Thunderhead’s Kevin Thorogood talks documentation and how the solutions provider has already saved one client $1 million in legal fees this year.
What is the top technology project for your clients this year?
Most client activity is revolving around the equity derivatives markets. I think our clients have done pretty well in automating parts of processing for the credit market, but equities are obviously very different and bring a different level of complexity. Consequently, equity markets have really been the focus for many of our clients and many projects are focused on creating more automation in processing to minimize risk.
Banks introduce new financial products all the time. And they need the operations to keep up with the constant flow of new financial products coming down the pipeline. The difficulty here is it takes time to put an automated solution in place to help process these new financial products and banks, in the meantime, are processing manually and incurring a high degree of operational risk. So really the aim for many banks isn’t just to automate more process and faster, but to do so for an ever expanding range of financial products and instruments.
Automating documentation processing for new equity products means taking into account all the components of the trade – the variability, counterparties and jurisdictions – and creating a solution that can process a transaction in an automated fashion.
To tackle this, banks are doing multiple things. Many of our clients are doing front-to-back development to try and improve the accuracy of the trading data that comes down the pipeline. Firms are also putting automated processes in place for managing exceptions so exceptions are handled in a more formalized and efficient workflow process while also trying to reduce the number of exceptions they have in the first place.
Has Thunderhead had to do much development to support the equities markets?
Thunderhead solutions are agnostic when it comes to asset classes. However, two years ago we enhanced the solution to include new formulas, which are now very relevant for the equities market will really help our clients take a leap forward in automatic documentation processing for equities. Our existing clients are at an advantage because they do not have to start from scratch for equities.
What are the other documentation headaches your clients are having?
We are doing a lot of work in term sheet generation. This if particularly relevant in the structured equities world, where trades are generating two-page high level term sheets of all the bank deal terms. Banks are really focused on term sheet generation because it is an area of high operational risk and cost.
What is the complication with term sheets exactly?
Typically in term sheet generation you have a basic economic term sheet created and passed on to external legal counsel who in turn would generate a 40 to 50 page prospectus with terms, which then is used for trading against and generates trade confirmations. For most banks, term sheet processing requires three separate systems and separate processes so they are manually taking one document and pass off to another system.
In this area, the ‘holy grail’ is having one document create all other downstream documentation because this allows banks to concentrate more on the front office and sales.
What are you doing to help clients with this problem?
Thunderhead had the core technology and capability already but we’ve enhanced the way in which we generate these term sheets now so the data needs to downstream already there.
For example, Thunderhead has interfaced with an XML spreadsheet system so the term sheets have all the key economics as data within the spreadsheet. So a firm already has the data it requires and can use this data and term sheet to automatically drive all downstream documents required such as the prospectus and trade confirmations.
This massively reduces a bank’s reliance on external legal counsel and it takes away the operational risk associated with migrating a term sheet to another system and getting economics right. One client we’ve worked with has gone from four working days to get the prospectus out the door, which costs $6,000 with external legal fees each time, down to a two second generation time. We have saved this client millions of dollars in external legal fees a year.
What are you working on next?
In general, banks are starting to realize that Thunderhead technology is truly independent in that it can be used across a firm’s core processing areas and we are seeing more interest in utilizing the technology for more areas upstream from documentation.
* Kevin Thorogood is director of Investment Bank Solutions at Thunderhead. For more information on documentation solutions please visit Thunderhead’s web site at http://www.thunderhead.com/
