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NEW ISLA STANDARDS PROVIDE THE FOUNDATION FOR RESOURCE OPTIMISATION, EFFICIENCY AND RISK MITIGATION

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Andrew Dyson, CEO, ISLA (International Securities Lending Association) and Akber Datoo, CEO, D2 Legal Technology

 

Modernising the management of contracts is long overdue. While many market participants in the securities lending market have reaped some of the efficiencies and risk mitigation benefits delivered by the use of systems and data for some time, their highly experienced documentation and legal teams are still constrained by manual processes that have remained fundamentally unchanged for decades. The result is not only wasted time and resources but a lack of vital control: day to day securities lending operations are not governed by carefully negotiated contract terms and organisations are still compelled to use outdated methods to provide the required information to regulators, such as under SFTR.

That is all set to change with the introduction of the ‘ISLA Clause Library & Taxonomy’. Introducing standards is an important step in the digitisation journey, which builds on the Global Master Securities Lending Agreement (GMSLA) preprint forms to improve efficiency, reduce the time spent by negotiators and lawyers in the drafting, negotiation and execution of master trading agreements – and provide a new platform for the use of securities lending data that will transform resource optimisation, regulatory compliance and risk mitigation.

The industry is on the cusp of an amazing opportunity. Andrew Dyson, Chief Executive, International Securities Lending Association (ISLA) and Akber Datoo, CEO, D2 Legal Technology (D2LT) explain the changes ahead in the digitisation journey.

 

Standards Imperative

Increasingly sophisticated data, systems and technology underpin every aspect of financial trading. Yet the legal agreements that define business relationships are still created in isolation – stored, at best, on separate document management platforms; at worst, hidden away in individual filing cabinets or MS Outlook folders. There is no integration with the rest of the business (despite the impact these documents have to a number of stakeholders), with no link to the systems used to manage pricing, risk, the transfer of securities, and cash movements.

In addition to the implications on operational processes and risk management, this manual approach compels experienced negotiators and lawyers to spend far too much time on tedious document creation rather than valuable contract negotiation. Institutions are failing to truly align agreements with day to day activity. With the ever expanding regulatory burden, the lack of rapid access to consumable contract information has become a serious operational drain and risk management challenge.

Digitisation is imperative. This is vital and valuable corporate information – automating document creation and management will provide a platform for better monitoring the rights and obligations of parties to a contract.  But that cannot be cohesively achieved without standards – for one, there are at least two parties to any trading relationship. Today, while the GMSLA is the standard master agreement for governing securities lending transactions, every market participant uses its own interpretations, and its own house style, so identical outcomes are expressed in very different ways across the industry. Without standards, it is impossible to capture, compare or share data. Progress on the digital journey demands the creation and widespread adoption of trusted standards.

 

The Role of ISLA

The role of industry bodies such as ISLA has evolved in recent years – and the creation and ownership of standards has become a key requirement to support industry change. In a recent survey asking 105 ISLA members for the key legal developments and enhancements they would like ISLA to develop for the industry, 80% called for a clause library. Institutions recognise the need for a standard approach to contracts to support the digitisation of the GMSLA, because of the opportunities this can bring.

Now published, the new ISLA Clause Library & Taxonomy is a key step in the digitisation journey, providing institutions with a standard approach to mapping contract terms. Adoption is simple – whether firms are simply writing contracts using MS Office and sharing via email or using contract lifecycle management (CLM) tools. Firms can identify, rationalise and align GMSLA document templates to the ISLA Clause Library & Taxonomy – essentially swapping existing clause libraries for the new standard.

The operational implications are significant – especially for those with ‘one to many’ relationships. With no need to spend endless hours negotiating broadly the same point with multiple different borrowers, the efficiency gains will be huge. Plus, of course, negotiators can massively reduce the time spent creating documents, releasing more time to focus on negotiation of material terms and added value activity.

 

Automation Opportunity

However, a standard, digitised approach to document creation and storage is just the start – the next stage is to proactively use that easily consumable data to optimise resources such as capital, liquidity and collateral. The ISLA Clause Library & Taxonomy provides the platform for new efficiencies, allowing firms to embrace document generation and negotiation platform tools. With template management, workflow, approvals and execution facilities, as well as metrics and reporting to help make the documentation process faster and far more efficient.

In addition, with legal agreement terms collated through the negotiation process, they can be automatically provided on execution to collateral, liquidity, risk and operations teams, ensuring the core components of each contract are not only available to all but the key requirements are automatically embedded within day-to-day activities.

With a structured data representation of the agreement, systems can not only be searched to provide a rapid check of agreed obligations and rights, but responses are automatically enforced through direct integration with operational systems and platforms. For the first time, vital legal agreements will no longer be buried but actually used to support business optimisation decisions in real time and conducting “what-if” analysis – and that is incredibly exciting.

 

Conclusion

There is still more business value to be unlocked in the digital journey.  In 2022, we hope to see the integration of the ISLA Clause Library & Taxonomy with its Common Domain Model (CDM). In addition to improving the management of legacy contracts that have been created over the past two decades, firms will also have access to a standardised representation of legacy contracts within a legal agreement data model.

This change will also pave the way for the use of data extraction tools with Artificial Intelligence (AI) and Natural Language Processing (NLP) capabilities, allowing institutions to optimise resources such as capital, liquidity and collateral – as well as simplify regulatory reporting and day to day operations.

An integrated Clause Library and CDM will also provide the building blocks for regulators to impose far more rigour over the compliance process with regulations such as Securities Financing Transactions Regulation (SFTR) and EMIR – without overburdening institutions. Rather than demanding a list of information required, regulators will simply be able to provide a piece of code that can be uploaded by the institution and automatically search out and provide the data, in the correct format – digital regulatory reporting. For institutions, no more wading through complex compliance documentation; or embarking upon expensive and resource demanding projects. For regulators, the ability to update and expand compliance demands far more frequently in response to changing risks.

Digitisation is overdue but ISLA legal agreement standards will deliver fundamental change. The future is truly bright – and the best is yet to come. It is now time for firms to embrace the ISLA Clause Library & Taxonomy as part of that journey.

 

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Why Zero Trust and securing the supply chain is key to post-pandemic recovery

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Jim Hietala, Vice President, Business Development and Security at The Open Group

 

Banking and finance have grown to provide a vast range of services to people, touching every part of our lives from splitting dinner bills with friends to buying your first home. At heart, though, the value they provide might be boiled down to a very simple statement: they offer security and interoperability.

Which is to say that, when we use money, whether that is to pay for the bus or establish a pension, we need to be certain that it will reach the right destination, regardless of which systems it passes through, without being intercepted along the way. Interoperability ensures that desired actions happen; security ensures that undesired actions do not happen. Between them, these two key capabilities give us vital freedom in how we financially interact with people and businesses.

 

Roads and walls

That simple statement, however, is not simple to implement. The industry has long relied on open standards in order to achieve interoperability: from basic identification needs performed through standards like the International Bank Account Number system, to complex interactions like those managed through the Open Banking Standard which is currently transforming the British banking experience, fairly managed rules which everyone understands are essential to modern finance.

These standards, of course, are not static, and need to keep evolving in order to meet new needs. The same can be said of security – banks might still be associated with huge metal safes and vault doors in the popular imagination, but we all know that that’s not what keeps our money safe today. The question of security is now a digital one. From multi-factor authentication, to Transport Layer Security encryption, to automatically blocking access from unfamiliar devices and locations, the industry has been an early adopter of a wide range of technologies which manage or control access.

The need to develop and improve security approaches is still present, though. As is always the case with cybersecurity, risks need to be continually reassessed as the operating context changes – and, indeed, innovations in how people interact with banks always need to be made with security implications in mind. At the same time, new methods and strategies for cyberattacks are always developing, and there are good reasons to believe that now is the time for a fundamental shift in how we think about the topic.

 

The new weak link

Banking and finance, it is needless to say, are among the highest-value targets for attackers, and that means that if one route to compromising the industry becomes too difficult, they will look elsewhere for their opportunity. This is precisely what we’ve witnessed happening in some of the highest-profile breaches of recent times as organisations in other industries have dealt with the realities of supply-chain attacks.

In late 2020, for example, the security consultancy FireEye discovered that it had, alongside many other organizations, fallen victim to a sophisticated intrusion which took an obscure and convoluted path to its target. The victims were users of software offered by the company SolarWinds, which was successfully infected with a trojan. As the SolarWinds tool was an approved piece of software, FireEye and others happily brought that malicious code inside the gates (so to speak) of their own networks. This gave the attackers a route to manipulate FireEye’s own software and ultimately give them access to sensitive and otherwise highly secure environments.

What’s important to understand about this attack is that no amount of network-focused security would have prevented it: rather than trying to pass as an authorised user, the attackers worked a situation where the actual point of infiltration was carried out by genuinely authorised users.

It’s a scary situation, and a tactic that becomes more viable for attackers as our digital infrastructure becomes more complex. As businesses in the sector offer their customers richer online experiences – often in ways which, as with Open Banking, seek to enhance interoperability – they also become more dependent on a whole stack of platforms and tools. Rather than build a new back-end system from scratch, for instance, a bank might bring in a fintech platform from a vendor, who will themselves use development and operational tools from other vendors, who themselves will have further dependencies on other vendors.

This supply chain, in other words, is starting to look like a vast new attack surface which requires a new approach to secure.

 

The end of trust

If securing networks is no longer enough, we need to look to models which secure the data and assets which those networks are there to carry. This is what the Zero Trust model offers: rather than assuming that any device on a network must have passed a security checkpoint and is therefore trustworthy, Zero Trust assumes that every action is potentially malicious, and performs security on an ongoing, case-by-case basis.

While the principles of Zero Trust are not new, the need to put them into action has never been greater. Few industries have gone untouched by the societal changes which the pandemic triggered, never mind the economic impact, and successfully bouncing back from those economic consequences will require innovating towards a position which reflects the expectations of modern consumers. For banking and finance, that means digital tools which work from anywhere, securely and intuitively.

Which brings us back, of course, to the other half of the value which this industry offers: just as new systems for interoperability need to be designed with regards to maintaining security, new security models cannot jeopardise interoperability if they are going to successfully preserve the freedom with which people expect to deal with their finances.

That’s why the industry’s adoption of Zero Trust has to happen from a position of open standards. Just as shared understanding powers institutions’ abilities to accurately communicate their customers’ intentions to one another, it is needed to enable mutual understanding about what needs to be kept secure and how. In a challenging and rapidly evolving environment, that’s a priority for all of us.

 

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NutreeLife triples production with finance from Siemens Financial Services

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Plant-based snack manufacturer NutreeLife has massively increased its production capacity with the help of a hire purchase solution from Siemens Financial Services (SFS).

Founded in 2017, NutreeLife is a rapidly growing company which produces vegan protein bars, snacks and other healthy vegan products. Following a significant increase in demand, the manufacturer wanted to invest in a new production line.

As Patrick Mroczak, MD and CEO at NutreeLife Ltd explains, “We were ready to invest in the next stage of business development. We needed new equipment to meet demand but we also wanted to preserve our cash flow to deal with the volatility of the pandemic.”

To protect the business’ working capital, SFS suggested a hire purchase arrangement. Under the agreement, NutreeLife could acquire the equipment immediately and with no upfront costs. Instead, SFS tailored the arrangement so that the company could spread the cost over 5 years in regular payments and at the end of the arrangement NutreeLife will automatically own the equipment outright.

Under the hire purchase solution, the manufacturer also met the conditions for the UK government’s super-deduction tax initiative, whereby a company investing in qualifying new plant and machinery assets is able to claim 130% of the equipment’s value in year one.

“As a relatively new business, it’s not always easy to gain access to the right finance at a good price but SFS were incredibly accommodating. They really understood the benefit of the technology for our business and helped us unlock the investment,” adds Mroczak.

With the new equipment and technology installed, NutreeLife has been able to triple its production and turnover, and expand operations in tow.

“Despite the ups and downs of the pandemic, the new production line has helped us to keep things moving. As demand rises we’ve been able to take on much more staff and use our working capital towards stockpiling raw materials when needed.”

And the business’ success has not gone unnoticed. NutreeLife was awarded Small Business of the Year at the 2021 Lancashire’s Be Inspired Business Awards (BIBAs).

“Working with SFS has truly opened up news avenues of business for us. The team is so fast and responsive and clearly dedicated to finding the best solution for our machinery needs,” comments Mroczak.

Kirsty Talmage-Rostron, Business Development Manager – UK South at Siemens Financial Services comments, “It’s always exciting to work with an innovative award-winning manufacturer like NutreeLife. Despite the challenges of COVID-19, we’ve been able to help the business rapidly develop and look forward to continuing to support this growth strategy as the business expands into new markets.”

 

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