23 August 2023
In the highly competitive world of financial markets, banks are constantly seeking ways to gain an edge over their rivals. One powerful strategy many clients deploy is the use of highly bespoke clauses in financial market contracts, particularly derivative, stock lending, repo and prime brokerage documents. By negotiating tailor-made clauses, banks can optimise pricing, reduce risk exposure, and ultimately gain a competitive advantage in the market.
At Likezero, it’s fair to say we have seen our fair share of these bespoke clauses and often one of the first questions we receive when speaking with financial institutions is “Our biggest challenge is managing bespoke clauses, can your software handle these?”. Clients ask this as the true potential of these bespoke clauses can only be realised if they have the means to extract and transform them from their legal agreements, with the associated context, into structured data. Thus allowing for seamless integration of downstream systems to support risk management, pricing and collateral optimisation.
Truly bespoke clauses, also known as custom or tailored clauses, are contractual provisions that are negotiated and customised to suit the specific needs and preferences of the parties involved. In financial market contracts, these clauses go beyond standard terms and conditions. Instead, they address unique requirements, risk factors, and obligations that are specific to the involved parties and the underlying financial instruments. For example in CSAs, we have seen bespoke clauses cover multiple pages when detailing provisions such as concentration limits.
To harness the full potential of bespoke clauses, banks must overcome this critical hurdle: unlocking these clauses from their legal agreements and converting them into structured data that can be consumed and then optimised. The complex nature of these clauses makes it challenging to extract and interpret essential information accurately, especially when solely relying on manual operations. The lack of associated structured data against these clauses can impede seamless integration into downstream systems, where precise and consistent inputs are vital.
Technological advancements have paved the way for innovative solutions that bridge the gap between legal agreements and structured data. Whilst many market solutions exist to extract, interpret, and transform basic clauses from legal agreements into machine-readable data format, applying these technologies for bespoke clauses presents significant challenges. Extraction is just the tip of the iceberg when it comes to bespoke clauses, the key to transforming these clauses is to have a solution which has a robust data framework that seamlessly links together and manages different parts of the clause, resulting in a contextualised and structured data output – one that also holds the underlying legal text, along with the associated document coordinates. Moreover, the associated data model must be flexible enough to be adapted, extended or enhanced at any point in time to capture bespoke or unique elements.
Once bespoke clauses are transformed into structured data, a world of possibilities unfolds:
Streamlined pricing and valuation: Structured data can seamlessly integrate into pricing systems, enabling accurate and efficient pricing calculations based on precise contractual terms. By incorporating structured data into risk management models, banks can conduct more sophisticated analyses and stress tests, gaining deeper insights into potential risks and their impact on the overall portfolio.
Enhanced risk modelling: By incorporating structured data into risk management models, banks can conduct more sophisticated analyses and stress tests, gaining deeper insights into potential risks and their impact on the overall portfolio.
Regulatory compliance and reporting: Structured data facilitates compliance with regulatory requirements, simplifying reporting and auditing processes while minimising the risk of errors.
Data analytics and business intelligence: Structured data empowers banks to conduct extensive data analytics, unlocking valuable insights into market trends, client preferences, and performance metrics.
Client-centric solutions: Armed with structured data, banks can better understand their clients’ needs and preferences, allowing for more personalised and client-centric services.
The strategic utilisation of bespoke clauses in financial market contracts can indeed deliver a powerful competitive advantage to banks. However, to fully unlock the potential of these tailor-made provisions, banks must have a solution to transform them into accurate structured data, that can be seamlessly integrated downstream. By leveraging the right contract intelligence software, firms can bridge this gap, enhancing a wealth of opportunities for optimised pricing, risk reduction, and client satisfaction. Embracing this, banks position themselves at the forefront of the financial markets, ready to gain a competitive edge in the face of ever-evolving challenges and opportunities.