Drill down from the tens of billions of pounds being coughed up by global banks annually for fines, litigation, settlements and regulation and one finds an unsung, stressed-out army of lawyers and negotiators struggling to cope with not just the accompanying, growing mountain of paperwork but also a way of working that for them has not changed for decades. They especially will be heartened to learn that London-based Clausematch is riding to the rescue armed with plenty of understanding of their plight and novel technology that promises to makes their lives an awful lot easier.
For the firm’s founders have dreamt up Clausematch on the back of their own personal experience as negotiators and technologists in top tier investment banks. Evgeny Likhoded, Clausematch’s co-founder, chief executive and driving force, for instance, has previously worked at Morgan Stanley negotiating contracts for trading OTC derivatives. Prior to that he was based in gas giant Gazprom’s legal department, working on documentation for trading gas, electricity and other structured products.
In explaining why legals and negotiators in banks are having such a tough time of it, why they are in desperate need of a solution like Clausematch, Likhoded quickly homes in first on the complexity of documentation processes within large institutions: “You can have many, many actors involved – potentially dozens who need to add content to documents and then others to approve it. And all of that needs to be version controlled, and you need to keep the audit trail.
“When you have 20 people or more working on one document, they can’t work simultaneously. When you send that document to five different departments and they come back to you with five different versions with comments all over, with approvals needed… then there is something in one email, something in another and so on . . .for the person that has to put it all together, it’s simply a nightmare. Plus, there are errors that are happening. It’s just the type of work no one wants to do, but we are stuck with it because there’s nothing else. Clausematch was created out of our own frustration with lengthy and painful documentation processes within large institutions. We want to simplify it all. We’ve built the platform especially for people like us.”
One can easily imagine that over the last few decades the combination of increasingly sophisticated markets and instruments has led to increasingly complex trading agreements, and surmise that regulation – especially post the Great Crisis – will have added another meaty layer of complexity to negotiations and contracts. Yet, amazingly, despite all these developments, large institutions are still working on legal documents in the same way they did 20 years ago: Microsoft Word documents exchanged via email. The last major advance in document editing functions dates back to 1995 when Microsoft made the incredibly useful “Track Changes” facility available for Word. The mid 1990s also saw the rapid growth in the use of the internet.
Likhoded adds: “When you look at today’s document workflow and collaboration platforms, they exist at the extremes of a spectrum. So, we have legacy workflow tools and business process management tools, which are great for managing workflows and approvals processes, at one end. Then, at the other end of the spectrum, you’ve got real-time collaboration offered by companies like Google, for example, with Google Docs. But you can’t marry the two together.”
Bringing it all together
Whatever the reasons for the lack of development in sophisticated, fully integrated document and workflow software and technology, Likhoded is clear that the status quo is no longer an option: “Especially since the financial crisis we have had a lot more regulation coming into force. Every regulation has an effect on legal departments, on compliance departments and ultimately it all ends up with more documentation within the organisation. My experience [from within institutions] was that we needed to streamline that process. We needed to go back to the process of how documents are created and how they’re approved in order to make sense of data within those documents. So we went back to the users and we asked them how they wanted to work on documents and what the problems were for them. Alongside that, we have incorporated our own experience – with Clausematch we are addressing problems we’ve personally faced working in financial institutions.”
The result of Clausematch’s rethink of the world of documentation is a collaborative platform which allows all parties to work together on documents in real-time. Likhoded highlights the platform’s data-driven approach to documents as a key innovation: “We don’t see documents as a collection of words. We see them as structured data. Each paragraph is a separate entity. That allows the detailed workflow to exist inside the document rather than separately, it gives institutions granular control over a document, over permissions, who can do what within that document.
“Imagine if you are able to work on a document and assign different approvers to different paragraphs within the document. You can see the history of each paragraph – who approved it, who changed it, who commented on that paragraph. But also, you can assign different roles to people at a paragraph level. So, within the document, you can say this person can edit this paragraph. This person cannot even see this paragraph. It allows you to have extreme control over content within documents.
“The end result is all parties can not only collaborate faster on documents but also ensure they have a rigorous audit trail for regulatory purposes. Just from a people perspective, it gives you control – you feel in control because you know exactly who has done what, who can do what on each document that you’re working on. It’s an intuitive way to work on documents in real-time that hasn’t really been provided for enterprise or for large institutions before.”
Clausematch’s promising proposition has certainly caught the eye of institutions. In 2014 it won Spanish banking giant BBVA’s Open Talent Challenge fintech competition and in that same year it graduated from the highly regarded Barclays accelerator programme. Earlier this month Clausematch was one of 15 companies selected to join Accenture’s Fintech Innovation Lab, based at Canary Wharf’s Level 39, giving it the opportunity to showcase its document platform to the 16 leading financial institutions collaborating on the programme. Seed investors in Clausematch include the high profile Tom Glocer, former chief executive of Thomson Reuters and founder and managing partner of Angelic Ventures, a family office focusing on early-stage investments in fintech, media, big data and healthcare.
Likhoded is keeping the identities of institutions Clausematch is directly engaging with in Europe and the US under his hat for now but says: “They are top tier banks. We have started working on proof of concept projects and trial projects for implementing our solution into certain departments within banks. We are looking at addressing specific problems such as issues arising for compliance teams working on policy documentation or responses to regulators where typically a lot of people are involved in creating documents and you need to have rigorous audit trail and approvals processes.”
Solutions for new rules
Against a backdrop of a rapidly evolving regulatory landscape Clausematch is also looking to develop solutions to help institutions prepare for new rules that are still in the pipeline. On the EU regulatory front alone, 2016 is going to be a pretty busy year. Solvency II rules have just kicked in for insurers but action later this year will include the Market Abuse Directive (MAD II); Key Information Documentation requirements for packaged retail investment and insurance-based investment products (PRIIPs); and Ucits V implementation.
A major focus for Clausematch is the introduction in September (through the EMIR regulatory vehicle) of tougher rules for OTC derivatives – a market valued at a mind boggling $600 trillion and famously described by Warren Buffet as a “time bomb” full of “financial weapons of mass destruction”. Regulators too are worried about the potential systemic risk posed by such a ginormous market. They believe its operation is too opaque and want to enforce greater transparency by requiring the clearing of OTC derivatives trades via clearinghouses or central counterparties rather than their being traded and negotiated between two parties as has traditionally been the case. Likhoded says the upcoming, more demanding clearing obligations will affect the entire derivatives market and all of its participants – banks, asset managers, pension funds, insurance companies and corporates – that use derivative products for hedging or other purposes.
He adds: “There are thousands of market participants in OTC derivatives – it’s the biggest market in the world. All OTC derivative trades have a document behind them and when the regulation changes, as it will later this year, you have to change the document. The big problem for banks is that we are talking about thousands and thousands of documents. For the market as whole we are looking at well over a million documents that will need to be renegotiated, agreed and signed in a very short period of time. It will require significant effort. To address the problem of just dealing with all this documentation it has been estimated banks will have to spend around $3 billion. That’s why Clausematch is addressing financial institutions first, because there is considerable regulatory pressure and they need cost effective solutions.”
The challenge presented to banks by the forthcoming changes in the rules for OTC derivatives show just how exposed legal departments and documentation within institutions are to external developments. Likhoded explains that typically most of the work carried out by legals and negotiators on documents ends up as PDFs. These however are unstructured and the data they hold cannot be automatically extracted and entered into other internal systems -such as collateral management systems, settlement systems, confirmations systems – all of which also need to have the data from those documents. In the absence of automatic processing, then, banks are left with no choice but to enter a lot of the data from those final documents into their internal systems manually. Furthermore, the data within those original documents, may need updating, requiring the whole process to be repeated.
Likhoded explains: “Every time there is a big event on the market you need to go back to that document and see what it says to understand the effect of that event on that document. If a bank goes through an event like a credit rating downgrade, it doesn’t just affect the ability of that bank to borrow on the market because the credit rating has been reduced. It also affects the trading portfolios of banks because the documentation might have triggers in there, based on the credit rating of the bank. The bank might have to provide some sort of collateral to cover the additional credit risk, and the numbers could be huge. So, you really need to know what’s in those documents.”
Clausematch is promising to help make such tasks a lot easier, streamline processes dramatically. It has expended considerable effort towards ensuring its platform integrates easily into institutional processes: “With Clausematch, Word documents – which are everywhere in an institution and not necessarily version controlled – together with emails, approvals, the audit trail and spreadsheets for recording and monitoring progress are all housed on one platform and we have the API to integrate it into any internal system. It is a single-platform solution for document authoring, templates, approvals, commenting, data points extraction and fully digital and structured storage. People don’t need to suffer from fragmented, inefficient documentation processes anymore.”
As for the Clausematch revenue model, Likhoded envisages it will be subscription based but with flexibility in terms of pricing. “It typically would be a per-use or per-month pricing model. But there are other ways we’re looking to implement our solutions where it makes more sense to have a different pricing model. We are offering an enterprise, more bespoke, solution for large institutions. There, you have to be listening to your client and you have to understand the exact value of our proposition. And that value will be different in different parts of the bank so we need to be flexible with our approach to pricing.”
Likhoded is clearly passionate about dragging the art and science of documentation into the 21st century – and not just for the benefit of financial institutions. He says: “When you think about documentation processes, it’s not just banks and financial institutions generally that are affected by how things have been, how they could be so much better in the future. We also have many other markets that have similar problems with documentation.
“We hope to spread Clausematch into every institution, every enterprise, and every company, every sector around the globe so they can use it to collaborate on documents. Longer term, we’re looking to add machine learning and artificial intelligence capabilities to our platform to help people analyse, understand and track the data within documents.”
He adds, smiling: “The really big ambition for Clausematch is that it makes people fall in love with their documents again. Maybe that’s not a good thing.”