When The Law Meets Technology

Across the banking industry, the combination of lawyers and technology hasn’t kept pace with automation throughout the trade processing lifecycle. One area that has resisted reform so far is the
January 25, 2017 - Editor

Across the banking industry, the combination of lawyers and technology hasn’t kept pace with automation throughout the trade processing lifecycle. One area that has resisted reform so far is the process of creating, revising and executing documents like the ISDA Master and CSAs, something that still relies upon Word and email.

Repapering Credit Support Annex For March 1st

Across the banking industry, the combination of lawyers and technology hasn’t kept pace with automation throughout the trade processing lifecycle. One area that has resisted reform so far is the process of creating, revising and executing documents like the ISDA Master and CSAs, something that still relies upon Word and email.

This article intends to explain the risks and benefits of moving from the traditional approach to a collaborative web-based platform called SmartDX. We’ve broken down the two approaches by categories and then compared each one with a realistic view of the risks and benefits of each. The background research for this article included consultations with independent lawyers who have not used SmartDX, but who were offered to share their opinion on the collaborative web-based platform. As we proceed, we’ll build up a side-by-side picture of how each approach compares and summarise at the end.


Executive Summary

Applying technology to the existing legal negotiation process needs a change of mind-set. By looking at the benefits of a shared collaborative platform, controls, efficiency and cost become manageable in a way not possible before. Comparing the traditional email and Word approach to a modern web based platform like SmartDX we see the following comparisons. See Table 1.

Repapering Credit Support Annex for March 1st

Engaging Your Counterparty

We know that lawyers the world over have access to email and a version of Word, giving everyone a de facto common platform to work from. The instant you ask a counterparty to participate with a new platform for negotiations, you are placing a burden on them to sign-up and use your new technology.  This brings problems, as your counterparty then needs approval to sign up to your platform and learn how to use it.

SmartDX is free to the buy-side and is used by ISDA and Markit as a key component of the ISDA Amend platform (http://www.markit.com/product/isda-amend) to enable on-line agreement processing. As part of this platform Markit are providing free training to buy-side firms, as the payback is in the speed of negotiation for everyone.


The dangers of email

Everyone uses email, no problem there? Not if you send the wrong agreement to the wrong person – giving away negotiation points or revealing private terms.  SmartDX avoids all those risks through verification of people and centralisation of the platform.

The contacts at your counterparty need to be on-boarded before being given access to your agreements. This is a short process designed to make sure that the right people have access, with the right contact details. Email is used for notification, but no details of any negotiation are revealed by email, keeping control of the sensitive negotiations on the platform.

Figure 1: Communication via the platform

Version control

During a negotiation, it is typical to hold two versions of an agreement, the black-line showing changes and a clean version. Achieving this relies upon people using Word correctly (or similar change tracking tools) and sending only the documents to the counterparty you want them to see. In some cases you may wish to ‘lock down’ provisions which you aren’t offering for negotiation, and display them to the counterparty. You may also want to show a third party counsel specific provisions without sending the whole agreement to protect client confidentiality. In this case SmartDX provides both approaches:


  • Keeping private internal negotiation out of sight of the counterparty
  • Showing the counterparty a change-tracked version of the agreement
  • Also showing a clean PDF view of the final agreement for both parties
  • Making provisions ‘read only’ and using the platform to send fragments of an agreement


Outcome: Word and email is the de facto standard, but moving to SmartDX has many benefits. SmartDX has training materials available on-line and is free to the buy-side.


People & Process

The biggest change from using a platform like SmartDX is a transformation of the risks and effort involved during the negotiation process. Typical processes see a reduction in risks, and most processes see a reduction in time and effort, due to the integrated nature of the SmartDX platform. See Table 2.


  • Templates and policies: The SmartDX platform provides a way to define, publish and integrate pre-made agreements, which drive the drafting. Human integrity is to be respected, but having a system to control the implementation of policies transforms the way teams work.
  • Teamwork: Smaller teams work well when they are in one office within shouting distance of each other, but as teams grow and span multiple locations, the SmartDX platform provides team leaders and managers with immediate ways to review progress and manage work allocations
  • Drafting: Relying upon Word may work, but SmartDX brings much more. A negotiation starts with an interactive interview sequence to make choices from the template elections. From there the platform streamlines the modifications to an agreement, tracks versions and communications on a timeline, and makes joint work on an agreement possible.
  • Filing, Faxing, Execution: During a negotiation SmartDX ensures that the agreements are saved in the ‘DocBox’ where relvant staff can see the drafts. Upon execution, the negotiator can request sign off from pre-defined internal staff, who’s authority and signatures are already setup. Tracking execution internally and with the counterparty is far simpler.
  • Communications: The individuals involved in a negotiation are purposefully added to the ‘DocBox’ in advance. Your counterparty is setup and validated before any agreements are revealed, and then they can track progress and respond to drafts right within the platform without you having to prompt them, unless really necessary.

Table 2: Cost and Risk Savings of a Platform Approach

Controls via Templates

Setting aside custom language and provisions that will always be hand-crafted, it is reasonable to say that for many agreements (such as CSAs) the choices during negotiation can be narrowed down to a checklist of elections. Eligible currencies and assets, downgrade provisions, minimum transfer amount, interest rates and many more terms can be pre-defined with allowed elections. In this case a new approach would provide a way to define the acceptable choices (from your perspective) and give the negotiating lawyer guidance on what can and can’t be included in a draft document.

Taking this further, a platform could enforce these policies either strictly, or with exceptions and report back with any deviations. Additionally the beginning of a negotiation can be driven by a process to make choices within the policies that quickly arrives at a draft document fully compliant from the outset.

Future options: If the negotiation process can be driven using a template with the freedom to hand-craft reduced or removed – does the negotiator need to be a highly paid artisan lawyer or a well-trained but less expensive clerk? This point needs debate as the flow of communication between you and your counterparty isn’t always going to fit the pre-defined policies and scenarios. Where the documents are standardised this approach could make quick progress on bulk changes (such as re-papering using standard CSAs) at lower cost.


Progress Tracking

Tracking a team of people gets harder as the team gets bigger. How do you know the progress of many negotiations when you rely on email? Once someone is away from the office, the flow of progress (and information) stops, and there is no easy way to know the current state of a negotiation.  Moving away from email and Word onto a central platform brings new options such as re-allocating work when necessary, having immediate feedback on progress, and a direct view of draft documents with agreements being stored and tracked centrally. See Figure 2.

Figure 2 shows the history of a negotiation during a day with notes on the amendments made, and responses from the counterparty.


Kicking off a negotiation

One approach to initiating a negotiation is to require the front office or credit risk team to provide a signed off ‘term sheet’ showing precisely what the lawyer is being asked to incorporate into the agreements. This term sheet is another Word and email workflow process that relies upon manual work to create, agree and sign-off.  In the current environment of re-papering for the bilateral margin rules, there is also the existing body of CSAs, which contain terms already negotiated between parties. And of course there is the input from your counterparty on their preferred terms.

Using SmartDX, a template for an interactive on-line interview process can be prepared and sent to the front office, credit or collateral. Those teams can work through the template selecting the provisions they desire, until a complete ‘term sheet’ is prepared, signed off, and delivered to the legal team.

Outcome: Moving away from the artisanal approach to a hybrid where the policies and process of a negotiation are more controlled by the system, means new options for lowering people costs.

Figure 2: Progress timeline of a negotiation


A problem with legal agreements is that there is no public standard on how to represent them as data, rather than a Word document (or PDF). Going forward, the panel agreed that expressing a legal agreement as data would bring huge benefits throughout the drafting cycle. See Figure 3.

Figure 3 is a context diagram of a legal team showing the many touch points they have within a firm, and the needs for data into and out of their process.

  • Terms for new agreements from Front Office, Credit and Collateral
  • Existing terms from previous agreements, so as to remain consistent with counterparty relationships
  • Policies on preferred terms and provisions from front office, credit and collateral
  • Feedback from counterparties on draft agreements

On the output side are the systems that need to know about the executed agreements, which themselves are part of the entire ISDA agreement structure and can have an impact on the profit and loss from a counterparty, and influence trading directly.  The collateral management team will need to process the terms and obligations negotiated in the CSAs, so need precise details of the final document, as will your counterparty. See Figure 4.

Using the traditional Word/PDF representation, there is no easy way to extract the terms of a CSA and place them into a downstream system. Imagine how much better this situation would be if underneath the negotiations was a pure data representation of what had been agreed, using XML and therefore easily fed into other systems? This is what SmartDX does behind the scenes, and maintains during negotiations. Once a document is executed, rather than a human reading a CSA and keying the data manually into a downstream system, the XML can be imported directly and processed automatically.

Figure 3: XML showing terms in a CSA

Markit Counterparty Manager

Over 5,000 buy-side firms representing over 78,000 funds use the Markit Counterparty Manager service to store and retrieve documentation. The SmartDX platform integrates with this service meaning a counterparty can log on and receive the output of your negotiations in one place.

Outcome: Manual keying of data or interpretation of a Word or PDF document is less accurate and more costly than representing agreements as data. Using XML to enable data storage, transfer and integration is the way forward.



Risks involved in negotiations are hard to measure quantitatively but can be understood subjectively. Comparing the two approaches, there are some risks to consider. See Table 3.

Figure 4: Data flows related to the Legal team


Moving to a new platform isn’t without cost, and the main impact is training people on the new way of doing things. The training required takes place in a short period of time, and most importantly for new users, SmartDX provides an on-line editor for agreements, which resembles Word in the essential elements of template creation. The approach to organising work is all around the web-interface, including communication between parties. This still relies upon email to notify people of the need to take action but doesn’t expose the negotiation or agreements to the email platform at all.

For a supervisor, there is a range of new tools to track progress on documents, view the version history and manage the flow of work. Compared to the complexity of a trading or risk management system, this transition can be completed within a day, what can’t be anticipated is which counterparties will be able to engage via the new platform.  The overall cost of moving to the SmartDX platform isn’t high, and the training can be completed by anyone within a few hours.

Table 3: A comparison of the fundamental approaches

Next Steps

Any firms facing the 2017 deadline to comply with the Uncleared Margin Rules have little time to put in place the required CSAs. According to a vote at an industry event 41% of agreements in place can be resolved using the ISDA protocol, in which case a way to re-paper the large number of bilateral relationships is needed right away.  In this context of repapering:

  • SmartDX can provide a lower cost, more scalable approach
  • On-boarding and training isn’t a large investment
  • A small amount of technology work is necessary to get up and running
  • The platform is free to the buy-side
  • The platform is supported and used by ISDA and Markit

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