Thursday, 19 July 2018

A&O launches swaps margin contract tool

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Allen & Overy has launched a new system to reduce the time taken for derivatives counterparties to rewrite legal agreements to ensure they fully comply with non-cleared margin rules that become effective from September 1.

MarginMatrix, which has been more than a year in development and was created in collaboration with Deloitte, codifies laws across multiple jurisdictions and automates the drafting of tailored contracts.

The law firm estimates that the automated service can handle 10,000 contracts in just 12 weeks while the process could take as long as 15 years if completed manually.

“This marks a real shift in the legal industry from documents to data,” said David Wakeling, partner at Allen & Overy. “The way of the world is changing. If something is required to be written thousands of times, it makes more sense to auto-write it.”

Under new rules governing the US$493trn OTC derivatives market, counterparties will be required to post initial and variation margin on their net OTC exposures. Studies estimate that a major swaps dealer will be required to provide around US$10bn of initial margin, with the rules requiring complex documentation changes.

Attempts to implement the rules on a global harmonised timeline were scuppered last week when the European Commission delayed EU implementation to mid-2017 for first-phase clients.

“A delay makes it more pertinent,” said Wakeling. “Repapering agreements is already an enormous project even with the system in place, but with two speeds of implementation it’s now double the work.”

Phase-one clients, typically large, global derivatives dealers, continue to push ahead with new legal agreements to comply with US and Asian rules from September. However, those agreements may have to be amended once the European rules are finalised to reflect any change to the final draft rules published by the Commission earlier this year.

“The largest institutions are all unblinking following the delay and will carry on repapering their agreements. For everyone else, the deadline gets pushed back, but not necessarily by much,” said Wakeling.

Phase-one clients in Europe are expected to be forced to post margin on their OTC derivatives exposures in March. Phase-two clients, which comprise the most active users of swaps, were scheduled to comply by next March - six months after the initial wave - but could now follow just two months after, pushing implementation to as early as May 2017.

Six of the largest sellside firms are already signed up the MarginMatrix system and some of them are in talks with A&O and others about the longer-term impact of the new rules on their systems after transforming legacy contracts to the new regime.

“A lot of clients are talking to us about what life is like after MarginMatrix,” said Wakeling. “Law firms aren’t usually involved with ‘business as usual’ discussions but we’re certainly part of the longer-term solution.”

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