Introduction

On 22 July 2024, ISDA published its latest “Digital Strategy Questionnaire”.  The results of the survey provide a useful benchmark against which other market participants can measure their own performance in terms of understanding the contents of their trading documentation.

Who participated in the survey?

42 institutions participated in the survey – so it was quite a small sample size.  The results probably shed more light on the activity of the sell-side than the buy-side, with 34 of the 42 respondents (80.95%) being either banks or broker-dealers.  Two respondents (4.76% of the total) were institutional investors.  There was also one government-sponsored bank and one supranational organisation.

Nonetheless, there was some representation from the buy-side, with one respondent from each of the following categories:

1. 1. corporate,
   2. hedge fund,
   3. insurance company, and
   4. mutual fund.

It’s also probably fair to say that the respondents tended towards the larger end of the market as nearly all stated that they are in scope for VM regulatory requirements (97.62%) and/or IM requirements (92.86%).

What does the average portfolio look like?

The profile of agreement portfolios of the survey respondents was probably fairly typical of most market participants.

56.00% of ISDA Master Agreements were 2002s, 39.00% were 1992s and 7.00% were 1992s that had been ‘upgraded’ (either bilaterally or through protocol adherence) to incorporate certain provisions from the 2002 (such as the Close-out Amount).  Approximately 6% of the total were ‘deemed’ ISDAs (for example, through entry into a longform confirmation or adherence to the March 2013 DF Protocol).

Almost 90% of the ISDA Master Agreements were governed by either English law (50.01%) or New York law (39.74%).  Only 0.36% were governed by French law and only 0.08% were governed by Irish law.  Some other governing law accounted for 9.75% of the total.

How do your peers go about acquiring agreement data?

The survey confirmed that legal document digitisation is THE top priority trade lifecycle category for derivatives infrastructure investment.

54.76% of respondents (23 out of 42) confirmed that they use some kind of digital automation for capturing data.  However, of those 23 respondents, 82.6% (19 of the 23) said they exclusively used MANUAL PROCESSES to actually acquire data from documentation.  To the extent that automation exists, it seems to come later in the process – in the automated processing of data and the feeding of downstream systems (such as collateral management, operations, payment/settlement and reporting platforms).

The application of technology seems to be much more prevalent in other areas.  Examples include digital contract execution (employed by 30.95% of respondents), contract generation (21.43% of respondents) and contract negotiation (19.05% of respondents).

What data are your peers looking for?

The survey indicated that the provisions most typically captured include ISDA Master Agreement schedule elections.  Not much detail was provided as to the nature of the actual provisions but, presumably, this focuses on things like Additional Termination Events, the applicability of Cross Default and governing law provisions.

Unsurprisingly, the CSA (both the IM CSA and the VM CSA) is also a real focus for data capture.  Terms captured include Thresholds, Minimum Transfer Amounts, Eligible Collateral and associated haircuts, Events of Default and Access Conditions, Margin Approaches, Applicable Regimes, Pledgor Access provisions and Custodial elections.

What do your peers do with the data once they have it?

Seemingly, not a lot.

Only 31.71% of respondents reported using digital automation at the counterparty level.  For those that do, monitoring of net asset value triggers seemed to be the most popular use case.  Most worryingly, in terms of risk management, was the fact that 68.29% of respondents positively stated that that DO NOT use any contract data.

Do you want to change?

So, almost everyone sees the value of acquiring contract data, but almost nobody is actually doing it.

Even among the biggest firms, only 9.5% truly use some kind of automated data extraction for actually pulling data from agreements.  Unbelievably, over two-thirds do NOT use agreement data at all within their risk management processes.  These facts led ISDA, in a moment of monumental understatement, to conclude that “the industry is not optimally leveraging the possibilities of structured legal data”.

Very true…

More to the point, there are SO MANY possibilities…

And so many risks for those whose view of their contractual obligations remains opaque…

But this is no longer just a game for the big boys.

Ark 51 is a platform that uses artificial intelligence to provide you with insight, hindsight and foresight into your agreements.  It will deliver huge benefits in the way you manage contract risk and identify commercial opportunity.  It’s a genuine investment which won’t require an army of paralegals or a huge budget to implement.

If you see the need for change and are interested in a platform that can help you to punch way above your weight without breaking the bank, drop us a line at [email protected].