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A new approach to close-out netting legal opinions in respect of OTC derivatives and securities financing transactions
Journal of Securities Operations & Custody,
15
(3),
260-277
(2023)
Abstract
Close-out netting has been, and remains, crucial to the success of capital markets transactions such as OTC derivatives. A key credit risk mitigant, it has significant regulatory capital impact for prudentially regulated financial firms if they have obtained reasoned legal opinions confirming the enforceability of the close-out provisions of the relevant master trading agreement. These legal opinions are, however, complex and extremely nuanced, resulting in excessive costs in reviewing and (sometimes incorrect) application of the advice they provide. This paper considers the inherent challenges in the review and application of these legal opinions and whether they could perhaps be partly expressed in formal logic to address these challenges.
Keywords: close-out netting; ISDA; legal opinions; regulatory capital; automation; derivatives
The full article is available to subscribers to the journal.
Author's Biography
Akber Datoo is Founder and CEO at D2 Legal Technology (D2LT), an award-winning global legal data consultancy advising firms on the use of technology and data to unlock business value through legal change, and a professor at the University of Surrey, where he teaches Law & Technology, Financial Services Regulation & FinTech Policy and AI & Ethics. Akber advises financial institutions at the intersection of FinTech and LegalTech to achieve business optimisation, regulatory compliance and operational efficiencies. Prior to D2LT, he started his career at UBS, working as part of the front office IT team within fixed income derivatives and leading its participation in industry initiatives such as Financial products Markup Language (FpML). He then qualified as a lawyer with Allen & Overy LLP, qualifying as an associate in the Derivatives and Structured Finance Group. Akber founded D2LT in 2011, and he has overseen its growth across the UK, US and Asia. His work includes developing standards for document and legal opinion digitisation for the trade associations ISLA, ICMA and ISDA. Akber sits on Law Society's Technology Law Committee where he chairs the digital assets and smart contracts sub-committee and is a PRIME Finance Expert. He is the author of the Wiley textbook, ‘Legal Data — Banking & Finance’, published in May 2019, with a second edition due in H2 2023, expanded to cover digital assets and smart contracts. In 2019, he was recognised as ‘one of the top ten market shapers' in the Financial Times Intelligent Business Awards and for the development of an industry netting counterparty type utility at the Waters Technology 2021 Inside Market Data and Inside Reference Data Awards. He graduated with first-class honours in computer science at Cambridge University.
Paul Williams is a PhD student at the University of Surrey. He has a BA in French from the University of Birmingham, and a postgraduate diploma in law from the University of Westminster. He has extensive experience working as a lawyer in the financial sector in London, and most recently as a senior consultant with D2 Legal Technology, a leading legal change and data consultancy firm operating at the intersection of FinTech and LegalTech. A major aim of his PhD project is to explore how technology could be applied to the current processes of preparing and producing legal opinions (such as ISDA close-out netting opinions) in the context of business and financial settings.
Rhodri Whiteley is an undergraduate student studying maths and philosophy at Magdalen College, Oxford. He contributed to this paper during an internship at D2 Legal Technology.
