Derivatives Law Firm of the Year: Allen & Overy

Asia Risk Awards 2016

Matthew Hebburn, Allen & Overy

Over the past 12 months, Allen & Overy has been proactive in identifying issues arising in the market before its clients have seen them, and developing complex solutions in anticipation of the problems they might face. This foresight has allowed the law firm to deepen client relationships – globally and specifically in Asia – and is why it is named Derivatives Law Firm of the Year.

One of the best examples of Allen & Overy's ability to deliver complex products to market ahead of its competitors is an end-to-end solution it developed for coping with the uncleared margin rules that are being phased in by the G20 countries.

The law firm began working on this solution, known as MarginMatrix, in the summer of 2015, more than a year before the new rules were due to be introduced, and officially unveiled it in June 2016 – well ahead of competitors, a number of whom have since teamed up with established data providers to tackle this issue.

Margining rules are being introduced in stages. So far, only the US, Canada and Japan have started to phase them in. The European Union is expected to follow early next year and other jurisdictions shortly afterwards. The first phase of implementation only concerns initial margin and then only for the very large derivative traders.

Of much more concern, particularly from an Asian perspective, is the second phase of implementation, when dealers will have to post variation margin against each of their trades. The current expectation is that everyone should be subject to this by March 2017.

"Implementation of initial margin before the September 1 deadline was a significant challenge in itself and, given that this was the first phase of implementation, everyone involved learnt key lessons along the way," says Ross Stewart, a partner in Allen & Overy's Hong Kong office. "Now the challenge is variation margin before March 1, 2017. While the legal and documentation complexities are different to initial margin, variation margin involves a massive scale and range of counterparties that far exceeds the first phase of initial margin."

Variation margin is the money that dealers have to post against their trades in order to account for any adverse moves in the market, and may have to be posted to thousands of counterparties spread across many different jurisdictions.

MarginMatrix takes some of the burden of this away from banks by producing standardised draft documentation based on an automated legal analysis of data from derivatives trades. While much of the system is computerised, Allen & Overy has also teamed up with consultancy firm Deloitte to provide additional manpower for those areas of the process that couldn't be automated – such as plugging the information into MarginMatrix in the first place and providing outreach to the client in case of additional negotiation.

Unlike other systems that are now on the market, MarginMatrix is fully owned by a law firm rather than a third-party data vendor.

The system is also multi-jurisdictional, which is a great advantage to Asia, where various regulators have been drawing up slightly different versions of the new framework and rules are yet to be finalised.

"This is one of the drivers behind the name MarginMatrix. For just one counterparty pairing, you might have two, three, or more rule sets on top of this, which we think about as being a matrix of different overlapping rules which must be satisfied for regulatory compliance," says Stewart.

This forward thinking has underpinned many of the other transactions that Allen & Overy has led across Asia.

For example, the law firm was arranger for BNP Paribas in the first ever issue of covered bonds under Korea's new covered bond framework, set up in 2014. This was for Kookmin Bank, a local Korean bank, which in 2015 was looking to issue a first tranche of $500 million worth of covered bonds in an $8 billion global programme.

There were a few challenges to working on such a new market.

"This was a heavily structured deal with a lot of local law complexity," says Matthew Hebburn, a partner based in Singapore. "You had the complexity of Kookmin itself, making sure that its balance sheet could cope with the issuance. Then you had to make the structure fit within the local covered bond regime. And then you had a number of issues around rating agencies – getting them comfortable with Korean sovereign risk and risk in the local currency. We had to come up with quite a few structural innovations to mitigate these concerns."

Since then, there have been other covered bond issuances in the market.

This solution-driven focus has been a hallmark of Allen & Overy's business this year, and has helped it deepen relationships and win new business.

"I've noticed this year how – perhaps more than ever before – we are presenting solutions to banks for problems that they don't fully realise they have," says Hebburn. "Margin is one great example. It wasn't a bank that came with a problem for us to solve. It was us seeing an issue and coming up with what we felt to be the most appropriate solution."

Hong Kong-based partner Yvonne Siew says the biggest impact of this is that Allen & Overy is now the go-to place for many banks looking to do new things in the market.

"As the market innovates and changes, we are there with the banks. We are the ones to pick up the phone to and to bounce new ideas off. That is the advantage of being at the forefront of what banks are doing," she says.