At the end of 2021, the benchmark rate that underpins more than $350 trillion worth of cash products and derivative contracts — the London Interbank Offered Rate (LIBOR) — is being sunsetted.
For many organizations, this means thousands of contracts need to be gathered up, assessed and repapered. Unfortunately, the clock is ticking, and obstacles are piling up.
Time is of the essence
The end of 2021 will be here distressingly fast, and preparing your organization for the LIBOR transition is going to take time. Getting prepared isn’t a matter of checking off boxes either — transition activities have to be performed well and thoroughly, or else your organization could be exposed to serious risk.
To prepare your organization’s contractual portfolio for the LIBOR transition, you will need to start your activities now. Unfortunately, global events haven’t made doing so easier. The COVID-19 pandemic has made it more difficult to meet with your peers and other stakeholders to plan out transition activities and to enter the office to access secure systems or files.
At the same time, the economic uncertainty brought about by the pandemic has made it all the more crucial that your organization’s financial contracts are in proper order before 2022.
Altogether, these factors mean that it’s time to implement and execute a contract remediation plan to ensure a smooth transition.
The 3 steps of a contract remediation plan
Even though the LIBOR transition is unique in its scope and timeline, we can divide any contract remediation plan into three broad steps: 1) collection, 2) analysis and 3) remediation. We’ll dive into each step into more detail and describe what in-house counsels can do to ensure they carry out each step expediently and effectively.
When considering the scope of the LIBOR transition, most counsels probably think about the huge volume of contracts, repositories, databases, business units and more that they need to sift through in order to identify affected contracts. There is no question that this is a Herculean task, but with the proper planning and tooling, it can be made less daunting.
The first step in a contract remediation project is to ensure that all of your contracts are digitized. If you’ve got any physical contracts, then you’ll need to scan these documents and use optical character recognition (OCR) to make them machine-readable. This will ensure you can automate as much of the contract remediation process as possible, and thereby save time, costs and manual effort.
Unfortunately, just because many of your contracts are digital doesn’t mean they’re organized. Your next task is to gather your organization’s contracts into a centralized repository — many organizations have contracts spread around in isolated drives, siloed databases or even in different countries. You’ll want to select a contract repository solution that can securely store all of your contracts in one spot. Many contract repository solutions also offer OCR capabilities to record paper documents and advanced search features.
If your contracts are particularly disorganized, you may want to bring on digital forensics experts to your team to assist in sourcing and processing your contract data.
With all of your contracts in one place, now you can begin analyzing your portfolio for contracts highly exposed to the LIBOR transition. One option for this is to use your contract repository solution’s search functionality, which can vary in sophistication depending on the solution you selected.
However, the scope of the LIBOR transition makes this approach untenably time consuming. In order to reserve your team’s time and energy for the tasks that truly require their attention during your contract remediation project, you’ll need to carry out your analysis via artificial intelligence (AI).
To do this, you’ll need to consult with AI experts to not just handle the technical implementation, but also to learn about the unique needs of your organization and to tailor your solution accordingly.
Using AI will enable you to identify which contracts among your portfolio are exposed to LIBOR, assess how much they’re at risk and group them according to their common features to facilitate remediation. You’ll be able to identify contracts with Force Majeure or fallback clauses, for instance, or the contracts whose underlying economics are likely to change significantly when an alternative reference rate is applied.
Importantly, AI can surface exceptional contracts to your team. In this way, financial experts can determine whether a given contract is likely to pose a liquidity risk after the transition, or your general counsels can review complex, unique contracts to better prepare for remediation.
In large part, organizations need to maximize efficiency in the collection and analysis steps in order to reserve an appropriate amount of time for the actual remediation process.
Collection and analysis are mostly internal tasks, meaning you’ll have the most control over them. Remediation, however, requires counterparty feedback and negotiation, tasks that can take longer than anticipated. Preserving time for this last step is key to entering 2022 with happier partners and fewer headaches.
Fortunately, you’ll be prepared by the time you reach this stage. You’ll have identified contracts that require updates to their fallback language, spread adjustments, trigger provisions and other features in order to ensure that neither party encounters any unexpected after end-2021. You’ll need to discuss your proposed remediation with your counterparty in clear fashion, allowing for feedback and with plenty of time before the end of 2021 to address any concerns that come up.
Your work in the previous stages of your LIBOR contract remediation project should make it easy to quantify the number of affected contracts and to point out any unusual contracts that your counterparty’s counsel may wish to review more closely. This will enable both parties to approve the changes, tweak boilerplate language for exceptional contracts or terminate contracts that can’t be remediated.
Even though time feels like it’s running out, there’s still the opportunity to complete your LIBOR transition in an orderly and well-executed fashion — you just have to use the right tools and processes. At Exigent, we’re focused on how technology can transform legal work, including preparing for the LIBOR transition. Get in touch with one of our experts to discuss your LIBOR contract remediation plan in more detail.