How These Partners Tackle a $350 Trillion Problem Disrupting Businesses

After 30-plus years as the industry standard benchmark, the London Interbank Offered Rate (LIBOR), is coming to an end. LIBOR is an interest rate average that banks use as a globally accepted benchmark to define borrowing costs.

History of LIBORYou may be aware of LIBOR and how its discontinuation impacts almost every industry. While you may have even started the necessary measures to prepare your organization for this change, many organizations may not fully understand the scale of this issue and to what extent it will impact their businesses. Even for those who are aware, the problem might seem insurmountable or they may not know where to start.

“A variety of industries and organizations should be paying attention,” said Ryan Drimalla, managing director at FTI Consulting. “Think about insurers, lenders, leasing companies, hedge funds. A massive amount of contracts and financial products used by these companies in their ordinary business rely on LIBOR. The issue's relevance across different functional areas is an enormous challenge for organizations as they plan for transition.”

A select group of large international banks have traditionally self-reported LIBOR rates. These rates influence how banks, companies, and consumers around the world borrow money. The potential to exploit that influence was too tempting for a few nefarious actors. Many colluded on rigging the rates as a result.

In the late 2000s, this became apparent following reporting by major financial publications. Regulatory bodies were forced to penalize these unethical practices and mandate greater oversight. In 2017, the body overseeing the rates’ collections announced it was preparing to discontinue LIBOR’s publication rate.

Since then, agencies like the Federal Reserve Bank of New York have sought an alternative rate, such as the Secured Overnight Financing Rate (SOFR).

Preparing for December 2021 

The publication of LIBOR rates will officially be discontinued in December 2021. Today, in preparation, organizations across the globe have quite a daunting task ahead of them. In outstanding contracts, financial organizations must locate every instance of LIBOR used. Then, they must adjust them to alternative reference rates such as SOFR. The scale of this effort is massive. To put this in dollars, it is estimated that LIBOR is the standard rate used in up to $350 trillion worth of contracts. 

Scale of LIBOR

According to Intercontinental Exchange (ICE) Benchmark Administration, an estimated $350 trillion in financial products such as mortgages, consumer loans, corporate debt, and derivatives are underpinned by LIBOR. To provide reference of how large that number is, it is shown here in proportion to other global economic benchmarks.

Failing to replace LIBOR references is risky. Contracts that do not make the rate change could be subject to contract breach. Organizations may be subject to massive waves of litigation if they do not or are unable to locate LIBOR instances and remedy its references.

“What is the most common client problem? Typically, the problem is that clients have imperfect insights into their contracts,” said Christopher Cahn, managing director at Morae. “They may have numerous contract repositories and not know what is relevant or duplicated, nor what is or isn’t impacted by LIBOR. There's a challenge around figuring all of that out.”

Fortunately, many in the legal space are doing just that.

We know the challenge is a big one. To shed light on solutions, FTI, Morae Global Corporation, Complete Discovery Source (CDS) and Heretik shared their approaches with us.

FTI Creates Task Force to Take on LIBOR

Many organizations are pushing thinking about LIBOR to the backburner simply because 2022 seems far away—especially with everything else we’re all facing today. However, a simple fix isn’t the answer.

“Organizations need to start talking about this now—most financial institutions already have. Talk to your financial advisors, counselors, and those that can get you headed in the right direction,” Ryan, from FTI, noted.

LIBOR is a complex and large-scale challenge. Going through stacks of contracts to find LIBOR references takes hefty resources, or the right tech.

Late last year, FTI launched its LIBOR Transition Task Force to help clients navigate this transition from LIBOR to alternative rates. As part of the Task Force, technology and legal experts devised a mechanism to determine LIBOR exposure and locate all relevant contracts and language across an enterprise using a proprietary integration with artificial intelligence.

A primary component of this solution is Relativity, taking advantage of the platform’s processing power and out-of-the-box functionality.

“Our product team really enjoys building custom solutions for contract analysis initiatives (like LIBOR transition) and connecting them with Relativity where the data takes form and becomes actionable,” Ryan added. 

Morae Optimizes Client Legal Spend with LIBOR 

Going through contract after contract can be time-intensive and costly. Often, deciphering relevant versus irrelevant contracts is unclear.

“You may have a contract that references a second contract. That first contract may not explicitly mention LIBOR whatsoever,” Chris Cahn said. “It is the second contract that is incorporated by reference that determines there is LIBOR exposure for the first. It is critical to consider these contracts together as an agreement to arrive at accurate conclusions.”

Morae uses Relativity to thread those contracts together by creating a parent-child relationship within the platform. This efficiency translates to a more accurate review and reduced overall spend.

"By de-duping and triaging the entire document universe down to only what matters, clients are not charged for reviewing every contract,” Chris said. “We’re helping clients optimize their legal spend and get the answers they need more quickly by finding relevant contracts and data.”

After relevant contracts and data are presented, legal departments can determine next steps using risk-based and data-driven assessments. They must answer questions such as whether they’ll need to send amendments or notices to the counter parties.

“We are also looking at new uses of Relativity for this process,” Chris said, such as creating a monitoring system to track the different buckets and ensure that structured, normalized data from Relativity drives greater efficiency in the decision, reporting, amendment and notice process.

“When we talk to clients about how they use Relativity, we sometimes find they only use 5 percent of its power,” he said. “There’s often so much more you can do.”

Morae recently hosted a webinar on just this topic. Check out a recording here.

Complete Discovery Source (CDS) Finds LIBOR Insights with Heretik

CDS is using Heretik’s contract review platform on Relativity to expedite LIBOR language identification and review the relevant contracts in a secure fashion. Reviewing contracts in Heretik also allows multiple parties to access the information they need.

Heretik, a powerful, scalable contract review solution built on the Relativity platform, has a track record of success in the contract analysis space. Founded in 2016, Heretik helps organizations like CDS make smarter, faster, and more favorable decisions with their contract data. Heretik is available on the Relativity App Hub and they’ve broken new ground via partnerships with law firms and service providers to identify ever more meaningful use cases for their innovations.

When assessing contracts, Heretik’s solution finds key data points quickly. Their software allows users to leverage machine learning to structure contract data and prioritize their LIBOR review and resources. With Heretik’s dynamic contract viewer, users can quickly navigate pre-populated extracted data points, quickly compare LIBOR fallback language, and even auto-draft LIBOR replacement amendments.

Heretik LIBOR Screenshot
Heretik’s Viewer in action with a LIBOR coding layout.

 

“The way the tool parses out documents allows us to set up two main work streams with Heretik and outside counsel,” said Chris O’Connor, director of e-discovery strategy at CDS. said. “This way, outside counsel can evaluate what they want to do with replacing language in the contracts.”

Still, corporations looking to analyze these contracts have a large task ahead of them.

“Corporations would tell us, ‘My contracts are in a warehouse somewhere and I don’t want to scan them because that costs money and you have to pay someone to host it,’” said Chris O’Connor, director of e-discovery strategy at CDS. “Now, they’re saying, ‘I wish I had done that and had these contracts as PDFs.’”

“It’s challenging to make sure corporations are getting the right resources to review the contracts. There can be a lot of moving parts,” added William Belt, managing director, CDS. “There are tax and accounting implications with every change made with respect to a contract.”

Time to Get Moving

Whether or not organizations choose to address their exposure to the discontinuation of the LIBOR reference rate, it won't change the fact that the deadline is fast approaching. All of the experts we spoke with agree that the time to act to prepare for the LIBOR transition is now.

That preparation may take the form of partnering with a service provider, working with an independent software vendor from the Relativity App Hub, or creating your own bespoke solution. Whatever the means, Relativity is the perfect platform for building workflows that can streamline the process and save time and resources.

Dylan Salisbury is a product marketing manager at Relativity, where he specializes in understanding and serving the corporate community.

 

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