Preparing for IBOR Retirement with Enterprise Contract Analytics
Much has already been written about the soon-to-be phase-out of the Interbank Offered Rates (IBOR), which includes the prevalent London Interbank Offered Rate (LIBOR), and the challenges it presents.
The IBOR phaseout is estimated to impact over $350 trillion worth of contracts. Financial institutions and companies with IBOR-related transactions must review every aspect of their business that depends on any of the IBOR Benchmark Rates. Risk management and remediation—crucial elements during this transition—are often time-consuming and costly, posing key challenges during the review process. And then there’s the challenge of creating products that employ alternative rates, not to mention effective customer outreach and necessary system updates.
The role of contractual documents in the IBOR equation
Financial institutions need to understand their contract landscape in order to segregate contracts based upon factors (e.g. expiration date, rate tenor and potential rate adjustment or fallback language) in order to determine prioritization based on risk.
Triaging contracts into like groups streamlines the remediation workflow, but it requires detailed planning and understanding of the various impacted lines of business. For example, we’ve encountered contracts that don’t include a specific IBOR Benchmark Rate reference but are related to an underlying IBOR Benchmark Rate transaction. These contracts are important in the review because they often contain critical rate adjustment provisions that can impact the decision of how to remediate. Consequently, the success of an IBOR remediation workflow plan depends on the ability to clearly identify and understand the nature and scope of the impacted contract landscape and efficiently take the steps necessary to transition away from IBOR Benchmark Rates. This type of clearly defined remediation program is the best way to minimize risks and challenges.
Contract analytics in a well-managed transition
Contract analytics solutions, particularly those that employ advanced artificial intelligence (AI), accelerate contract review and remediation efforts of critical financial transactions. By identifying legal documents based on the presence of IBOR-related terms, these platforms can deliver insight and automation that streamlines the IBOR review process. Best-of-breed contract analytics solutions can identify and extract key IBOR-related topics from a wide range of financial transactions. They also make it possible to recognize variance in standard contracting language, a capability that not only expedites the triage process but also feeds directly into automated decision making regarding replacement documents.
The most effective AI tools for IBOR remediation exhibit a deep understanding of the key issues and employ contract analytics for the IBOR remediation analysis. They can also incorporate new guidance as it becomes available, such as the ARRC or ISDA fallback language provisions. This type of flexibility will also be a critical component in the inevitable litigation and conflict resolution to follow.
Building actionable insight from the data made available in the IBOR phaseout is the best way to minimize risk and maximize revenue, avoid litigation and costly administrative burdens, and provide some assurance during the shift that lies ahead. Further, the work done today will better position you for the next regulatory shift. After years of working in regulated industries, we can be certain that there’s always more change on the horizon.
For more information on how DocuSign Insight can help with your risk management and remediation process, read Moving Away from LIBOR - Are You Ready