A day in the life of a financial documentation negotiator can be extremely busy and challenging. The primary responsibility for someone performing this role is, as the job title suggests, negotiating and executing various forms of legal documentation (such as the ISDA, GMRA and GMSLA agreements).

 

To say this is all a negotiator does would be misleading – the job function is varied and other tasks[1] undertaken include: conducting Capacity & Authority reviews; responding to document-related queries; and maintaining strong working relationships with key asset managers. Increasing negotiation volumes, coupled with involvement in ongoing regulatory initiatives (e.g. Brexit, UMR), and performing all other responsibilities, can place a significant burden on a negotiator’s workload.

 

The question then arises: Are there any opportunities within the firm to delegate and/or outsource Capacity & Authority (C&A) reviews to help alleviate increasing workloads whilst maintaining a high standard of delivery?

 

What is Capacity & Authority?

 

The conducting of C&A reviews is an important requirement – the legal issues relating to capacity in the context of financial transactions are complex and require careful consideration.

 

Legal capacity is the ability of a company or any other entity to enter into a legally binding contract. The capacity of an entity to contract may be defined by its constitutional documents, board resolutions and/or the laws of the jurisdiction in which the entity is established.

 

Authority is the power of a person to act on behalf of a natural or legal person, either generally or in certain prescribed situations, and either for a certain period of time or indefinitely. Corporate Authority is where the governing body of a counterparty has provided authorisation to enter into transactions and/or related documentation, whilst Signing Authority is where an individual purporting to act on behalf of a counterparty and/or to sign relevant documents on behalf of that counterparty, has authority to do so.

 

It is important to establish that the counterparty to a Master Agreement and any underlying transactions has the necessary legal capacity to enter into it. The consequences of a lack of capacity could mean that the contract is declared void from the outset as a result of it being ultra vires, hence allowing counterparties to walk away from transactions which could result in potential losses for the organisation.

 

Important Case Law

 

The concept of ultra vires was in the spotlight in the 1990s, with an increase in case law focusing on those banks that entered into interest rate swap transactions with UK local authorities in the 1980s.

 

The landmark case of Hazell v Hammersmith and Fulham LBC [1992] AC 1 ended in a House of Lords decision which held that interest rate swaps were not only outside the legal capacity of Hammersmith and Fulham but were also beyond the powers of all local authorities. Many local authorities used interest rate transactions for the purposes of managing their interest rate risk on their loans. However, looking at the trading activity undertaken by Hammersmith and Fulham LBC, it was easy to argue that this was more speculative and less like hedging. The consequences for banks of the decision of the House of Lords were extremely dire. The total losses to the many banks that had entered into interest rate swaps with local authorities were estimated at around £500 million.

 

More recently, in the case of Credit Suisse International v Stichting Vestia Groep [2014] EWHC 3103 (Comm), the English Courts held that a Dutch social housing association (Vestia) was liable under an ISDA Master Agreement because, although it had lacked capacity to enter into a number of swap transactions, it had made additional representations indicating that it did actually have the required capacity, which gave rise to a contractual estoppel preventing it from escaping liability. Although this case was ruled in favour of Credit Suisse, it still highlights the complexity and ambiguity of Capacity & Authority involving derivatives and the importance of performing such reviews prior to entering into such agreements and /or transactions.

 

Why outsource?

 

The importance of getting C&A reviews right is abundantly clear – failure to dedicate the right levels of resource and not conducting reviews in the proper manner could land the organisation in front of the courts, contesting the validity of the agreement and transactions that have been entered into with the counterparty.

 

FinTrU can provide clients with dedicated resources to perform all C&A duties on behalf of their respective documentation teams and to ensure all such reviews are conducted to a very high standard. There are many benefits to outsourcing C&A requirements to a third party vendor such as FinTrU:

 

• Centralising the C&A process: Having a dedicated C&A team, as opposed to it being the responsibility of each individual negotiator, will drive consistency in terms of approach and adherence to the wider process. By maintaining a centralised client specific database of completed reviews, clients can also avoid the duplication and triplication of work which is inevitable when different teams are responsible for different forms of documentation (i.e. if a newly onboarded counterparty requires an ISDA/CSA and a MRA, it is quite possible that two different negotiators in two different regions will be responsible for such negotiations and will effectively review the counterparty’s capacity twice).

 

• Improved completion rates/times: A reason often provided by negotiators for delays in the completion of negotiations is the need to complete C&A reviews (especially when onboarding a large list of principals to an existing agreement). Negotiators will often only begin the C&A review process when the request for documentation reaches their queue. Establishing a dedicated C&A team allows the review to begin much earlier in the approval process, ensuring completion before the request reaches the negotiator to begin drafting – this can only lead to improvements in the completion rates for each negotiator.

 

• Allocation of resources: As mentioned in the introduction to this article, a day in the life of a negotiator can be extremely busy. Delegating the responsibility of C&A reviews to a third party vendor allows negotiators to focus their efforts more directly on the negotiation process. Negotiators are no longer required to chase up client onboarding for the relevant constitutional documentation or conduct detailed reviews of such documents.

 

• Enhanced audit trail of C&A reviews: When a negotiator picks up a negotiation mid-flight, or is intending to rely on C&A completed by another negotiator for other documentation, it can be difficult to determine (i) if C&A was actually completed and (ii) to what level or standard. A FinTrU C&A team can provide clients with a detailed audit trail of all reviews which, in turn, contains a detailed analysis of each C&A check in the form of a completed form and database.

 

Tighter completion deadlines set by asset managers to ensure documentation (and therefore the ability to trade) is in place on day one of a fund launching puts significant pressure on negotiators across the industry. Document units should now prioritise a review of their existing processes, identifying potential ‘bottlenecks’ and opportunities for improvement or outsourcing, in an attempt to increase productivity and efficiency across the entire workstream. C&A reviews are clearly an area worth considering in terms of outsourcing as a means of increasing negotiator productivity levels and giving them more time to focus on other demanding responsibilities. The save on negotiator capacity can make all the difference when it comes to meeting a fund launch for an important asset manager – in the race to begin trading as soon as possible, every second counts.

 

[1] Other tasks completed by negotiators include attending client calls, approving accounts, preparing draft documentation and other administrative tasks.