Legal data for banking : business optimisation and regulatory compliance

295 Pages·2019·12.096 MB·English

by  Datoo, Akber

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LegalDataforBanking
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Legal Data for Banking
BusinessOptimisationandRegulatoryCompliance
AkberDatoo
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Thiseditionfirstpublished2019
©2019AkberDatoo
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LibraryofCongressCataloging-in-PublicationData
Names:Datoo,Akber,1978-
Title:Legaldataforbanking:businessoptimisationandregulatory
compliance/AkberDatoo.
Description:Chichester,WestSuxxex,UnitedKingdom;Hoboken:Wiley,2019.
|Includesindex.|
Identifiers:LCCN2018061435(print)|LCCN2019005061(ebook)|ISBN
9781119357209(ePDF)|ISBN9781119357223(ePub)|ISBN9781119357162
(hardback)
Subjects:LCSH:Financialservicesindustry—Lawandlegislation—Data
processing.|Lawoffices–Automation.|BISAC:BUSINESS&ECONOMICS/
Finance.
Classification:LCCK1066(ebook)|LCCK1066.D382019(print)|DDC
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10987654321
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Contents
Preface vii
Acknowledgements ix
1 TheRoleofDatainaFinancialCrisis 1
2 TheLaw,LegalSystemandBasicsofContractLaw 11
3 StructuredFinanceandFinancialProducts–Derivatives 27
4 Data,DataModellingandGovernance 53
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5 BCBS239–LegalDatainRiskAggregation 81
6 CapitalandNetting 89
7 Collateral–Enforceability,ReformandOptimisation 115
8 CASS–ClientAssetsandClientMoney 155
9 LiquidityRiskManagementandReporting 167
10 ContractualImpediments–RecoveryandResolutionPlanning 187
11 DocumentGeneration/Data-DrivenContracts 213
12 SmartContracts 233
13 ElectronicandDigitalSignatures 259
AppendixA 267
AppendixB 271
AppendixC 279
Index 281
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Preface
Ifirstencounteredthecapitalmarketsandinvestmentbanksinthelate1990s.Thrust
intoatradingfloorenvironmentstraightfromacomputersciencedegreeatCambridge
University,therewasalovelymixofmathematics,businessandadrenalineonthatFixed
IncomeDerivativesTradingfloorthatIfellinlovewithandwhichsetthepathforderiva-
tivestobetheoneconstantinmyfutureprofessionalcareer.
Duringmylifetime,technologyhasbeenagamechangerineveryaspectofourlives,
not least the workplace and business, with the increasing reliance on computers, the
internetandsmartphones,totheincreasingdata-enabledworldanddigitaleconomy.
The investment banking and finance industry recognised this in the late 1990s and
early2000s,usingtechnologytoscaleandgrowbusiness.Butamongsttheinnovation
(cid:2) andembracingofchange,Iencounteredin-houselegalteamsandexternallawyerswho (cid:2)
wereseeminglyoblivioustotheempowermentofferedbyprocessrefinement,systems
anddata.Thelegalprofessionisquiterightlyaconservativeoneinapproach–onecer-
tainlydoesnotwantlawyerstobeovertrisktakers,rathertrustedadvisersandcounsel
throughtherisksthataretakeninordertosucceedinbusiness,andtobalancelegaland
commercialrisksasrequired.However,Ifeltthebalancewaswrong,andresultedinfar
toomanymissedopportunitiestounlockbusinessvaluethroughlegalchange.
AfterwonderfulyearsatWarburgDillonRead(UBSbythetimeIhadleft!),including
meeting my lovely and dear wife Naila during my time in New York, I decided to go
backtostudy,curiousthroughmyengagementwithin-houselawyersatUBS,particu-
larlythroughindustryinitiativessuchasFpMLandSwapswire(nowMarkitwire).There
surelyhadtobeawaytooptimisebusinessoperationsandachievethroughthemedium
oflegaldata,andIwashopingtofindthisoutviaajourneythroughthelegalprofession.
IwasfortunatetopractiselawatAllen&OveryLLP,amagiccirclelawfirm,withan
outstanding derivatives and capital markets practice. I worked alongside some of the
brightestminds,manyofwhomhadworkedonkeyfoundationalindustrydocumenta-
tion,suchasdraftingtheoriginalISDAMasterAgreementinamythicallysmokyroom
in1987.
Itwasonly,however,duringmysecondmentstothelegalteamsofRoyalBankofScot-
land(RBS)andCreditSuisse,thelatterduringthemidstoftheFinancialCrisisandthe
LehmanBrotherscollapse,thattheimportanceofthelegaldatareallystruckhome.
Decidingthatthetimewasright,withtheregulatoryimpetusinmanywaysforcing
thefinancialindustrytorecognisetheimportanceoflegaldataandsystems–especially
giventhatthefinancialinstrumentsattheheartoftheFinancialCrisiswere,inmany
ways, nothing more than contractual obligations – I decided to pull the two strings
together,legalanddata,foundingD2LegalTechnology(D2LT)inOctober2011.
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viii Preface
Over eight years later, we are truly seeing legal data come to the fore, through the
intersectionofFintech,RegtechandLegaltech.ItmaybeoveradecadesinceRichard
Susskindraisedthespectreoftechnologyreplacinglawyers,withhissensitivelytitled
book The End of Lawyers, but the arrival of commercially viable artificial intelligence
solutionshas,quitesuddenly,beguntomakethevisionlookevermorereal.Theques-
tion arises, though: Have organisations truly understood the new digital agenda – or
how to respond to digital disruption? This is not just about the use of automation to
reduceheadcountordrasticallyminimisefees.Itisaboutdeliveringbusinessvalueand,
critically,bringinglegalteamsoutoftheivorytowersandfundamentallyintothebusi-
nessmix.Thisrequiresnotonlytheuseoftechnology,butalsoacriticalexaminationof
thebusinessneed,andthecurrentprocessesusedtotryandmeetthatneed.Legaldata
isattheheartofthis.
The new model should be about using digitisation to become data driven in order
toaddbusinesscontexttolegalactivity.Particularlywithinthespecialismoffinancial
services,thenewlegaldigitalagendaisachancetobringlegalcounselfurtherintobusi-
ness and use digitisation and data connectivity to achieve hyper-awareness both pre-
and post-trade. With real-time recognition of key events and how they may affect a
position,anempoweredlegalteamcandrivenewandmeasurablevalue.Thegreatest
riskisinaction.
Thisbookismyhumbleattempttobringtogethersomeofthefoundationalbuilding
blocksrequiredtoempowerthecapitalmarketsbusinessthroughlegaldata.Asaresult,
bothtechnologistsandlawyerswillfindsomesectionsinthebookbasicforthemandso
(cid:2) theyareprobablybestskippedover.However,Ihopeallreaders,betheystudents,legal (cid:2)
practitioners,technologists,businessanalysts,traders,riskprofessionals,regulatorsor
academics,willfindsomethingofuseinthisjourneyonthedigitisationofthelaw.
AkberDatoo,London–20February2019
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Acknowledgements
Firstandforemost,aspecialthankyoutomyparentsfortheircontinualsupportand
encouragementineverywalkoflife.Withoutyou,Iwouldnothavebeenabletofinish
thisbook,especiallywithouttherecenttriptoFrancewhenitfinallytookpropershape.
Nothankyoucaneverbecompleteenoughtoacknowledgeyourroleasthebestparents
asoncouldaskfor.
IwouldalsoliketothankmydearwifeNailaforherlove,patienceandsupportasIhave
beenwritingthisbook,togetherwithmywonderfulsonanddaughter,AbbasHassan
andFatemaZahra(whohaveconvincedmethatIhavemissedmanyatrickinfailingto
coverthemoreimportanttopicsoffootballandfairiesinthechapterstofollow).Abbas
HassanandFatemaZahrareallyarethebestchildrenafathercouldhave–fun,loving
(cid:2) andcaring–andIhavemissedoutonsomuchwhilstwriting! (cid:2)
I would like to thank all of the staff at D2LT,especiallyJessica Bryant, Katie Oliver,
PeterNewton,JasonPugh,MichaelWood,SubhankarGhosh,CarolLanceandAdrian
Jenks,whohaveendlesslyreviewedandassistedwithvariouspartsofthebook,provid-
ingtheirexpertviewsandfeedback,aswellascheckingforaccuracyandcorrectness.
ManythankstoEmmaPatient,SeniorCounselatHSBC,forhermeticulousreviewand
commentonChapter7.
Ihavebeenfortunateinthetimeinvestedinmebyanumberofmanagersandcol-
leagues, such as Jeffrey Golden at Allen & Overy, Ulku Rowe and Kirren Basavaraj at
UBS.Yourtimeandefforttoguideanddevelopmyknowledgehasbeeninvaluable.
My colleagues and clients, including Colin Hall Nicholas Sainsbury and Vasan Siva
(Credit Suisse), Amir Mehdi, David Todd and Laura Muir (Barclays), Sam Hooker,
Vivienne Chan and Jillian Melton (HSBC), Simon Berkett (Macquarie), George
Simonetti, Lee Cummins, Richard Paolini and Josh Luber (Wells Fargo) and Ciarán
McGonangle(ISDA)–thankyouforallthelegaldataadventureswehavebeenthrough,
manyofwhichformthefoundationofpartsofthisbook.
Finally,butnotleast,thankyoutoWileyformakingthisbookareality.Inparticular,
thank you to Thomas Hykiel (with whom I shared the initial idea – I am grateful for
hisenthusiasmandsupport),KariCapone(Manager),ElishaBenjamin(ProjectEditor),
BanurekhaVenkatesan(ProductionEditor)andGemmaValler(CommissioningEditor).
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1
TheRoleofDatainaFinancialCrisis
This first chapter serves to provide context for the rest of the book – setting out the
causes of the 2007–2008 Financial Crisis (the Financial Crisis) that swept the global
financial markets well over a decade ago and has substantially impacted the banking
andfinanceindustryasweknowittoday.Itwasthisturbulentperiodthatprovidedthe
impetusforthesubstantialbodyoffinancialregulationthathasbeenintroducedover
thelast10years,aswellastheenhancedlegaldatarequirementsthatthisbodyofregula-
tionimposes,extendingbeyondthebusinessandoperationalneedsforsuchlegaldata.
InsubsequentchapterswewillfurtherexaminetheFinancialCrisisthroughvarious
lenses, as some of the more pertinent aspects of recent financial regulation (such as
regulatorycapitalrequirements,marginforunclearedderivativesandrecoveryandres-
(cid:2) olutionplanning)areconsideredindetail.Itisimpossibletoadequatelyconsiderlegal (cid:2)
datawithinthebankingindustrywithoutreferencetotheFinancialCrisis.Thesubstan-
tialregulatorychangethathasoccurredaffectshowbanksconductbusiness;therefore,
legaldata,onceinitiallyimportantforbusinessoptimisationandbusinessprocesses,is
nowmandatedforregulatorycompliance.
For the purpose of this book, any reference made to the ‘Financial Crisis’ should
be taken to mean the financial crisis of 2007–2008 and its subsequent impact. In the
contextofthisbook,bylegaldata,weareusuallyreferringtolegalagreementand/or
legalopiniondata,orthatrepresentingfinancialrulesandregulations.
TheFinancialCrisis–LookingBack
The world of finance has undergone a tremendous period of change, including much
retrospective questioning and attempted diagnoses, since the Financial Crisis. Albeit
withthebenefitofhindsight,theseedsandsignsofimpendingtroublewereundoubt-
edlypresentandgrewinthebuild-uptothedramaticeventsof2007.Manyoftheeffects
oftheissuesthatcametolightduringtheFinancialCrisisunexpectedlycompounded
eachother,catchingoutinvestors,dealers,banks,regulatorsandpoliticians.
Most put the cause of the Financial Crisis down to the rapid expansion of the
securitisation markets and a backdrop of accommodative monetary policies serving
toheightenthevalueofthehousingmarketpriorto2007.Sub-primeborrowerswere
encouraged to take out more and bigger mortgages – in effect, creating an inflated
‘housingbubble’.
Legal Data for Banking: Business Optimisation and Regulatory Compliance, First Edition.
Akber Datoo.
© 2019 Akber Datoo. Published 2019 by John Wiley & Sons, Ltd.
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2 1 TheRoleofDatainaFinancialCrisis
Some also attribute the Financial Crisis to finance professionals who lost track of
the risks they were generating by entering into securitised deals, compounded by a
lackofregulation.Bankregulationinrespectofthelevelofcapitalthatbanksneedto
holdbasedontheBaselAccordsplayedapartinencouragingunconventionalbanking
practicestooptimiseregulatorycapitaltreatment,contributingtotheFinancialCrisis.
The repeal of the Glass-Steagall Act removed the previously mandated separation of
investment banks and depository banks, effectively providing a stamp of approval for
a universal risk-taking bank model. Financial firms were allowed to move significant
amounts of assets and liabilities off-balance sheet, into complex structures such as
structured investment vehicles (SIVs), having the effect of masking the real risks, in
particular,capitalandleverageinvolved,onlytobeunmaskedandunravelledduringthe
fullforceoftheFinancialCrisis.Furthermore,theover-the-counter(OTC)derivatives
market was substantially unregulated, however, it increased exponentially in volume
andcomplexity.Fromsupposedlybeingarisk-mitiganttoolatheart,theirusagequickly
becameasignificantsourceofsystemicriskinthemidstoftheFinancialCrisis.
Overall, the explanations given for the Financial Crisis are still hugely contested.
Perhapsthisisbecauseoftheundeniablecomplexitiesofthesubjectandthebanking
systemasawhole,leadingtoanoversimplificationofitscausativefeatures,ormaybe
it is because of the tendency to lay blame or scapegoat on particular actors in the
financialmarkets.
It is crucial, however, to remember that banking is ultimately about taking risks.
Without the assumption of risk by those financial firms best placed to assume and
(cid:2) managetherisk,thereisnobankingbusinessandthereforenofinancialintermediation (cid:2)
system.Theissuewastheinabilitytoidentifyactivitiesthatweretooriskyforthebanks
toundertake,bothbythebanksthemselvesandbytheirregulators.
Within the financial markets, there was a natural incentive for the underpricing of
systemic risk by financial institutions. Absent regulation, they were not commensu-
rately burdened with the costs of the broader systemic risks, fostering and, in many
cases,rewardingriskybehaviour.ThroughtheFinancialCrisis,thepublicatlargeulti-
mately bore the burden of the market failure, due to the ‘too big to fail’ view of the
largestfinancialfirms.
Regulators’ forecasts of serious problems and ‘dire prophesies’ years in advance of
the FinancialCrisiswere largelyignored, partlybecause ofthe successful lobbying by
theveryfinancialinstitutionsthataretodayeitherbankruptorhadtoberescuedwith
governmentfunding.Forinstance,thefailuresofthetwofederalagencies(FannieMae
andFreddieMac)wereprecededin2005byasuccessful$2millioncampaignbyFreddie
MactolobbyCongressfromrestrictingtheirowninvestmentsinhigher-riskmortgages.
Thesesameagencies,banksandotherinstitutionsprovidedassurancesthattheirlend-
ing practices (including those enabling loans without adequate documentation) were
‘safe’basedonevaluationsofpastdata.
Dataplayedasignificantrolethroughafailuretoprovidebusinessintelligenceonthe
underlyingcausesoftheFinancialCrisis,occurringnotonlyattheindividualfirmlevel
but also at the broader industry and supervisory level, and being unable to aggregate
andderivetherequiredintelligenceinrelationtotherisingsystemicriskbeforehand.
Attheindividualfirmlevel,itisasignificantfailurethatthedataavailableandusedto
supposedlyoptimisethebusinessdecisions,infact,couldnotevenensuresurvivalin
manycases.
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