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The News of LIBOR’s Demise is Highly Under-Exaggerated

Added on the 22nd Feb 2019 at 10:06 am
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By Alison Meredith, Senior Legal Analyst, Diligen

When traveling abroad, we rely on currency exchange rates to serve as an agreed upon medium on the value of goods and services. Banks too need to agree upon rates for doing business. But what happens when those rates cease to exist? And what does that mean for businesses that rely on them?

LIBOR, the London Interbank Offered Rate, is an interest rate used globally as a benchmark for trillions of dollars of loans. Every day, panel banks send their best guess of the cost of borrowing to the Bank of England who then take the average to determine the rate. Reliance on  human “expert judgement” rather than an objective true cost lent itself to easy manipulation, and the Financial Conduct Authority (FCA) has now decided it will no longer require banks to submit their daily rate after 2021, effectively announcing LIBOR’s demise.

The end of LIBOR isn’t just a UK problem since LIBOR is used worldwide. Millions of contracts all over the world reference LIBOR. Contracts that are set to expire before 2021 are safe to ignore, but those with due dates past that need to be dug up, dusted off and renegotiated. If they’re not, come 2021, lenders may find themselves caught short. With no way to calculate interest payments, loans typically revert to the lower cost of borrowing rate. A banker’s nightmare.

Finding the LIBOR wording in a contract, let alone changing it is no small feat. But companies that reference LIBOR in their contracts and don’t begin to act now do so at their own peril. The FCA has repeatedly encouraged organisations to plan for the transition to avoid unnecessary risk from having legacy contracts linked to an illiquid reference rate. Andrew Bailey of the FCA has stated that “The biggest obstacle to a smooth transition is inertia – a hope that LIBOR will continue, or that work on transition can be delayed or ignored. Misplaced confidence is a risk to financial stability as well as to individual firms.” The FCA’s Director of Markets and Wholesale Policy, Edwin Schooling Latter, recently spoke at the International Swaps and Derivatives Association (ISDA) Annual Legal Forum, where he warned it would be “extremely problematic for large back books of derivatives to remain on a

non-representative LIBOR”, in the final stages of LIBOR’s demise.

All legal experts know that the effort and cost involved in reviewing these contracts manually is huge, not just from a time perspective, but all the inherent practical problems that come with it such as finding a way to quickly assemble resources and allocate this work. Reliance on outdated technology dependent on keyword searches is ineffective and costly. Lawyers inevitably end up spending a huge amount of time searching through irrelevant material in contracts, looking for a needle in a haystack.

AI assisted review clearly makes sense for this situation. It’s the most efficient way to quickly identify the contracts that require amending without engaging in a lengthy, manual review process.

When lawyers can skip directly to the key provisions in the riskiest contracts they are able to prioritize what matters and spend less time pouring through what doesn’t. Diligen helps lawyers get to the key provisions quickly, resulting in a significant time and cost saving. We review hundreds of contracts every hour. Independent tests have shown AI software such as ours reviews contracts with a higher accuracy and in far less time than lawyers (26 seconds cf. 92 minutes for 5 contracts). Plus, lawyers can be confident they haven’t missed anything.

With the right tools and the right planning, the abolition of LIBOR need not be a daunting task. In fact, by being proactive, businesses can gain a first mover advantage and turn this milestone into a strength.

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