Quick: What famous British invention from the 1970s is more ubiquitous than the Beatles?
The London Interbank Offered Rate, commonly referred to as LIBOR, has provided a mainstay reference rate for a broad variety of financial products since its introduction by the British Banker’s Association (BBA) in 1986. Last year, however, the Alternative Reference Rates Committee (ARRC) estimated that over $200 trillion in issued products were indexed to the rate, surpassing even the Beatles’ record sales. LIBOR is meant to represent the rate that major international banks use to loan each other funds for a variety of term periods, and it is made available for several currencies including the US dollar, the UK pound, and the Euro. LIBOR’s flexibility, ubiquity, and global reach has allowed it to provide a benchmark interest rate that efficiently captures both short- and medium-term inflation expectations and currency fluctuations.
Unfortunately for us all, LIBOR does not have the same staying power as the Beatles’ music. According to current plans, the London Interbank Offered Rate will no longer be calculated and published as of the end of 2021 (and possibly sooner). While LIBOR has always had its detractors – some motivated by technical reasons, others by politics – the recent rigging scandal was the straw that finally broke the index’s back. After taking control of the LIBOR calculation from the BBA and proposing reform, the UK government’s Financial Conduct Authority is now planning to retire the LIBOR sometime in 2021.
This unfortunately leaves many financial sectors facing an octopus’s garden of potentially undesirable outcomes. Financial institutions and regulators are looking for replacement rates, but in the meantime there is an astounding number and variety of contracts that critically depend on LIBOR continuing as usual. In the absence of a clear consensus with detailed transition plans, uncertainty and confusion reign. What will the new standard be? Will it vary by jurisdiction, product, or counter-party? Will it be SOFR, SONIA, SARON, TONAR, or a sovereign base? More importantly, regardless of the replacement, how will real agreements and portfolios be affected, from a risk perspective?
Before your organization can answer these questions, you first need to find and organize all of your contracts that are impacted. In our work with many organizations, we have found that the extent of the problem is fundamentally unknown. Once you find all affected documents, you will have to individually review them to determine how their terms and any fallback provisions, if present, may be impacted by LIBOR changes. Some agreements may survive unscathed, while others may require renegotiation or, even worse, dispute resolution. With $200 trillion on the line – and probably quite a lot more – the financial and legal industries can’t allow this problem to go unaddressed. Regulators, for their part, have no intention of allowing a catastrophic break from LIBOR. So what can you do to take action?
The good news is, ContraxSuite can help you navigate this uncertainty. Loan and credit agreements can be exceedingly lengthy, and looking for specific sections of a document can be like looking for a needle in a haystack. Banks, financial institutions, accounting firms, and everything in between are looking for tools to help manage the inherent risk of transitioning away from LIBOR-based standard interest rates.
Even if you use a document management system (DMS), you may not know what each and every document explicitly says. ContraxSuite can organize and search relevant documents your organization needs to analyze for LIBOR-related content.
In fact, in response to this growing need, we’ve begun to build a LIBOR-focused version of ContraxSuite. Trained on tens of thousands of financial contracts, ContraxSuite can find and label important LIBOR-related clauses, including fallback provisions. Contact us to find out more about how we can help your organization navigate the LIBOR transition (or scroll to the contact form at the bottom of this page). Click here for Part 2.
LexPredict is an enterprise legal technology and consulting firm, part of the Elevate family of businesses. Our consulting teams specialize in legal analytics, legal data science and training, risk management, and legal data strategy consulting. We work with corporate legal departments and law firms to empower better organizational decision-making by improving processes, technology, and the ways people interact with both. We develop software and data tools, including ContraxSuite, LexSemble, CounselTracker, and LexReserve, that assist organizations with contract analytics and workflows, early case assessment and decision trees, outside counsel spend management, and case valuation. Discover more at lexpredict.com.