Documentation risk and data integrity risk in Investment Banking

 

Author

Paul Duffy

 Vice President - Legal

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Published
Tuesday 30 June 2020
Risk

This article explores the risks associated with documentation and data integrity in investment banking and how to mitigate against those risks through the implementation of checks, controls and codification of best practice.

A. DOCUMENTATION RISK VS. DATA INTEGRITY RISK 

Documentation risk arises from the terms agreed in a bank’s documents. Banks must ensure that each document fulfils its intended purpose and meets regulatory, legal, tax, and compliance requirements. 

Data integrity risk recognises the potential for contractual terms to be inaccurately captured in a bank’s internal reference systems, which must capture ever-changing commercial, regulatory, and contractual terms.

B. FIVE KEY RISK AREAS 

Documentation risk and data integrity risk impact many different areas of investment banking.  For example, the contractual terms captured in a bank’s systems drive capital and margin calculations. Not having structured processes in place for documentation and data capture integrity can impact an investment bank in five identified key risk areas: 

  • Counterparty and Contract Risk:  risk associated with a counterparty[1] and not knowing if the appropriate protections[2] are documented in the agreements to allow the bank to take quick and effective action.

  • Regulation Risk: the impact of regulatory requirements on trading documentation (e.g. UMR[3]; LIBOR[4]; CSDR[5]). 

  • Data Capture Risk: incorrect systems capture of complex and/or interpretive terms in legal and trading documentation which can lead to trading losses and/or an inability to quickly identify agreements that can be closed out or terminated. 

  • Systems Enhancement Risk: failure to maintain IT systems meaning important provisions and commercial terms cannot be captured leading to further data capture risk. 

  • Trade Risk: not continuously monitoring live trades, systems data capture, and documentation standards to mitigate against the above risk types which can lead to losses and inability to close out or terminate trades. 

 

C. PROJECT REMEDIATION PROCESS (RETROSPECTIVE)  

The following process can be used as a starting point for project remediation across all above mentioned risk types. 

D. BEST PRACTICE (MOVING FORWARD) 

 There are certain safeguards that a bank can put in place to minimise the five key risk areas.

CONCLUSION

We have identified five key risk areas that investment banks need to be mindful of when considering the impact of documentation risk and data integrity risk. At FinTrU we have a proven track record assisting our clients to mitigate such risks through remediation projects and also through the implementation of checks, controls and codification of best practice.

 

For more information on how FinTrU can assist with helping to mitigate the impact of documentation risk and data integrity risk, please contact: bd@fintru.com

REFERENCES

  1.  Different types of Counterparty Risk can include Credit Risk and Legal Risk. Legal Risk will cover areas such as Tax and Sanctions risks

  2. Tax Gross-Up; Events of Default and Termination Events; Close-Out Netting; Set-Off

  3. https://www.isda.org/2020/02/12/derivatives-subject-to-margin-rules/

  4. https://www.isda.org/2020/05/11/benchmark-reform-and-transition-from-libor/

  5. https://www.esma.europa.eu/regulation/post-trading/settlement

  6. https://www.flaticon.com/

About FinTrU

 

Founded in December 2013, FinTrU is a multi-award winning Financial Services company that is committed to giving local talent the opportunity to work on a global stage with the largest international investment banks. FinTrU provides its clients with high quality, cost-effective, near-shore resourcing solutions. FinTrU’s products are: Legal, Risk, Compliance, KYC, Operations and Consultancy. Its clients are all Tier 1 Investment Banks based in London, New York, Tokyo, Frankfurt and Paris. FinTrU currently employs 500 staff at its two Belfast city centre offices and Derry/Londonderry.

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