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The ContraxSuite LIBOR Program

We know already that LIBOR is going to disappear sooner, rather than later. The global move away from LIBOR will affect many types of assets, in markets on both sides of the Atlantic. From mortgages to derivatives, syndicated to non-syndicated loans, the impact of the LIBOR transition will be far-reaching. Regulators like the Federal Reserve are already advising market actors of the potential costs. Regulators are reaching out to general counsel, asset managers, lenders, and everyone in between, inquiring about the status of their LIBOR exposure. The Financial Conduct Authority, for example, has warned banks in the UK about the risks associated with LIBOR exposure. The New York branch of the Federal Reserve has taken similar action in the US.

In light of this news, you and your organization may already be assessing and effecting re-papering and re-negotiation.

Key Questions

Sooner or later, the regulators will come calling. When they do, saying “LIBOR isn’t a problem for us” is not a valid answer. Getting out in front of the LIBOR problem requires preparation for what regulators will ask for. A good starting point is to develop answers to the following key questions:

  1. How many contracts have already been reviewed, as a percentage of all contract paper?
  2. Of the contracts reviewed so far, how many are affected by LIBOR?
  3. Of the known contracts affected by LIBOR, how many have already been re-papered, re-negotiated, or otherwise “fixed”?

A regulatory body – like the Federal Reserve or the FCA – will ask some variation of these questions. These questions are easy enough to pose, but an organization of sufficient size will have piles of contracts and no good place to start.

Question #1

Answering our three questions requires digging into your organization’s document management system.

A GC or an asset manager needs to gather all of their commercial credit agreements. There could be thousands of these contracts. Resources are tight, and LIBOR re-papering isn’t considered as high of a priority as dealing with other high-touch matters. So now what?

libor dashboard contract breakdown

Dashboard breakdown of 1,000 contracts

A dashboard – like the one we’ve built for the ContraxSuite LIBOR Program – can easily show how many contracts have been reviewed, as a percentage of total paper. It can also show us how many contracts have LIBOR clauses, and how many of those contracts have already been fixed. This is a good start, but really only gives us a substantive answer to the first of our three major questions.

Question #2

Out of this example set of 1000 contracts, our GC or asset manager still has 700 to review. The client, a large global bank, wants a list of all contracts that are exposed to LIBOR risk, and also wants a breakdown by geography. Regulators wouldn’t mind taking a look at that same information.

There are resource and time constraints to an undertaking like this, but there’s another problem: not all contracts that are tied to LIBOR will necessarily mention “LIBOR”. Many contracts contain words and phrases like “eurodollars,” “eurocurrency,” and “base rate,” without explicitly mentioning “LIBOR”. This means that a simple search through your document management system won’t get the job done. You need something like the word embedding models used in the ContraxSuite LIBOR Program:

LIBOR word embedding word2vec model

Word2Vec model showing words with a close association to “LIBOR”

The numbers in this image represent a mathematical calculation of each word’s closeness to the word “LIBOR” (the word “LIBOR” itself would have a numeric value of “1.0” on this scale). Conducting contract analysis of the bank’s unknown 700 documents using this model would find any commercial loan agreement that might otherwise fall through the cracks because it uses an interest rate term structure that is tied to LIBOR but does not explicitly contain the word “LIBOR”.

Question #3

So we can determine with great accuracy which contracts are affected by LIBOR. To answer our third major question, we can return to our dashboard and break down our data set by, for example, geography:

LIBOR dashboard with pie chart showing percentage breakdown of governing law clauses

Whether it’s the 300 contracts already reviewed, or the 700 whose content is still somewhat unknown, this number is manageable with the ContraxSuite LIBOR Program. This is because the review process necessary to find governing law clauses in these contracts doesn’t have to be done manually. The ContraxSuite LIBOR Program already has data field extraction built in for the most commonly needed clauses, including governing law.

In addition to finding governing law provisions, ContraxSuite can categorize syndicated loans and non-syndicated loans, discover when contracts will expire or otherwise terminate, find fallback provisions related to LIBOR, and detect illegality clauses, among other things.

ContraxSuite LIBOR Program

The transition away from LIBOR is already underway. What lies ahead is a massive market-wide campaign to re-negotiate and re-paper contracts that rely on LIBOR. An organization’s deep dive into thousands of commercial loan agreements will eat up a lot of resources if the right tools aren’t used. Diligent manual review takes time, and pulls valuable resources from other efforts. This is where technology-assisted review comes in.

The set of three questions posed here represents a boiled-down first run at assessing LIBOR exposure. There are dozens of specific, targeted questions that a GC, asset manager, lender, or other risk management agent needs to answer, not only to protect their own assets, but to maintain regulatory rigor. Number of contracts, for example, might not be nearly as important to a stakeholder as finding the contracts with the highest dollar amounts. With the ContraxSuite LIBOR Program, any institutional goals can be met with a configurable UI, and support for building dashboards. With these tools, you’ll be ready to face a post-LIBOR world, and ready to respond when the regulators come calling.

 

Further Information

For more on the ContraxSuite LIBOR Program, read our five-part series. For more on technology-assisted review in general, and its use in the LIBOR transition, take a look at our white paper.

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