ICMA has launched a four-month initiative to develop its Global Master Repurchase Agreement (GMRA) clause library and taxonomy, designed to improve efficiencies in negotiating and managing repo transaction documentation. Carmella Haswell discusses its potential and the drive to standardise and digitise the securities finance industry
In the past year, the introduction of clause library and taxonomy projects has reinforced the vision of standardising and improving industry processes within securities lending markets. In particular, these projects have focused on modernising the management of documentation including repurchase agreement (repo) transaction documentation and securities lending contracts.
Most recently, the International Capital Markets Association (ICMA) launched its Global Master Repurchase Agreement (GMRA) clause library and taxonomy to improve the efficiencies in the process of negotiation and managing repo transaction documentation. The four-month initiative aims to build an industry-wide, foundational clause taxonomy that will support the association’s goal in promoting resilient, well-functioning, international and globally coherent cross-border debt securities markets.
ICMA believes increased standardisation and digitisation will drive more accurate data capture and efficient repo trade processing, both within firms and across the market.
Gabriel Callsen, director in ICMA’s market practice and regulatory policy team, says: “Digitisation of many aspects of fixed income market activity has accelerated over the last few years. This is true also in the repo market, where it’s been driven by regulatory initiatives like reporting under SFTR, the push for greater operational efficiency and of course by the digitisation of processes in the context of working from home.
“When a trade is executed, the details are shared in different shapes and forms between counterparties and market infrastructures. Normalising transaction data from multiple sources and systems comes at a cost, and so does the onboarding of technology solutions.” Callsen highlights the Common Domain Model (CDM) project and how it seeks to facilitate interoperability between firms and platforms, reducing the need for manual intervention, automating workflows and laying the foundation for innovation. The project was designed to capture transaction details in a data structure that is consistent across repo and bonds, securities lending and over-the-counter derivatives.
Standardisation
A recent survey by ICMA found that there were no fewer than 20 electronic repo trading solutions and more than 200 applications for collateral management, liquidity monitoring, corporate actions and ancillary activities available. This proliferation produces the potential risk of fragmentation — and standardisation is a requirement for ensuring connectivity between these elements.
Highlighting the importance of standardisation, Callsen says: “Lack of common standards and protocols is a major barrier to the adoption of new technologies and to new ways of automating business processes. Initiatives like the Common Domain Model for repo and bonds, which creates a standard means of representing the trade lifecycle, will not only form the basis of future digitisation and innovation but also create operational efficiencies for market participants.
“Similarly, negotiating and managing repo transaction documentation can benefit greatly from digitisation. Standardisation of the clauses within the Global Master Repurchase Agreement and the creation of a clause library seeks to improve efficiencies and facilitate automation of processes which remained hitherto largely manual.”
Standardisation is the process of creating protocols to guide the creation of a product, service or in this case a process, based on a consensus of all the relevant parties within that industry.
Jonathan Avery, senior product manager at LPA, a technology-based capital market solutions firm, says the move to standardise provides only good for the industry. He explains: “Standardisation should make the repo market more efficient and lead to clients being able to trade with more banks because the legal agreements are easier to negotiate. This, in turn, should provide greater liquidity. There are no drawbacks, especially as it gives market participants more time to manage risk, be compliant, implement regulatory change and respond to challenges such as COVID.”
Avery notes that ICMA has made a very positive step forward with this decision, and such standardisation should reduce risk and improve pricing for the buy-side and profitability for the sell-side.
Reinforcing this point, Martin Walker, head of product, securities finance and collateral management at Broadridge, believes the trend of standardising clause libraries, as done by ICMA, ISDA and ISLA, will be well received by the industry. He adds: “The benefits across all asset classes for general standardisation are broadly the same. Standardisation is one of the main drivers of increasing automation and reducing operational risk. This is particularly so in master agreements.”
One of the key challenges regarding standardised master agreements, relates to how firms have negotiated variations to key clauses or added annexes. This in turn has created difficulty in converting master agreement into the data and business rules needed by systems for automation, he explains.
Walker adds: “The process of mapping written agreements to data or business rules is a source of legal risk – sometimes from the simple difficulty of representing agreements in systems – but very often from the mapping process itself, whether people or natural language processing techniques are used. Standard clauses with standard meanings will make the entire process easier.
“The only possible drawback relates to financial innovation. While standardisation is a major aid to automation, an overly restrictive or inflexible model can limit innovation. However this seems to have been one of the factors considered in the design of the clause libraries.”
ICMA’s decision to standardise and digitise the repo transaction documentation process follows on from the International Securities Lending Association’s (ISLA) release of its own clause library and taxonomy in September.
ISLA’s project aims to build on Global Master Securities Lending Agreements (GMSLA) preprint forms to improve efficiency and reduce time in drafting, negotiating and executing master trading agreements. Prior to this, the International Swaps and Derivatives Association (ISDA) published its clause library for the ISDA Master Agreement in June 2020, which was aimed at bringing greater consistency in the drafting of clauses when there is no need for customisation.
Speaking to SFT, Michael Huertas, head of financial institutions regulation Europe, at PwC reflects on the digitisation efforts of the three regulators, ICMA, ISDA and ISLA and its potential. He says: “ISLA is fast on the foot of ISDA’s digitisation efforts. They’ve been thinking about the general move by the trade associations to digitise existing documentation suites and use this as an opportunity to also standardise, harmonise and create greater consensus amongst market participants on providing standard-form drafting options for commonly negotiated provisions. The ISDA approach has been very successful, ISLA will follow and I would think that ICMA will also be very successful in doing that for the GMRA.”
Industry approval
ICMA aims to upgrade the process in which repo documentation is handled across the industry. Using the clause library to mitigate the legal risk that comes with this current process, ICMA will introduce clauses that will: reduce scope for error and problematic or inconsistent drafting; improve the efficiency of negotiations by allowing lawyers and negotiators to focus on the most substantive and consequential clauses and issues; and allow for greater visibility in meeting business, regulatory and operational requirements.
However, Huertas does not believe it possible to reduce the legal risk in its entirety. He adds: “The aim of the clause library is to get consensus around the clauses that are already added into the specific parts of the documentation. You will never be able to reduce legal risk in a full sense because the law evolves across the various different jurisdictions in which the trading counterparties are based.”
He continues to say: “Equally, we anticipate this move will also help a more consistent and accurate reporting of legal agreement data for regulatory reporting purposes. The benefit to ISLA, coming on the coattails of ISDA, is that ISLA and its members are able to apply the lessons learned from ISDA’s efforts and adapt these to the securities lending markets’ specific needs.”
ICMA’s clause library will be shaped by the finance industry itself, where firms are able to consult and exchange views on the direction that the intended process of repo documentation is headed. For this reason, PwC’s Huertas believes the initiative by ICMA will be well received within the industry. However, LPA’s Avery says it will all depend on whether market participants use it. He explains: “To enable the development of technology-enabled contract delivery solutions, ICMA should make the clause library and taxonomy open source and expressly not claim intellectual property rights, but instead expressly encourage anyone (especially technology companies) to use them.”
This step towards digitisation gives rise to the question, is this the way forward for an efficient industry? According to Huertas, as long as the technology works and those involved in creating these processes are aware that they’re replacing operational risk with technology risk, there is a window of opportunity to minimise this operational risk around manual and paper-based processes.
“However, any digital solution is only as good as the digital hardware and the software behind it, and the ability for systems across various different counterparties to interoperate with one another,” Huertus explains. “But if the market can benefit from core solutions that build upon the consensus of the relevant trade associations, then this should speed up market participants’ digital transformation and improve compliance while reducing negotiation times.”
This ever-changing financial landscape has been altered substantially through the financial crisis of 2007-8, Brexit and now the COVID-19 pandemic. According to Huertas, this demands that ISLA, ICMA and ISDA to a certain degree, should also think about some of the wider-ranging issues affecting master agreement documentation suites. “Those working on the clause library — and the consensus that’s formed around that — might want to consider how best to ensure that the documentation works for the new reality of trading relationships post-Brexit.”
