The future of the law and technology
In an on-going series of conversations we have been talking to practitioners in the legal space about their views on how the role of lawyers and their activities are changing.
In this update we spoke to three people with different backgrounds, Edward Ivey at Linklaters in New York, Michael Beaton at DRS LLP and Adam Ward at Amunet both in the UK. We will be publishing more thoughts on these topics on-line as we carry on the conversations.
What’s been happening in the last twelve months?
Michael: The role of lawyers has spun from being 80% product focussed to 80% regulatory focussed given the influx of similar and overlapping regulations globally. With a product focus, the data you need is there in the trade, and the mind of the trader, whereas with the regulatory focus, the data you need is locked up in thousands of agreements in English. Getting access to the data needed to quantify and measure legal risk is getting increasingly difficult. For instance the task of finding agreements which will be materially affected by a credit downgrade — trawling through them one by one isn’t good for anyone.
Edward: The existence of two similar but different regulatory environments in the US and EU mean I spend a great deal of time helping non-U.S. firms understand and navigate the evolving regulatory environment in the U.S. As one of the leading global law firms, we handle a lot of complex cross-border assignments which requires my expertise to ensure the deals get done within U.S. regulations and to ease liquidity across jurisdictions. Some firms are making a deliberate decision to avoid entering the U.S. markets, because they don’t want the added complexity and cost of having a compliance programme with the U.S. in addition to the EU. The effect of this market fragmentation is that liquidity is splitting, which does not benefit the global markets, stability or liquidity.
Adam: The political landscape and beyond has been dominated by the result of the Brexit referendum. Whilst many of its consequences have obviously yet to be seen, the last year has seen an increasing mobilisation of change management resource. This has had to be combined with other regulatory projects, such as those to enable the market to implement MiFID II and the evolving world of cleared derivatives and margin for non-cleared derivatives. These topics haven’t just absorbed regulatory resource either — changes are increasingly also being seen at the transaction level.
What do you see coming up in the next twelve months?
Adam: I see a continuation of the move away from what were traditional working practices and employment structures for lawyers — the most traditional of professions — to much more flexible working practices. From full-time employment with one employer to the ability to deliver one’s key expertise (in a more flexible way) to the people who need it.
I also believe that legal tech will thrive given the successes of such technology in helping the legal industry grapple with its own challenges (such as the automation of drafting and negotiation and dealing with huge volumes of data). The impact of developments in the financial markets (in turn largely a response to regulatory and political change) is only going to amplify this.
Edward: The work necessary to come into compliance with the Initial Margin (IM) requirements on uncleared OTC products will be more difficult that many market participants likely anticipate. IM will require firms to enter into a triparty agreement to govern the holding of assets, and therefore custody too. Purely domestic arrangements in the U.S. won’t face this challenge because they can easily sign-up with a triparty agent as domestic business is all under our own regulations. Once you go cross-border, issues like security vs title transfer arrangements, local laws and different service providers (and their operational set-up) come into play. This highlights why it is important for lawyers from both sides to understand the particularities of cross-border regulatory issues and know which provisions can be negotiated under all applicable laws. Even a basic a basic triparty agreement can take weeks to negotiate and custodians have a finite capacity to engage with on-boarding firms.. Then throw into this mix a cross-border element and multiple custodians, and things can get much more complicated, in others words – plan ahead!
Michael: Legal work has always been labour intensive, but the pressures to keep costs down now are huge. Computers are a long way from having any meaningful ‘understanding’ of contracts keeping many tasks manual. There are firms investing in machine learning to try to bridge the gap but there is a huge task to translate legal concepts into data points which can then be processed further with high reliability. We need legal work to become more mechanised and cheaper to increase the flow of OTC business – our profession isn’t easily scalable.
Where could technology help the industry?
Edward: Anything that makes negotiation more efficient is a good thing. I wish the tools in front of me would provide an interactive way to confirm defined terms and their working within the transaction, this could hopefully save time and allow great amounts of focus and time spent on details that cannot be automated. There are many larger conversations, with a particular focus on OTC derivatives, regarding how IT can benefit clients and law firms. Linklaters has collaborated with tech companies in producing technologies that can perform document review and regulatory checks, and continue to look for ways that IT can be incorporated into our profession. As these technologies develop, law firms and their clients could benefit from IT where the editing tools have built in intelligence to make coding or drafting quicker with automatic checking and insertion of provisions.
Michael: The law needs to learn from the programming world – at the moment if you ask a lawyer to define the five trigger events for a bespoke provision they fall flat on their faces. The representation of contracts in English has to end, we need to make a radical step by inventing a new method of representing the law which machines can process and humans can verify. Maybe not a representation like maths which is highly symbolic but something like XML which has structure and precision but can also be read and understood for verification purposes by people. The data to manage legal risks is locked up in un-readable PDFs and the sooner we start to move into new data formats the better.
Adam: We mustn’t let the qualitative nature of much of what we lawyers do dissuade us from making progress towards efficient workflow, for example in contract drafting and negotiation. There are a number of initiatives which provide good solutions in this area. We need to build on their good work to ensure that the industry becomes more dynamic.
How would you like to see the industry change?
Michael: The recent paper from ISDA and Linklater’s starts to lay the foundations for a radical future in which contracts become like a programming language akin to FpML, let’s call it Legal Markup Language (LML). My wish is that legal technology embraces the 21st century and we see a rethink on how the entire ISDA documentation framework is defined and processed by machines, and gets away from using English as the primary representation. Imagine a legal risk impact assessment using machine readable data, we would then be able to examine trade structures and portfolios for embedded legal ‘options’ as it were and put a value on those circumstances if they occur.
During the recent re-papering for uncleared margin ISDA made a strong push to use standardised documentation, but I saw some firms adding verbiage and provisions which over-complicated the documents for no real benefit and delaying the process. When we say we are going to use standard documents, we have to mean it and walk the walk, not just talk the talk.
Edward: The OTC market is so complex now that it takes considerable time for newcomers to get oriented and make progress. I would like to see firms think of the OTC market as more approachable and as a source of risk transformation solutions, rather than the negative way some have portrayed it following 2008. Another area ripe for improvement is the relationship between regulators and market participants. It would be great for both parties to have a joint aim of facilitating business to solve real-world problems while being compliant—at times the goals of the two sides seem at cross-purposes. I would also like to see better understanding of the products, how they work, and where the risks and benefits are because these are key to a thriving market.
Adam: I would like to see the legal industry become less fragmented on issues of technology and other reforms of its working practices. There is a long way to go before we can consider ourselves an industry which leads the field in innovation, yet there is so much strength in the depth of legal resource that this should not be the case. Combining that pool of expertise with some of the excellent legal tech proposals out there must be the ultimate goal.
What could ISDA do to make life easier for the market?
Michael: ISDA see the need for technology to transform the legal profession and the paper with Linklater’s is evidence of new ideas. The ISDA Master has been revised over the years but remains largely intact in the face of the challenges of the 2008 crisis, I’d like to see a reduced number of elective provisions to speed up the execution. There is a need for a new approach to the ISDA master agreement looking towards the next 25 years, using new technology throughout the ISDA stack enabling a leap forward.
Adam: By keeping on doing what it is doing: predicting and monitoring issues arising in the derivatives market and engaging with industry participants and other experts to propose and implement those solutions. I would, however, like to see ISDA work in an even more inclusive way so that we bring more diversity into the conversation.
Edward: ISDA has done a lot already, I recommend people continue to use them as a resource and visit their website and published materials to learn more about the ISDA Master Agreements, CSAs and related documentation. I’ve discovered that you can’t read about a single provision, but you need to learn about an entire document and how it is used in more practical and real-world terms, to really understand how it works. ISDA provides great resources including live programs and conferences to help with this. Given the depth of work by ISDA, everyone should aim to attend an ISDA conference to keep abreast of current developments and learn about the breadth of what ISDA is doing to support the market.
What are Your Three (Professional) Wishes?
Edward Ivey, legal negotiator for Linklaters, New York:
- To make ISDA business more approachable
- For new technologies to assist in document drafting and review
- For better harmonization of regulations between jurisdictions
Adam Ward, owner Amunet Partners, a legal consultancy in London:
- For Brexit not to occur
- To make it easier to find good legal people
- Improved communications between lawyers and counterparties
Michael Beaton, Partner, DRS LLP in the UK:
- That legal teams get a higher profile
- That legal teams get a budget to make real change
- That technology transforms our profession (for the better)
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