As we begin to phase out LIBOR (the London Interbank Offered Rate), the financial services industry faces a significant contractual shift. LIBOR, published in five currencies, is the most commonly used interest rate benchmark in a wide variety of transactions, including credit agreements, bonds, and qualified financial contracts (QFCs). Due to perceived shortcomings and structural weaknesses associated with LIBOR, the UK’s Financial Conduct Authority (FCA) has mandated that the benchmark be retired by 2021. This change is estimated to impact over $350 trillion worth of contracts, and to manage the transition, companies and financial institutions alike must review every aspect of their business that utilizes LIBOR and all other IBOR-based benchmarks. Risk management and remediation are often time-consuming and costly, posing key challenges during the review process.
In response to the challenges surrounding the LIBOR phaseout, we were thrilled to partner with D2 Legal Technology to share expert insights on how to approach the impending changes and prepare contractually. In our joint webinar, Phasing out LIBOR – How To Prepare Contractually, Seal Software’s, Chief Strategy Officer, Jim Wagner and Director, Lynn Sumlin were joined by D2 Legal Technology’s Chief Operating Officer, Peter Newton. With extensive international banking and legal experience, the presenters brought a wealth of knowledge to attendees. This expertise combined with the application of Seal Analytics provides pivotal insight to guide finance professionals in navigating the remediation process.
The presenters shared organizational best practices as the financial services community prepares for LIBOR retirement, highlighting the following:
1. Understand your contract landscape
Identification of transactions that are subject to the LIBOR benchmark is the critical initial step. Companies and financial institutions must identify all legal documents tied to the LIBOR benchmark in order to manage the transition. Financial institutions will want to understand their contract landscape in order to begin segregating contracts into “buckets” based upon factors such as expiration/tenor, identification of the form of IBOR benchmark and potential rate adjustment or fallback options.
The identification of template contracts will allow an expedited and defined workflow to be put into practice. Identification of templates contracts with modification can be quickly assessed and pushed into defined workflow processes. Having the ability to quickly and accurately identify templates and any modifications of templates provides more dedicated review time of contracts that require a unique remediation approach. Further, patterns may arise in these non-template contracts that will allow for a defined remediation workflow to develop.
2. Have a robust and well-managed transition program
A well-defined and cross-functional transition program is vital to a remediation of this scale. Organizations must establish a governance structure across impacted business lines, allocate budget, and identify clear workstreams for effective transition. The success of the LIBOR remediation workflow plan will hinge upon the ability to clearly identify and understand the nature and scope of the impacted contract landscape and the ability to efficiently take the steps needed to transition away from LIBOR. Organizations will be able to minimize risks and challenges through an established and clearly defined remediation program that allows for early engagement of contracting parties, regulators and industry associations.
Seal Software customers have a distinct advantage when it comes to assessing contractual risk and planning for remediation. LIBOR Insight™, Seal’s pre-built analytic solution, allows organizations to accelerate contract review and remediation efforts for their critical financial transactions. By identifying legal documents based on the presence of LIBOR-related terms, the Seal platform delivers unparalleled insight and automation to streamline the LIBOR review process.
Sample analytics via LIBOR Insight™ (LIBOR Insight™, Resolution Preparedness Datasheet)
As AI-powered analytics enable organizations to assess risk from a contractual perspective, the time to prepare is now. For more on how financial services professionals can prepare for the transition away from LIBOR, listen to the on-demand webinar.
If you are interested in learning how Seal can support your risk management and remediation process, download our LIBOR Insight™ datasheet today.