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Forbes reports US $350 trillion dollars is the world’s most important number. It’s the term most banks and financial institutions are familiar with as this represents approximately 80% of the over the counter and exchange rate derivatives. The next number is US $3.4 trillion. That represents 97% of the syndicated loans in the US. And finally,  $US 8.7 trillion. And that represents about 50% of US loans that reference LIBOR and 60% of loans in the European marketplace.

What is LIBOR and how does it work? 

Beginning on January 1, 1986, banks estimated how much they will pay in interest and the LIBOR submitter reported these rates to the LIBOR committee. Ideally, this submitter provides their honest view and not be influenced by banks or traders. Then all the rates were averaged out and that became the LIBOR rate.  

Why is LIBOR coming to an end?

In good times: Banks manipulated the interest rate they reported to the LIBOR committee and allowed their traders to take derivative bets on where the LIBOR rate would be. This allowed them to make more money, as the interest rate was artificially distorted.

In bad times: In a depressed market, banks again manipulated the rate which it could allegedly borrow from other banks. This made the bank appear financially stronger than it was. And all of this was possible because regulators were fearful of banks dissolving, which would have a huge financial impact on the economy. And by 2012, this banking scandal came to light and resulted in LIBOR being phased out.

LIBOR has Left the Building

By the end of 2021, the Financial Conduct Authority will stop publishing LIBOR. Banks and other financial institutions will have to figure a plan to transition to other lending rates. This is the key tenet of the LIBOR Transition Programme. Seems simple enough, except all the legacy contracts must be reviewed and updated to reflect this change.  Many banks increased their workforce, by hiring additional lawyers (insert appropriate lawyer joke here) creating a huge expense.

It’s not just UK banks that must deal with this. Every global bank or financial institution that used LIBOR rates will need to change every contract and document. This affects retail and investment banks, hedge funds, insurance organisations, pension funds and even private corporations around the globe.

LIBOR replacements include various risk-free reference rates (RFRs) and in 2018 the Bank of England and the Federal Reserve Board published Secured Overnight Financing Rate (SOFR) as the RFR for US currency and the Sterling Overnight Index Average (SONIA) for the British Sterling. These new RFRs were designed to provide stability and risk reduction in the long term.

Do You Know Where Your Contracts and Documents Are?

Banks and financial institutions are known for organisational silos. It’s highly likely the documents including contracts are no different. While many might be indexed, there’s likely to be many more that aren’t, especially documents in paper format only. 

Here’s the rundown of tasks involved in a LIBOR transition:

  1. Identify LIBOR deals

  2. Search repository

  3. Read through agreements

  4. Identify dependent documents

  5. Search for more documents

  6. Identify and review alternate contract language

  7. Start updating documents

  8. Notify borrowers of changes

  9. Follow up with outside parties

  10. Review amendments and changes

  11. Index updated documents to a repository

  12. Document SOFR and Reporting

You’ll notice one commonality across these tasks – they’re all manual. And there’s a lot of steps and people required to manage this process.

Working Smarter with Automation

But working hard and working smart are two different things. Working smart includes automation. Automation can play a huge part in reducing banking risk and meeting the 2021 compliance deadline.  Best of all, the technology is readily available, literally error-proof and is a fraction of the cost of adding headcount. Specifically, it’s a 70% reduction in manual effort and over three times the speed to become compliant. Plus, the accuracy is nearly 100%.


5 Ways Automation Accelerates LIBOR Transition

  1. Integration: Any automation solution you choose must work with your legacy systems of record such as CRM, document and contract management systems.

  2. Implementation: You can’t afford to wait several weeks, let alone months to get the automation process up and running. Finding a partner with deep subject matter expertise and experience in banking and finance is key.

  3. Capability: The majority of data inside an organisation is unstructured. Traditional capture technology like OCR, won’t be able to ingest and digitise unstructured data such as forms, PDFs, images, handwritten, signatures and optimise the documents that are poor quality, so they can be utilised. You’ll need to source a solution that’s able to ingest and digitise all documents and information, regardless of format.

  4. Organisation: Auto-indexing your documents is key. Not only for updating current contracts, but keeping records organised. There are providers offering technology to automatically classify and index all documents and data, so they can be located quickly.

  5. Insight: Visibility into the transformation process is important. You need to know how your automation programme is performing, so you have the chance to address any issues. This process insight helps with auditing and monitoring and measuring productivity.


Wow. And we thought GDPR was tough.

Watch LIBOR-Beat the Transition webinar to learn best practices from industry experts.
 

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