The Clock Might Be Running Out on LIBOR, But There Is Still Time to Remediate

By Scott Mackey | July 15, 2021

As companies endeavor to get through the transition away from LIBOR, Scott Mackey, Adlib’s SVP Market Strategy, presented at the 5th Edition Best Practices for the LIBOR Transition in the Loan Market virtual event to share how companies can leverage technology to help accelerate remediation. The virtual event was hosted by the Global Financial Markets Institution (GFMI) and took place on 21 June -22 June 2021.

Participant poll questions revealed:

  • 43% of attendees came from risk and compliance, 14% from finance, 14% from legal, 29% came from “other” functions, and zero from IT departments.
  • In addition, 56% of respondents reported that their organizations were relying mostly on people and manual effort to remediate LIBOR, while 44% claimed a mixture of technology and people.
  • However, 60% of attendees acknowledge they were looking for broader analytics and AI solutions with only 40% looking to solve for LIBOR only.

Mackey kicked off his presentation by sharing the ARRC estimate that more than 80% of exposure would have been resolved by the end of 2021 if market participants had heeded warnings when they first emerged in 2017. Instead, the use of LIBOR has not only continued but increased to the tune of $223 trillion in outstanding exposures to USD LIBOR.1

In aggregate, $400 trillion in assets across currencies including the British pound, Japanese yen, Swiss franc, euro, and U.S. dollar need to migrate toward nearly risk-free rates.2 

According to Mackey, one of the primary obstacles enterprises face as it pertains to this massive amount of LIBOR exposure is finding and accessing the data. In fact, 80% of valuable information is hidden in documents, contracts, agreements, scanned images, email attachments, and PDFs that are stored in various business units, multiple content repositories, file shares, cloud systems, and workflows. Yet, this dark, unstructured data holds answers to the questions that companies have whether it’s related to LIBOR exposure or other regulatory changes.

Automation & AI to the Rescue

He shared the benefits of adopting a Contract Analytics solution that is based on automation and AI. By doing so, companies will:

Increase visibility into contracts by extracting key data from a variety of contract types.

  • Accelerate review by analyzing large volumes of data and honing in only on the ones that meet business review rules.
  • Simplify compliance by reviewing clauses to determine where revisions need to be made.
  • Mitigate risk by finding missing clauses and non-standard language. 

Intelligent Data for LIBOR Reform

 Rather than expend human power scanning through repositories of content looking for contracts or other content affected by LIBOR, technology can be trained to do the grunt work.

Mackey reminded his audience that AI is simply technology doing what humans can do. Like people, AI is trainable and gets smarter over time, which accelerates the overall process from beginning to end. Vital information gets to subject matter experts faster, more consistently, and at a lower overall cost. 

  • Enable the Chief Risk Officer to know what P&L risk lies in existing contracts.
  • Enable the Chief Compliance Officer to align all contracts with current and future regulations.
  • Enable Legal Counsel to discover risks and accurately remediate faster than when done manually.
  • Enable the Chief Technology Officer to provide the best solution in the shortest time.
  • Assure the heads of the businesses that disruption will be minimal, and reputations protected.

He goes on to explain how automation and AI apply specifically to LIBOR remediation. Leaders across business units will be able to:

Find all contracts and content with LIBOR mentions and clean them up by locating duplicates and eliminating trivial content.

  • Leverage AI to classify contracts and apply the necessary metadata to surface LIBOR risk.
  • Extract LIBOR clauses and authorization codes, names, date values, and determine which require attention.
  • Access configurable views and reports to present findings to the users that need them.

 Beyond LIBOR

 Mackey also discussed the value of a Content Intelligence solution that is able to distill huge volumes of complex content to solve several other challenges, including mergers and acquisitions, force majeure response, supply chain disruptions, IFRS 17 and compliance regulations like GDPR and CCPA. 

It’s not just about solving for today’s challenge, which is LIBOR, it is putting the right combination of technology, people, and processes in place to solve other problems as they come up. That is the hallmark of a company that is truly gaining on their digital maturity overall.

Q&A Highlights

Q: Are there any best practices or lessons learned from the United Kingdom’s approach to solving LIBOR? 

A: Get started as soon as possible. There is still time to meet the 2023 deadline. Find the right mix of technology, internal resources, and external consultants to accelerate some of these processes.

Q: How can we pave the way for other regulatory change management? 

A: Think long-term because there are always going to be new questions that need answers. The same principles that apply to LIBOR remediation generally apply to most regulatory changes. Find a way to create and leverage clean structured data. Adopt a scalable solution that is part of a discipline within an organization to strengthen resilience and agility. 

Q: What is the biggest epiphany organizations solving for LIBOR have uncovered? 

A: Senior executives often have misconceptions of how difficult it is to remediate LIBOR and think their organizations are way ahead of where they are. Throwing expensive bodies at the LIBOR challenge is not going to solve the problem in time. Doing a thorough inventory is an essential first step in leveraging some of these automation and AI tools and technologies to help with remediation. 

Reimagine LIBOR and be prepared for Future Governance, Risk and Compliance Changes 

Scott Mackey encouraged his audience to step back and imagine a world where one can leverage automation and AI to digitize all legacy and third-party contracts and documents that might be impacted by LIBOR—or future challenges—and mobilize all that dark data faster. Adlib’s scalable, configurable Content Intelligence platform will empower companies to address ongoing regulatory and geopolitical changes so they never again feel as unprepared to respond, adapt, and compete.

Ready to Get Started? Learn how Adlib can help you address LIBOR and more.

LIBOR eBook

Sources & Credits:

1NewYorkFed.Org

2J.P.Morgan

 


 

 

 

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