Claira, which analyses documents using artificial intelligence, has expanded its use across traditional asset classes and is looking to “atomize” documents by putting individual terms and conditions on-chain for digital assets.

In October Claira announced a partnership with Octaura, the electronic trading platform for syndicated loans and collateralized loan obligations (CLOs). The integration is due to be operational in the fourth quarter of this year.

Eric Chang, co-founder of Claira, told Markets Media that the fintech can help traders analyse assets far more quickly. CLO traders can spend a long time analyzing a single structured credit document but Claira can extract relevant sections, perform initial analysis, and interpret results to deliver actionable insights on pricing.

“It was very sensible for us to work with Octaura,” he added. “Claira can go through documents in just a few minutes and pull out all the key terms and conditions, which is very attractive.”

This will also make it easier for new participants to trade, potentially expanding the CLO and syndicated loan markets.These markets have had a twofold increase over the past decade according to Claira, reaching impressive outstanding notionals of over $1 trillion and $1.4 trillion, respectively.

Chang continued that Claira is reviewing how to bring further disruption and innovation to these markets and increasing price transparency in these esoteric assets. For example, Claira could analyse price against terms and conditions data in deals across the last few years to see if there are correlations.

“Ultimately, we may be able to reach a price per term,” said Chang. “That is still a little bit away but there are a lot of things that we are very excited about working on together.”

Joe Squeri, co-founder and advisor at Claira, told Markets Media that Octaura has hundreds of both buy-side and sell-side clients, so this vast amount of data will enable much more precise analytics on pricing and individual terms and conditions. Many of the inefficiencies in the syndicated loan and CLO markets are replicated in private markets, which are still very manual and involve bespoke documentation for deals.

“We have developed a unique technique using computational linguistics, which does not require us to have hundreds of documents that are all the same. Highly negotiated bespoke documents, such as those used in private markets, is our sweet spot,’ said Squeri.

Claira’s proprietary computational linguistics technology converts each sentence into a logic map and then maps all the relationships in a legal document. In contrast, most existing documentation platforms require users to label and tag data which is not scalable or sustainable. Users can configure and customize the data so Claira integrates into existing workflows or pricing and risk models, and users can also trace back all the data to the exact provision in the original document.

Buy-side clients

Brian Bejile, chief executive of Octaura, said in a statement that incorporating Claira’s analytics directly into the platform marks a significant advancement for leveraged loans and CLOs.

“This innovative integration will foster greater efficiency, providing comprehensive insights in one platform,” added Bejile. “We are enthusiastic about offering this capability to the 76 buy-side firms and ten dealers currently using Octaura’s loan trading platform.”

Squeri said some buy-side firms are looking at how to use Claira’s document analysis to give them an edge in generating alpha.

He said: “Firms have the ability to get insights based on the ingestion of tens to hundreds of thousands of documents that a human just cannot comprehend.”

For example, fund managers can analyse their entire portfolio of hundreds of holdings to see if they all have the same terms and conditions in place.

Digital assets

Claira has also been in discussions about digital assets, tokenizing real assets and putting documentation on a blockchain.  Citi estimated that up to $4 trillion of assets could be tokenized by 2030 in a report in March.

Chang said: “There has been a challenge in using the digital asset infrastructure to show the terms and conditions that the owner has agreed. We can fully digitise that document and make information available in the digital asset ecosystem, and I think we are key to enabling that to happen.”

Squeri added that Claira has dubbed this process as “atomization of the asset.”

“Putting a loan agreement on-chain as a blob is not very interesting because you have to read the documents in order to understand it,” said Squeri. “If you can atomize documents and put individual terms and conditions on-chain, then it becomes a much more interesting and transparent process.”

Growth

Since Claira’s last funding round, the firm has been targeting large multinational corporations and complex financial institutions. In July 2022 Claira received strategic investment from Citi Spread Products Investment Technologies (SPRINT), the strategic investing arm of the bank’s global spread products division. Claira has also expanded into asset classes such as private commercial real estate and municipal bonds since the last funding round.

Squeri said: “We have purposely focused on the most complex enterprises with the most complex problems and more than doubled our client base. We have got some marquee names and road tested Clara to prove that we can handle the most complex documents.”

For example, in September this year Claira was accepted into Barclays Rise Growth Academy, where startups and scale-ups can connect, and accelerate innovation and growth for Barclays, startups and corporates.

Chang said the partnerships with Citi and Barclays, and other large institutions, validates Claira’s approach, and  over the next 12 months the firm aims to grow in terms of clients and asset classes.

“We will be pursuing what we call insight analysis versus analytic analysis to provide information that is very hard to get,” he added. “For example, no one really knows what is the average liquidation preference for private credit.”

Claira can create analytics such as pricing per term or industry-wide benchmarks which Chang said will make markets more transparent. Creating transparency can enable real assets to be treated as digital assets, and also potentially increase velocity by allowing new entrants into more complex markets.

Chang said: “We are an enabler for that innovation to happen. From day one Claira was built with finance in mind by finance professionals, which is key to the success of digitization in the financial services industry.”

In addition, the move to shorter settlement cycles next year is also making firms review their workflows to make them more efficient in order to meet the new deadlines. The standard settlement cycle for most US broker-dealer transactions in securities will be reduced from two business days after a trade, T+2, to T+1 on 28 May 2024 in the US and on the previous day in Canada. The move will have a global impact due to the large amount of overseas investment in the US market.

Squeri compared the move to T+1 as similar to what Octaura is doing in terms of increasing the velocity of trading, which increases the demand for products such as Claira. Increasing the velocity of trading also puts more pressure on the middle and back office.

“Clearing and settlement need to be at the forefront of the contents of a prime brokerage agreement, or how assets and liabilities can be encumbered in the event of a client liquidation, so the demand for Claira is increasing,” he added.