A new platform co-constructed by global firm Allen & Overy, market data and analytics group IHS Markit and document generation and negotiation platform SmartDX aims to give firms a better handle on initial margin (IM) regulation work.

Margin Xchange, the new tool, intends to be a portal for all negotiations around initial margin regulation, a set of collateral requirements used to reduce risk in the derivatives market. The platform supports document generation, negotiation, execution, case management and data exports. The platform also stores actions as data, giving organizations the ability to review and analyze document content through algorithms.

Paul Cluley, partner at Allen & Overy, said the firm developed the idea for Market Xchange and provided the content knowledge for the product. The firm decided to move forward with a technology-based approach to IM regulation after seeing some of the potential limitations in expanding out the firm's existing work on IM compliance.

Allen & Overy chose to partner with the two companies because of their existing roots in document negotiation and market data. “It made perfect sense to bring these three pieces of the puzzle together,” Cluley said of the collaboration between the firm and software companies.

“It was clear to us that the traditional approach couldn't be scaled up, and there would be an explosion in the number of derivatives market participants who would come into scope and the volume of negotiations required. We needed industry experts to work with us,” Cluley added.

To effectively serve IM negotiation, the platform has pretty extensive collaboration features, allowing multiple parties to work across the same matter.

“For every trading relationship, it's five or six agreements. That's because as well as posting the collateral, both counterparties also need to take into account their relationships with the custodians who manage the collateral for them. So there are both bilateral and tri-party contracts to consider, which understandably makes things very complicated,” Cluley said.

The platform's greatest achievement, Cluley noted, lies in its ability to store derivative documents as data, readable both by humans and machines. “The current Word document, PDF-based system is very cumbersome, and this solution is a step towards making the documentation side of the market work more slickly in the long run,” he said.

“It's vital that we improve how the many thousands of documents out there are used and recorded, once they've been put in place,” Cluley later added.  

Cluley said that technology holds opportunities for other applications for the firm and its client base. “It doesn't have to stop at the derivatives market, and clients are already letting us know about alternative potential use cases for a system like this,” he said.