The reasons why you need to digitize your ISDAs with intelligent document processing technology
By Dr Lewis Z Liu – Co-founder and CEO at Eigen Technologies
Capital market firms are using AI-powered intelligent document processing (IDP) to digitize ISDA documents, enabling them to generate new opportunities, optimize risk management, improve compliance and reporting processes and drive operational efficiencies. In this blog I explain why these financial institutions are implementing IDP for ISDA digitization and how.
What’s the catalyst for ISDA digitization
In 2017, when Eigen was only 15 people strong, we won our first-ever production customer and use case. The customer was Goldman Sachs, and the use case was to digitize all of its QFCs (including ISDAs, GMRAs, etc.) to support Dodd-Frank compliance. The implementation was so successful that Goldman Sachs decided to invest in Eigen’s Series A. At the time, we thought that every bank was going to jump on the bandwagon – to use AI to digitize their ISDAs and other Capital Markets documentation, and by 2020 all banks would have complete data coverage of all of their Capital Market documents.
We were wrong. In fact, we were too early to the market. To our surprise, the vast majority of the market was capturing both operational data and regulatory data (e.g. A3 table for QFCs) in an ad-hoc manual way. Digging into this further, we noticed that many of the banks received slaps on the wrist for poor compliance with QFC due to poor data quality or processes. At the same time, the notion of AI reading and answering complex regulatory questions on an automated basis did not sit comfortably with the various committees within these G-SIBs.
But something suddenly accelerated AI adoption here. We suddenly went from only serving Goldman Sachs in ISDA digitization to having processed more than 50% of all ISDAs in the US market in the last 18 months. Having talked to many customers, including Heads of Derivatives Documentation, Legal COOs, Capital Market COOs, Chief Risk Officers, and General Counsels across most of the G-SIBs, I have reached the following conclusions as to what is the catalyst for rapid adoption of AI-driven ISDA digitization:
- Regulatory Push – Regulators are much more diligent than they have been in enforcing and auditing various regulatory requirements such as Dodd-Frank, BRRD, etc. Many of our customers have started to digitize their ISDAs either as a result of/or to prevent slaps on the wrist from regulators.
- Inflationary Costs – wage inflation has added significant cost pressure for manually collecting data from these documents. Many banks still employ fully qualified attorneys to extract data, but we have seen extreme wage growth amongst junior lawyers making this an unsustainable option.
- Extreme Market Volatility – from COVID, Archegos, and Greensill, to SVB and Credit Suisse, counterparty risk and market volatility have been at historic highs. Risk Management is starting to mandate a much more comprehensive understanding of counterparty risk and legal terms and for good reason.
- Competitive Data Landscape – as more banks and buy-side firms digitize their documents, including ISDAs, those who do not have complete data are at a disadvantage when it comes to negotiation and positioning. As such, it is becoming increasingly important to have complete data just to keep up.
- “iPhone moment for AI” – the ChatGPT phenomenon means that AI is now in the hands of the consumer, and anyone can use it. As a result, every Board has AI on top of their agenda, and we notice that digitizing documents is an obvious and easy way to leverage LLMs to add value and ‘check the box’.
What are the benefits of digitizing ISDAs
The benefits are pretty straightforward and align directly with the catalysts for digitization noted above:
- Regulatory Compliance – increase regulatory compliance. In our conversations with regulators, there is an increasing view that 24-hour real-time compliance is needed more and more, especially, in this time of market volatility. As such using AI like the Eigen platform may be the only way to stay compliant properly.
- Cost Reduction – reduce ISDA data collection costs by 80-90%. This is especially salient given the inflationary costs of today
- Risk Reduction and Understanding – having complete data access means that risk management can properly assess counterparty risk.
- Improved Competitive Position – by having complete data access across your ISDAs you can compare terms and be much better prepared for negotiations.
- Staying Cutting Edge – the pressure is on to leverage AI in ways that benefit shareholders, customers and your workforce. By using IDP to digitize your ISDAs, you check the AI box and continuously keep it checked by having a cutting-edge solution delivering a healthy ROI at the heart of your day-to-day operations.
What ISDA digitization lessons have we learned?
Having worked with many banks and firms on their digitization efforts, we’ve learned what’s important and what anyone looking to undertake such a project should consider before they start:
- Partner with someone who understands the complexity of the ISDA family of documents. This is especially key as there are several complexities that only a mature market player can address, including:
- Parent/child mapping
- Extraction and mapping of all the ATEs, including the ATEs that you may not know you have
- CSA-eligible collateral mapping
- Fund-level data points (dealing with joinder tables and umbrella agreements).
- Pre-trained models with the flexibility of adding your own questions is the best of both worlds – providing speed of implementation and ongoing scalability.
- Human exception handling remediation, model risk management and auditability are crucial to ensure data accuracy and integrity. You need to be able to evaluate your models and validate and remediate the output to give you confidence in the resulting data.
The Eigen ISDA Digitization Solution has been specifically designed to automate, accelerate and augment ISDA document and data workflows for financial institutions and includes pre-trained models to provide customers with rapid ROI.
Eigen’s AI-powered platform delivers intelligent document processing capabilities to financial services firms enabling them to quickly and accurately extract, classify and interpret virtually any information from any document to make smarter business decisions, eliminate manual processing, and optimize data flow. We have an optional GPT integration enabling customers to leverage the power of LLMs alongside the market-leading accuracy and model governance framework built into the Eigen platform. Request a demo today or get in touch to speak to one of our intelligent document processing experts.
- World Economic forum 2020
- Gartner Cool Vendor 2020
- AI 100 2021
- Lazard T100
- FT Intelligent Business 2019
- FT Intelligent Business 2020
- CogX Awards 2019
- CogX Awards 2021
- CogX Awards Best AI Product in Insurance
- Forbes The AI 50 2022
- Ai BreakThrough Award 2022
- FStech 2023 awards shortlisted