For more than 40 years, the London Interbank Offered Rate (LIBOR) was the benchmark interest rate at which major global banks lend to one another. After extensive investigation, LIBOR is being replaced because of its role in the 2008 financial crisis as well as scandals in 2012 involving LIBOR manipulation among rate-setting banks. The LIBOR rate has been used in numerous financial services industry contracts for calculating interest on payments and derivatives, and measuring risk return calculation and annuities, among other things. Most recently announced was its implication on the US Dollar LIBOR. Literally, hundreds of millions of contracts representing approximately $400 trillion worldwide use the LIBOR rate for these calculations and measurements. Many of those contracts will have to transition to the Secured Overnight Financing Rate (SOFR), which is a secured interbank overnight interest rate and reference rate established as an alternative to LIBOR.
Replacing LIBOR with SOFR in Contracts
As a result of the transition from LIBOR to SOFR, contracts using LIBOR will have to be amended to replace LIBOR with SOFR. This exercise will be a HUGE undertaking for financial institutions using traditional manual methods of contract repapering, especially considering issues such as locating the contracts that need to be updated, amending them to support the LIBOR replacement and discerning the applicable regulations in different jurisdictions.
Compliance provides expertise, solutions, services, and technologies that are at the intersection of eDiscovery and contract analytics, and we see many similarities in the AI philosophies and workflows of these complementary disciplines. Providing the answers so that organizations can make decisions on what to amend, apply the amendments, and update the correlating tracking systems takes 1) an eDiscovery element, because the workflow is similar to that of a typical eDiscovery project where we must find the relevant documents or in this case, contracts and 2) an analysis element where analytics and artificial intelligence (AI) technology is leveraged to rapidly assess that discovery piece, i.e. whether this contract impacted by LIBOR. As is the case with eDiscovery, the ability to leverage predictive coding and other analytical tools, coupled with subject matter expertise is the key to identifying the contracts and obtaining answers around the contract portfolios that are rapidly needed to meet deadlines. Expertise – in the vertical, the subject matter, and in the technology makes it possible for qualified partners to be able to address major initiatives such as amendment of contracts to replace LIBOR with SOFR, as well as the daily demands that our clients face every day.
Without the technology and the expertise to leverage the technology, this major effort would take warehouses of people to accomplish this work, each with their own subjectivity. As stated by Charles Post, our executive vice president and head of contract analytics & lifecycle management, “If we’re doing a project for twelve months, and on the last day of the eleventh month a new requirement is added that must be applied to millions of contracts, you can’t be nimble with warehouses of people, you can only be nimble with technology.”
Financial institutions need to be able to leverage technology to find answers quickly, and to do so in an agile fashion – this is the additional value that experts leveraging these technologies bring. If you think this is the last HUGE deadline you’ll face with regard to evaluating and/or amending your contract collection in a large-scale fashion, just remember that last year, COVID-19 forced many organizations to evaluate the Force Majeure clauses in their contracts. The only thing predictable these days regarding contract management and analysis is unpredictability. If $400 trillion isn’t a motivator for change, what is?
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