January 2020 | By Jeffrey Catanzaro, Integreon Executive Vice President, Contracts, Compliance & Commercial
As the calendar flips over to 2020, many in the financial services industry are hearing the steady tic toc of the LIBOR clock counting down to 2021 when LIBOR becomes an obsolete reference rate.
Countless contracts and automation processes include LIBOR as a reference rate and over $350 trillion or more than £240 worth of financial agreements reference LIBOR — with more being created despite the looming change. Regardless of these numbers and clear warnings from regulatory bodies and other industry experts to prepare now and not delay, many organisations do not have an articulate transition plan.
Most organisations have begun to assemble multiple internal stakeholders to ascertain the best way to manage the transition. It is not too late to form a LIBOR Task Force, which should also include retained 3rd party providers that bring the expertise needed to develop and manage a transition plan. Executive support and input on Task Force prioritisations are essential and will help to eliminate any roadblocks as the project progresses. In addition, a Program Manager should be assigned supported by, in most cases, several project managers as there are typically multiple work streams requiring oversight. With the right team and project management, a seasoned Program Manager is able to oversee several projects at once, ensure accountability, and meet agreed upon milestones. Organisations that do not have a Program Manager need to fill this essential role immediately. In addition, strong communication at every step of the process cannot be stressed enough and will be a major factor in determining the project’s overall success.
Part of preparedness also means gaining an up-front understanding of the full impact and ramifications of this change. There are many known and unknown variables, ranging from the effect on balance sheets, potential stress scenarios as a result of new reference rates, as well as addressing client response. Whilst many contracts and legal documents contain fallback provisions if LIBOR becomes unavailable, since LIBOR is generally for floating rate transactions and SOFR, SONIA and others apply to fixed rate transactions, it can leave organisations open to potential financial and reputational damages, especially if risk is not properly managed.
Understanding the reverberations before-the-fact is one of the most challenging aspects of any LIBOR transition plan. To pave the way for an informed, cost effective, and streamlined path to compliance that has little to no impact on business as usual, organisations should consider the taking the following steps:
- Assess: Determine any anticipated risks or challenges. To assist in this process, Artificial Intelligence (AI) tools in conjunction with experienced resources can identify what must be transitioned and what supporting materials need to be developed (documentation, systems, fallback provisions, standard operating procedures, limiting new transactions, training, etc.). AI and enhanced machine learning are highly effective in identifying active agreements and pinpointing their contents. This is a complex process that requires both human and technology resources.
- Prioritise: Identify potential issues and bottlenecks so they can preemptively be addressed and remedied. Six Sigma trained resources and applied principles can be highly advantageous during this phase of the project.
- Strategise: Establish a comprehensive and detailed roadmap complete with specific steps, stakeholders, vendors, resources, and procedures. Ultimately, the success of the project will, in large part, be determined by the quality of this plan which should include standardised approaches/playbooks for legal document drafting, remediation, amendment, and outreach.
- Execute: Execution is everything. Deploying the strategy in a streamlined, sensible and diligent way is the final step toward transition. Tracking to the strategic plan will ensure all milestones and objectives are met and compliance is achieved.
No plan can fully anticipate every roadblock or challenge. That is why the transition team must remain nimble; able to pivot and adjust prioritisations as new information and potential risks are uncovered. Paramount to successful execution is also well-articulated communications plan and function, along with rigorous calendar management to ensure all stakeholders are informed and contributors are held accountable.
A well-conceived plan will include the use of third party resources including technology solutions and alternative legal service providers (ALSP). As noted, successful execution will be delivered by a combination of human resources and technology. ALSPs like Integreon are instrumental in working with clients to expertly handle the vast amounts of documentation (contracts, prospectuses, and other legal documentation, as well as marketing collateral and product details) that requires remediation. Any mention of LIBOR as a reference rate must be replaced with agreed upon new language. Some may consider using a law firm for this work, though they may find the price tag to be cost-prohibitive. In addition, law firms do not typically handle, nor are they resourced to handle this manner of project. On the other hand, this is right in the wheelhouse of most ALSPs who ideally will bring deep expertise, access to a large pool of experienced resources, and the technology relationships required to galvanise and execute successfully.
In 2020, financial institutions need to make a New Year’s resolution to start the LIBOR transition process. Although 2021 may seem like a long way away, there is clearly much to be done to fully understand the size of the challenge, properly resource, develop a sound plan, and efficiently execute. Happy New Year and here’s to a happy and healthy LIBOR transition starting…now!
Integreon is a trusted, global provider of award-winning legal and business solutions to leading law firms, corporations and professional services firms. We apply a highly trained, experienced staff of 2,400 associates globally to a wide range of problems that require scale and expertise, enabling clients to become more operationally efficient by streamlining operations, maximizing investment and improving the quality of work they provide their end clients. With delivery centers on three continents, Integreon offers multi-lingual, around-the-clock support, as well as onshore, offshore and onsite delivery of our award-winning services. Visit us at CLOC London on January 20-21 at table 25.
About the author
Integreon Executive Vice President, Contracts, Compliance & Commercial