Over $300tn of financial contracts are based on London Interbank Offered Rate (LIBOR) as a reference rate and are due to transition to an Alternate Reference Rate (ARR) in 2022, according to the Bank of England’s report on Preparing for 2022: What you need to know about LIBOR transition.
The Financial Conduct Authority (FCA) announced in July 2017, its decision to discontinue Libor settings and its use as a benchmark by the end of 2021 and provided further clarity on the dates for the cessation of LIBOR in March 2021.
With the deadline fast approaching, financial institutions and corporates are pouring over large volumes of contracts to extract data from multiple sources, re-negotiate terms, re-paper contracts and manage credit and operational risks. It is a manually intensive, high cost, error prone and time-consuming activity.
This switch to an ARR involves many challenges with legal, risk, operational and financial impact, calling for an efficient workflow-based transition strategy.
Some of the areas that are likely to be impacted the most from this transition include:
- Identification and classification of contracts: Each contract has varied titles, descriptions and clauses making it prone to incorrect classification. This could lead to last-minute repapering and unfavourable negotiations.
- Application of appropriate reference rates: Complex product descriptions and taxonomies need to be mapped as prescribed by the FSB. Failing to do this could result in incorrect calculations and financial and operational losses.
- Changes in Calculation Conventions, accounting methods: Relevant calculation conventions need to be aligned with the new ARR to ensure appropriate interpretation of non-economic terms. Incorrect calculation could lead to accounting and regulatory challenges.
An easy-to-setup intelligent automation solution built using Artificial Intelligence (AI), Natural Language Processing (NLP) and Optical Character Recognition (OCR) could reduce time and effort significantly and provide a sustainable strategy.
LatentBridge’s automated end-to-end solution can:
- Perform contract discovery across multiple data sources and comprehend clauses / sub clauses, reducing manual efforts by 70% on contract analysis.
- Remediate by applying the correct reference rate in systems and re-papered contracts with 100% accuracy, eliminating error-related operational and financial risks.
- Analyse impact on internal pricing models (LTP / FTP) referencing Libor, with 50% cost savings on running simulation processes.
- Draw insights on exposure and risk from transition to ARR within defined parameters and create robust scenario analysis.
- Build data dictionary and audit trail of re-papered contracts with 100% accuracy.
Set your organisation up for a smooth and successful LIBOR transition now.
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