, but also may involve carefully

thought out criteria. Reports may be ad hoc or run

on a periodic basis. Be sure your developer or

vendor can provide such reports, and allow you to

produce ad hoc reports on an as needed basis.

Reports created by the application will be a vital

resource for the risk and compliance teams.

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RECAP

Let’s summarize the factors you need to consider:

1. Start by determining “how much” contract management you need. Do you need a spreadsheet only? Doyou need a platform or technology solution?

2. Factors that will influence these decisions are scope of contract coverage, number of contracts, and datapoints to be captured.

3. Contract coverage can involve master agreements covering financial derivatives, both off- and on-exchange; beyond these any kind of contract can be covered, and indeed any kind of document.

4. The problem of significant numbers of “legacy” documents can be addressed by focusing on activedocuments first.

5. Data points can be as many or as few as you want, but think through first what you want before beginningand be sure the solution has the flexibility to add or subtract data points in the future.

6. Amendments and umbrella agreements require special attention. Develop rigorous procedures to make sure you have a paper trail for all amendments and in the case of such things as name changes think about both formal (amendments and/or name change certificates) and informal methods (e.g. internal emails). Umbrella agreements present even more issues, but such basic problems as creating or deleting new entities can be covered informally (e.g. with internal emails from a relationship manager based on prior written agreement with the counterparty).

7. Protocols are challenging because of the different ways of evidencing protocol adherence. Be sure youdevelop procedures for capturing all of them (standard amendment via Protocol, separate bespoke hardcopy amendment, and data feed). If using a vendor, make sure all of these are understood.

8. Integration with internal systems must be considered in order to enhance risk management, compliance,and even trading. If using a vendor, pick one that can help you with integration.

9. Decide what report you want delivered from the beginning and that there is the capability for tailoredreports as you go along.

10. If you need a vendor, do you simply need to buy an application to use as a contract repository (with orwithout search capabilities) or do you need integration with internal systems?

CONCLUSION

In this white paper we have identified some of the basic factors to be considered in making the business case for contract management. Another crucial area, however, is that of technology—will OCR be used? Will individuals be used to do data entry? How is data encrypted and confidentiality maintained? We will deal with these complex issues in a separate white paper.

docGenix, a technology product by Innodata offers proven and customizable solutions for derivatives contract data management in banks, hedge funds and other financial enterprises.

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Contract Management with DocGenix

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To know more about DocGenix, please contact us:

Email: info@docgenix.comPhone: +1-877-454-8400Website: www.docgenix.com

About InnodataInnodata is a global digital services and solutions company. Our technology and services power leading

information products and online retail destinations around the world. Our solutions help prestigious enterprises

harness the power of digital data to re-imagine how they operate and drive performance.

We serve publishers, media & information companies, digital retailers, banks, insurance companies, government

agencies and many other industries. We take a “technology-first” approach, applying the most advanced

technologies in innovative ways. Founded in 1988, we comprise a team of 5,000 diverse people in 8 countries

who are fiercely dedicated to delivering services and solutions that help the world make better decisions.

docGenix is a web-based derivatives contract analysis and risk management suite that enables financial services firms to easily generate OTC derivatives contracts, extract critical data points, centrally store critical clauses and provide analytics to comply with increasingly stringent regulations like Dodd-Frank, EMIR, New Margin Rules etc.

With docGenix, market players can generate, capture, monitor and analyze the negotiated provisions of ISDA Master Agreements and Credit Support Annex (CSA), as well as other financial and legal documentation relating to repos, securities lending, prime brokerage, investment management and clearing. docGenix offers sophisticated automation coupled with manual analysis of over 1200 data points which we extract and normalize from standard agreements like ISDA Masters and complex umbrella agreements.

The docGenix product suite consists of:

docGenix Analytics: docGenix Analytics provides risk management with a single repository for over 25 different types of financial documents (ISDA, SIFMA, ISLA, MAG, CSA, etc.) providing a convenient and easily accessible document library including all amendments and supporting documents, with data points sourced from the main documents on which simple or sophisticated query and analytics can be performed on the fly within a secure environment.

docGenix CREO: docGenix CREO enables you to generate new financial documents by answering simple questions relating to variables specified by you in a document template. After the negotiation process and the contract is finalized, it may be added to the docGenix Analytics platform, which provides a searchable repository for finalized contracts, with a copy of the new contract and its data points.

docGenix CREO and docGenix Analytics work together throughout the entire contract life cycle to give you powerful tools for all your financial & legal contract management needs.

NOTICE - This white paper is provided for informational purposes only. Readers are responsible for making their own independent assessment of the information contained in this white paper and the use of Innodata docGenix's products and services.