23 August 2023
Contracts involving derivatives, stock lending, and repo transactions, amongst others, introduce a layer of complexity that amplifies existing pain points in contract management – from digitisation, analysis and intelligence. Domain expertise, complex structures (even in standardised industry templates), tables, definitions, and document cross referencing create their own set of challenges. These complexities have often made it difficult for banks to leverage technology solutions – and gain successful outcomes from it.
However, technology is now offering solutions to address these challenges and usher in a new era of streamlined operations and enhanced trust.
With an increased regulatory focus around counterparty management from the likes of the Bank of England (PRA) and ECB, requiring systematic reviews of client and risk management, including onboarding and ongoing management that includes contracting processes, now is the time to leverage this to drive change.
Banking, and in particular global markets, contract management has been grappling with a range of challenges that hinder operational efficiency and risk mitigation. These pain points have underscored the need for innovative solutions. Through in depth research, both independently and from our own discussions, we have found six core challenges that banks are looking to solve.
1_ Lack of trust and data confidence
A cornerstone issue in contract management has been the lack of trust and confidence in the data extracted and used downstream. Critical decisions are often based on incomplete, outdated, or inaccurate information. This not only poses financial risks but also damages the overall credibility of the contract management processes.
2_ The cost and risk of contract variance
The variance in contract terms in complex counterparty contracts, especially when compounded with risk factors, can lead to substantial financial and operational challenges. Our analysis shows variance increases significantly as risk increases – often due to the client profile and the level of negotiation around those specific terms. Inconsistent terms and conditions can impact profit margins, increase legal disputes, and erode stakeholder confidence, as seen, for example with the Archegos default.
3_ Low levels of digitisation
Manual operations have persisted as a dominant approach in contract management, leading to inefficiencies, errors, and lack of real-time visibility. Low levels of digitisation hinder the ability to respond swiftly to market changes and regulatory events.
4_ Data governance and traceability
A staggering 85% of the market remains reliant on manual operations, resulting in inadequate data governance and traceability. This lack of oversight increases the likelihood of errors, non-compliance, and operational inefficiencies.
5_ Poor data quality
The prevalence of poor data quality has undermined the efficacy of contract management efforts. Slow response times to market and regulatory events, coupled with inadequate data coverage for front-office operations, have further exacerbated the problem.
6_ High costs
The escalating costs associated with regulatory compliance, data capture, and exception management have strained profitability. Moreover, increasing oversight of data processes has raised operational expenses and hindered the agility of contract management.
As the contract management landscape continues to evolve, organisations cannot afford to ignore the transformative potential available and the competitive advantage that this can give them. The urgency to confront the challenges mentioned above,and soaring costs requires a paradigm shift towards automated solutions. Efficient contract management becomes a strategic advantage rather than a burdensome necessity. We have helped clients to invest in the untapped potential within counterparty contracts and transform the way these are managed, boosting their profitability and operational excellence.
Clients have asked us to share some of the market insights we’ve seen in counterparty contract management, an area that is getting increased focus within firms. Formed from in-depth research with 30 global banking institutions, including 15 GSIBS our insights report is helping our clients to understand these challenges and aiding them in constructing a compelling business case to leverage existing and emerging technologies, including Generative AI – a solution that holds immense promise, if adopted for the right use case, in addressing these pain points.
At Likezero, we have a unique insight into how the Investment Banking industry is affected by these challenges and how they are responding.