In the first marquee joint venture between a Big Four accountant and a Magic Circle law firm, Allen & Overy(A&O) has teamed up with Deloitte to create a tech-driven service to help banks handle post-Lehman regulation.
The new service – dubbed MarginMatrix – will deploy automation to help banks address incoming global regulation of the $500trn over-the-counter (OTC) derivatives market. The rules under the European Market Infrastructure Regulation (EMIR) framework will require counterparties for derivative contracts not processed through an authorised clearing system to provide additional margins for their net exposures.
The reforms – which A&O estimates will require a large banking group to provide around $10bn initially in additional margin alongside thousands of new contracts – are a major compliance challenge for the securities industry and potentially a lucrative product line for advisers.
MarginMatrix codifies legal regimes in multiple jurisdictions and automates the drafting of documents based on computer-assisted analysis. A&O claims the system can create a document that would conventionally take three lawyer hours in just three minutes. On its estimate, the 10,000 OTC contracts a major bank would normally hold can be processed in 12 weeks with one person deploying the system, against 15 years of lawyer hours.
A&O will run the programme and provide legal input, while Deloitte will provide project management to large teams of negotiators in multiple jurisdictions.
A&O derivatives partner David Wakeling came up with the concept. He said the programme 'will allow [major banks] to carry on trading derivatives without worrying that they may be, for example, complying with the US rules, but they're not compliant with the Singapore rules. What we're doing is gold plating all the regimes and making sure their trading relationships works all over in the world.'
After finishing a prototype of the programme in June last year, A&O approached Deloitte with a proposal in November. Wakeling (pictured) added: 'We thought that it was all very well that our system would spit out a beautifully crafted legally compliant document, but it would probably be negotiated and there's a lot of work around execution. We started talking to Deloitte and said: "You're very good at large scale, disciplined projects." The scale is thousands and thousands of contracts in multiple jurisdictions, so it's the managed services arm coming in from Deloitte.'
A pioneering tie-up of a leading accountancy group and an elite global law firm on a high stakes project will be seen as a significant development for the legal industry and further bolster A&O's progressive credentials after previous initiatives such as its flexi-lawyer arm Peerpoint and its suite of online services, aosphere.
A&O senior partner Wim Dejonghe commented: 'MarginMatrix is an example of the way in which we are evolving our offering in the face of changing client needs. We foster a culture of entrepreneurialism and risk-taking, which enables our partners to deliver market-leading initiatives like this one.'
The new OTC regulation was expected to come into force on 1 September but the European Commission last week said the implementation deadline would move back, with a likely date in the middle of 2017, though US implementation will happen in September.
Wakeling said the reaction to the project has been positive. Six global banks have already signed up to the service including one 'Bulge Bracket' house. 'What became very clear very quickly is that this is exactly what they needed. This is a very worrying thing to have global regulations kicking in this year in lots of regimes which are very complicated and a system and a process was exactly what they needed,' Wakeling toldLegal Business. 'We very quickly picked up quite a lot of clients. It's become a very significant business for us.'
Around 20 A&O partners are dedicating 'significant' time to implementation. A&O's London derivatives partners Emma Dwyer, Guy Antrobus and Paul Cluley worked with Wakeling through the programme's creation. Hong Kong derivatives partner Ross Stewart and regulatory/capital markets partner Yvonne Siew, Singapore capital markets partner Matthew Hebburn, New York derivatives partners Deborah North and David Lucking, and Washington DC-based partner Bill Satchell have also been involved.
Deloitte's team working on the project includes its New York, Hong Kong and London offices. Its team is led by partners Hugo Morris and Katelyn Brown.
Morris commented: 'MarginMatrix's ability to codify the law across multiple jurisdictions, auto-draft contracts and provide a controlled workflow environment for contract negotiations will lead to significant cost savings and help maximise institutions' ability to achieve regulatory compliance.'