ISDA derivative contract data extraction using artificial intelligence

Today, in response to increasing regulatory requirements, banks and other participants in the OTC derivatives market need to improve their ability to manage counterparty exposures and the corresponding collateral obligations.

There are a number of solutions on the market that can help with the static data but they still require the manual extraction of the key terms from lengthy legal agreements to be input as metadata into collateral management systems. CloudMargin, a partner of RAVN is an example of one such solution.

ISDA (International Swaps and Derivatives Association) Master Agreements are a standard format agreement that govern the trade of over-the-counter (OTC) derivatives (those trades which are not conducted through an Exchange). These documents in themselves don’t change, however, the schedules and annexes are negotiated at length between two trading parties and once agreed form the basis of any trading. The Credit Support Annex (CSA) in particular contains bilaterally negotiated variables which must be captured with 100% accuracy in the collateral system in order to achieve a reliable collateral management process.

Artificial Intelligence (AI) and the automation of the process of reading and extracting key provisions and definitions from contracts is becoming an increasingly attractive option due to an industry now saturated with regulatory constraints. These regulatory demands born out of the crash have seen a rise in central clearing for OTC derivatives, use of trade depositories, tightening eligibility criteria, Basel III capital charges and a change of internal counterparty credit risk management practices to name but a few constraints pushing operations departments to their limits.

In some cases, these regulatory changes will require the repapering (re-negotiation) of certain existing contracts, a requirement aimed at reducing unacceptable levels of risk, which will be an extensive and time-consuming exercise. In turn, this will cause significant documentation management problems for users of derivatives.

Solutions such as RAVN ACE joins elements of AI and information processing to deliver a platform that can read, interpret, extract and summarise the content held within ISDA CSAs and other legal documents. It converts unstructured data into structured output, in a fraction of the time it takes a human – and with a higher degree of accuracy. This sort of platform can be further enhanced with a collateral management technology solution to increase the analytical efficiency of client legal documents and to focus on higher value work for clients.

Even where companies have a good understanding of their contracts and collateral, innovative and readily available AI systems can offer an audit service to compare the actual terms in the documents with what has been manually abstracted. Due to the historic nature of some agreements, and from past experiences of other manual abstraction exercises, there are likely to be differences.

Having extracted (or audited) the metadata, AI data extraction systems can then analyse the contract estate, identify the high credit risk relationships and as a result, quickly and easily scope the size of the repapering exercise required.

Above all, the emergence of new technology solutions offers a variety of functionalities and benefits that are of interest to the financial world. In this case, by automating the pushing of extracted metadata into a firms collateral management system of choice, institutions will be able to tackle the three main challenges they are facing- namely to manage time efficiently, stay regulatory compliant and keep costs to a minimum – something incumbent technology and manual methodologies simply cannot do.

The right data extraction solution

In summary, when it comes to derivatives contracts data extraction required by new regulations for organizations participating in the OTC derivatives market, CloudMargin brings together the software solution and the expertise needed to calculate initial margin and — most importantly — meet compliance deadlines. In addition, for members of the CloudMargin community, Margin Tonic offers free guidance consultations to help users on their journey to full compliance.

Moreover, in regard to ISDA data extraction using AI, the simple automated efficiency of iManage RAVN can serve as the technological breakthrough for firms looking to cut costs and reduce risk while at the same time increasing productivity and profit margins.