LIBOR Transition: Addressing the Legal and Operational Challenges

The London Interbank Offered Rate (LIBOR) is one of the prominent and widely used interest rates in the world. LIBOR has been in use as the reference rate for borrowing costs between banks as well as the standard reference rate for different financial instruments since 1986.

But it is being phased out.

LIBOR will be decommissioned by the end of 2021 which has led financial institutions to accelerate their efforts to transition from LIBOR to Alternate Reference Rates (ARRs). The LIBOR transition is a complex affair with its impact on both legacy and future financial instruments and the challenges it poses to the financial industry.

Key Challenges in LIBOR Transition

The two primary challenges that financial institutions need to tackle are the legal and operational ones.

Legal Challenges: The calculation methods for LIBOR and RFRs are different which can lead to the invalidation of the legacy contracts. The standard-term legacy contracts contain fallback provisions but these do not address the permanent discontinuation of LIBOR. This exposes firms to potent legal risks. 

Operational Challenges: The transition will cause significant changes in the operating environment and it is imperative to identify them to optimize the cost to deliver transition. The effect of this transition across areas and departments makes it important for the firms to be aware of the dependencies and conflicts with other areas.

How can you stay prepared?

In order for you to mitigate the impact of the transition, it’s important to recognize and understand the complexity of the challenges and build an action plan.

For all legacy contracts with references to LIBOR that mature after 2021, define a clear transition strategy and roadmap. Introduce robust fallback language for all new transactions referencing LIBORs to cap the potential legal risk.

You should also establish the client outreach and communication strategies for operational readiness and identify impacted systems to develop a detailed business requirement plan.

How can Quantiphi help?
The transition poses a huge document management challenge. Contracts referencing LIBOR need to be reviewed and re-written to facilitate the transformation. Traditionally, large scale document review projects use a structured manual review process. The amount of document review required to address LIBOR issues demands significantly more than what the manual review can easily offer. The benefit from technology-assisted review (TAR) undoubtedly justifies the cost of using software systems.

Quantiphi’s AI-enabled processes help you manage the disparate and unstructured data. From converting documents to information retrieval, classification and remediation, Quantiphi makes the transition cost-effective and scalable. 

Quantiphi’s Document Intelligence solution helps you conduct an extensive review and processing of contracts in an automated manner via optical character recognition (OCR) and machine learning.

Get in touch with us for a customized LIBOR transition solution for you.

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