What You Need to Know About Schemas for LIBOR Contract Remediation
Our LIBOR expert digs deeper into the technology process for remediating LIBOR-exposed financial contracts and explains how schemas can further expedite the effort.
25 March 2021
The end of the London Interbank Offered Rate (LIBOR) is finally certain. The benchmark — which underpins USD 260 trillion in financial contracts globally — is ending for all currencies and tenors by the end of 2021. The only exceptions are one- and three-month USD LIBOR which will continue through June 2023. It’s estimated that banks will spend up to USD 100 million each on LIBOR transition this year, with about a quarter of that amount earmarked for contract remediation.
Whether your organization has contracts in the thousands or the millions, the technology processes for remediating LIBOR contracts are very similar.
At a high level, the process involves artificial intelligence (AI) enhanced contract analysis and structured document review, coupled with a secure repository for storing the contracts. Ideally, the secure repository also has case management, reporting and secure external file-sharing capabilities.
How automation can help speed up the transition process
Many in the marketplace misunderstand the purpose of AI tools. AI is not a crew of robots that can make decisions for you, but rather software technology able to process large volumes of data, quickly classify and analyze documents to pinpoint LIBOR-relevant clauses that need to be amended, and find key dates and other pertinent information. AI is not going to do all the work for you. People need to interpret the information presented by the AI tool to decide what to do. This is where structured review tools come in.
Structured review tools such as eDiscovery review — the process of reviewing large amounts of electronic documents to respond to a litigation discovery request — can ingest the unstructured output (text) from the AI tool, structure that data and feed it into asset-specific workflows such as syndicated loans, bonds, derivatives tied to loans or floating-rate notes. During the structured review, finance and legal experts can weigh in on how to amend specific contracts. Those determinations can then be appended to all the appropriate contracts within the corpus of contracts.
The output from the structured review is not simply remediated contracts. Rather, it is a schema with instructions on how to remediate each contract. This schema can be as simple as an Excel spreadsheet or as in-depth as a relational database.
In either case, the schema is fed into systems that automate the contract amendment and client consent processes. For example, repapering tools are designed to ingest these schemas.
The optimal LIBOR transition solution for contract remediation not only ingests these schemas but also uses these structured plans to automate the creation of cases in a secure repository for each contract. The cases contain the contract, supporting documentation, remediation instructions, plus the bank team, client, counterparties, and any other stakeholders. The bank’s LIBOR team then uses the repository to securely share the contracts with outside counsel for amendment and with clients and counterparties to get the fallbacks accepted. Granular permissioning allows the bank’s LIBOR team to pinpoint what documents internal and external parties can access.
The entire remediation effort needs to be tracked with dashboard reporting so all stakeholders know where they are in the process. The dashboard allows a firm to demonstrate its progress for LIBOR transition to regulators, rating agencies or against industry benchmarks. Lastly, an ideal solution documents every activity with granular audit trails and compliance reporting to ensure the defensibility and integrity of the remediation process against future litigation.
(Above) The seven steps for LIBOR contract remediation.
Banks and financial institutions with LIBOR-pegged contracts face a daunting and expensive transition process. Now that the future of LIBOR is certain, there is no more time to waste: Every minute counts when potentially millions of contracts must be identified, categorized and updated. Fortunately, firms can opt for solutions that combine secure file-sharing, AI technology, robust document analysis, workflow and schemas for contract remediation. Full transition out of LIBOR is a reality attainable sooner than later.
SS&C Intralinks has developed an end-to-end contract remediation solution that includes finding, collecting, organizing and locking down contracts in a secure case management repository. We partner with industry experts to facilitate LIBOR contract remediation schemas, but we can also work with any LIBOR remediation structured schema that has resulted from an organizations’ contract analysis.
Dominic Brown is a field technology head at Intralinks in Waltham, MA. Dominic employs his 15 years of compliance and IT experience, along with Intralinks’ unique technology, to help organizations address challenges with sharing, distributing, and collecting highly confidential data. Dominic helps organizations understand and change internal procedures to deploy technology solutions that dramatically reduce the risk and expense associated with secure data exchanges. He has spent his career working with the Fortune 1,000 and North America’s largest government agencies.