Smart Contracts: The Way of the Future for Financial Master Agreements?
The new regulatory requirements which are coming into play in the over-the-counter derivatives space (particularly clearing and margin requirements) are leading to firms reassessing their legal documentation and financial master agreements – to ensure compliance. In addition, more sophisticated systems are being put in place to cope with the increased regulatory requirements.
Until now, lawyers involved in negotiating financial master agreements have exchanged Word documents with each other. Typically, once signed, the Word document which reflects the agreed-upon terms, is scanned into an electronic filing system. This means that parties are simply left with an image of what the terms of the agreement are. This data is not accessible to other downstream processes or systems. Any data from that contract has to be manually extracted and fed into other infrastructures. For example, if Bank A has agreed to accept ZAR cash as collateral from Bank B, but has agreed to accept Euro cash as collateral from Bank C, this information cannot be accessed automatically by the collateral management system. Rather it has to be manually looked-up and fed back into the collateral system.
Smart contracts will use blockchain technology to change all of that, by making certain elective or variable provisions in the contract ‘live’. The PDF version of the agreement will still be created for legal purposes, but downstream systems will be able to tap into the contract and automatically pull the terms contained in the live fields. Data extraction from the contracts will therefore become automated. It will ensure that systems are always up-to-date with the latest contract data, and manual intervention and human error will be minimised.
In addition to this, using smart contracts will allow reports to be run on master agreements that a firm has with its clients. It will be able to highlight non-standard clauses, and contracts where thresholds are too high; or flag provisions which are no longer in-line with new regulatory requirements. By simply running a report, all this data will be accessible, instead of the alternative – lawyers spending vast amounts of time manually trawling through the hundreds of legal contracts to pull the data that is required.
Another possible function of smart contracts is to include an approval log showing which authorised staff members approved certain clauses. This would create an audit trail of who signed-off on what terms.
Finally, the use of smart contracts could also mean that instead of lawyers exchanging marked-up Word documents showing changes which have been made to the document; the negotiation could take place in the cloud, where the smart contract is updated and amended by the negotiators as approvals from their relevant firms are given. It could flag where outstanding terms are still needing approval and which negotiator still needs to respond. Think of it as an uber platform for master agreement negotiations!
Melissa van der Merwe (DeriviDoc Director)
21 October 2016