Contract Data Operations

Food for thought: Are financial products too complex?

22 April 2021

Here’s some food for thought. Since the lockdown started in the UK, people have become obsessed with reading the wrappers on food. It’s amazing what you can learn from a wrapper – from how far your strawberries have travelled before they reach your breakfast table to how many Russian twists it takes to work off a few biscuits.

But just imagine for a moment a store filled with random cartons and tins without any distinguishing features or wrappers – Marks & Spencer offer over 6000 products so how would you manage the risk of buying something inappropriate for dinner? The answer is, you couldn’t.

It’s just as easy to get bamboozled by the sheer number of products and acronyms in the world of finance. Over the past 30 years, markets have evolved rapidly, and financial instruments have become more and more complex – but have ‘products’ really changed and is there a way to understand them better?

To answer the first part of the question, it’s helpful to study and understand the past. Historians and academics have long written about the origins of money, from the theories of commodity, fiat and credit coinage to the rise of derivatives driven by the desire of farmers to manage risks associated with the effects of nature on their crops. It’s an undeniable fact that at the foundation of these theories are the core products of cash and commodities, from which bonds and equities emerged as instruments of credit and debt.

If there’s a reasonable argument that core underlying products haven’t changed for decades – then what makes financial instruments of today so varied and complex? The fact is that markets have become highly innovative, and structures have invented new ways of trading old products. In other words, buyers and sellers have created new wrappers to wrap around core products.

But here’s the kicker. Since products such as bonds and equities became dematerialised and open outcry and voice trading were largely replaced by electronic platforms, the new products have existed only in contract law. Qualified financial contracts, terms sheets, prospectuses and other legal wrappers define the characteristics of these new products and set out the expected behaviours and rules of the road for traders, operations, and risk managers to abide by. Logically then, if you want to understand products better and manage your financial risks with any degree of certainty and confidence, you might want to start by reading the wrapper.

Likezero’s software offers the visibility most financial institutions are missing across their counterparty relationships. Our contract data operations solution  removes manual intervention associated with contract review and data extraction, and it allows organisations to consume accurate contractual data and “read the wrapper” faster than ever before.

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