Law firm of the year: Allen & Overy

Risk Awards 2020: Not just "stodgy lawyers", fintech incubator gives A&O a headstart on automation

Emma Dwyer
Emma Dwyer

In a world of stereotypes, finance lawyers and technology innovators would never meet. The suited-and-booted lawyers would be too busy dispassionately advising their clients in corporate boardrooms, while t-shirt-and-headphone-wearing technologists would tap away at keyboards in pizza-powered late-night coding sessions.  

In the real world, Allen & Overy’s two-year-old tech incubator has brought these two tribes together, opening doors for both. The venerable law firm now has an advantage in the race to automate and simplify legal and compliance functions, while early stage start-ups get access to A&O’s network of lawyers and clients.

“We are becoming a lot more than just ‘stodgy lawyers’ and are able to be advisers on how we and our clients should use these new technologies,” says Deborah North, a New York-based partner at A&O.

First launched in September 2017, the Fuse platform houses a select number of tech firms rent-free. So far, 17 tech companies have been through the programme, working on technologies that include artificial intelligence, automation platforms and natural language processing.

“[Before we created Fuse], I felt these start-ups existed but were completely parallel to a law firm,” says Shruti Ajitsaria, a London-based partner at Allen & Overy, who first came up with the idea of Fuse while angel investing in her spare time. “As lawyers, we should really see these and have the opportunity to help guide the products; we should be piloting and testing, and using them to better the client experience.”

There are already a number of success stories. For example, lawyers in A&O’s Madrid office connected Santander with Fuse firm Nivaura for the first bond to be issued completely via blockchain, whilst another unit of the bank purchased the bond. Nivaura’s role was to provide its web-based platform, which turns legal contracts into structured data, and automatically populate the systems of the various players in the transaction.

“Fuse lets you interact with global brands, which is not something as a start-up you can do from day one,” says Richard Cohen, general counsel and head of strategy at Nivaura, who joined the fintech company from A&O in January this year. “So it has been a fantastic uplift for us.”

Word appears to be spreading. In the most recent batch of new entrants to join Fuse in May 2019, Ajitsaria says 100 companies applied for the four available spaces.

The Fuse platform has also brought tech initiatives together in order to experiment with each other and push the boundaries of their projects.

We are becoming a lot more than just ‘stodgy lawyers’ and are able to be advisers on how we and our clients should use these new technologies
Deborah North, A&O

In October last year, teams from the Bank of England and the Financial Conduct Authority, along with seven banks, came into A&O’s incubator to explore the potential for regulatory reporting to be digitised – the vision being that regulators would be able to suck the required information out of a database on demand, automatically verifying and processing it, rather than rely on supervised firms to send periodic reports.

Fuse joined the regulators with REGnosys, which had been working with the International Swaps and Derivatives Association on its common domain model. The CDM standardises the code used to describe derivatives trades and their various lifecycle events. Together, they have been looking into whether derivatives reporting can be digitised.

“The collaboration we helped with was REGnosys, the FCA and the Bank of England, who were all hosted in Fuse,” says A&O’s Ajitsaria. “So the FCA and Bank of England were working on a pilot to look at making reporting more machine-readable and executable with respect to mortgages. But because they were with REGnosys and Isda, they started looking at other products.”

Ajitsaria says the supervisors concluded it would be possible to digitise reporting and are now considering whether to implement it.

Mutual benefit

Fuse’s benefits are not one way. By being in close proximity to a range of tech companies, A&O lawyers can learn about technology and develop their own ideas about where to apply it.

“Historically, a law firm wouldn’t have even been in those conversations with technology teams at our largest clients and we wouldn’t have any visibility on what is out there,” says Tom Roberts, a London-based partner at A&O. “Now we are able to have those kind of exchanges with our clients and really understand what they are seeing in the market and also share what we have found.”

In April, A&O released a new product named MarginMapp that aims to help buy-side firms determine whether they will be required to exchange initial margin on non-cleared over-the-counter derivatives, during the final two phases of the regime.

Buy-side firms with more than $50 billion aggregate average notional amount (AANA) of non-cleared derivatives will have to start posting initial margin from September 2020. In September 2021, the AANA threshold will drop to $8 billion.

“Actually navigating your way through whether you are above the thresholds is not straightforward,” says Emma Dwyer, a London-based partner at A&O. “It is complicated by whether you have to look at the aggregate amount over an individual entity or a whole group, with that answer varying depending on the entity. Also, you could have different rulesets apply across your group for what counts as an OTC derivative contract for the purposes of the aggregation. So you could be above the threshold according to the EU rules but not the US rules.”

Shruti Ajitsaria
Shruti Ajitsaria

A&O worked with Fuse entrant Neota Logic to create a tool that asks simple questions with “yes” or “no” answers to determine whether a firm is subject to the rules in either the EU or US. Users can then print off the analysis to show regulators they have done their homework.

In a second step, MarginMapp then determines whether buy-side firms need to put in place bilateral documentation to facilitate the exchange of margin with individual counterparties, as firms with non-cleared derivatives exposures of less than $50 million to a single counterparty don’t need to exchange margin or have the documentation in place.

“It was marketed to the buy side, but in fact we know a number of sell-side institutions are accessing and using it to help their clients navigate the requirements,” says Dwyer.

A&O has also created a product that will aid banks and buy-side firms move contracts away from the doomed Libor benchmark and onto new risk-free rates, known as Ibor Matrix. The Matrix puts trade documents through two artificial intelligence tools that tell the user where they have Libor exposures, what type of products they are, their maturity and other information relevant to amending documentation.

Ibor Matrix then auto-generates amended documentation and gives clients a single interface to send those to the relevant clients and counterparties.

The tool uses two sets of AI-based scans so each can check the other’s work. One provider, RAVN, was discovered by A&O through the Fuse platform; the second, Eigen, was recommended to A&O through a client.

Putting itself out there

The law firm has suffered one setback this year. In the third quarter, A&O and its partners – IHS Markit and SmartDX – chose to axe their Margin Xchange platform, a negotiation service for the next two waves of initial margin requirements, after regulators cut the workload for initial margin requirements.

The delay by the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions (Iosco) to the final phase of initial margin requirements by one year to September 2021, and creating an intermediate phase on September 2020, effectively cut the workload firms needed to do in 2020.

“We had extremely good feedback around the product itself,” says Roberts. “The problem was essentially the market for it was no longer there, so for all of the parties involved it was no longer economically viable to bring it to market.”

Ditching Margin Xchange effectively gifted rival platform Isda Create – backed by Isda and Linklaters – a free run at the business.

One bank client argues the u-turn does not reflect on A&O’s technology capabilities.

“It would be unfair to judge A&O solely on the back of Margin Xchange,” says a bank client of A&O. “The fact they were in the game shows the strength of the firm’s focus on tech solutions within the legal space and I would class them as one of the premier-league law firms in this regard.”

It is not the first time in recent history A&O has lost out to rival Linklaters, which won last year’s law firm of the year award. Since 2016, A&O has been displaced by Linklaters as Isda’s go-to counsel – a plum appointment in the world of derivatives law.

Deborah North
Deborah North

A&O still receives some important mandates from the trade body, including a recent gig in creating a protocol to stop so-called manufactured defaults in credit default swaps. The fix is designed to stop CDS-players gaming the market by providing cheap financing to companies on the condition they default on a portion of their debt.

“It is fair to say Isda has diversified the legal counsel and we are very supportive of that decision,” says Dwyer. “Generally, we think a trade association is stronger if it has a diversified legal panel and that is obviously the direction Isda has gone in. In terms of the impact on us, while we have been sad to lose some of the Isda mandates, we don’t believe it has detracted from our presence in the market and we still believe we hold the market-leading position.”

That market-leading position was evidenced by A&O’s firefighting work for clients dealing with the changes to the European Market Infrastructure Regulation as part of the EU’s Regulatory Fitness and Performance Programme, which came into effect on June 17.

The Emir Refit ambushed EU dealers and their third-country fund manager clients by requiring them to evidence whether their relationships were subject to Emir’s clearing and margining requirements in a short space of time.

“We were trying to get answers for our clients which were correct in the face of the legislation but also veered along the side of pragmatism in terms of what actually is achievable in the time frames that are available,” says Dwyer.

A&O set out by quickly analysing which clients in Asia had a high likelihood of being affected by the change and so allow banks to become more targeted in their outreach to clients.

“There aren’t many firms that could have provided such practical, risk-based advice in the face of so much uncertainty,” says the bank client. “A&O provided a roadmap that allowed us to deal with Refit with a level of comfort that seemed unlikely at the beginning of the project.”

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