TIME FOR A CHANGE
Discover a unique approach to LIBOR remediation
The transition from LIBOR gives rise to a number of highly complex issues – not least the sheer operational scale of the endeavour. But technology alone isn’t the panacea for optimising your transition project.
The transition from LIBOR to Risk-Free Rates (“RFRs”) presents many challenges for financial institutions and commercial parties alike.
In addition to managing the substantial contractual risks arising from legacy counterparties (discussed in our article “Handle with Care”, the most significant and time-consuming impact for most businesses is the process of remediating all of their implicated legacy contracts and transactions. For financial institutions, this requires amendments to hundreds or thousands of back-book LIBOR-based contracts containing terms extending beyond Q4 2021.
This transition exercise contains compounding complexities in at least three dimensions.
The first challenge lies in the inherent legal complexity of evaluating how each individual contract is implicated by the legal and regulatory framework of transition.
The second dimension of complexity lies in the commercial implications of any proposed adjustment – how does a substitute RFR impact rights, obligations, and returns under the associated contract or trades; and what concessions or safeguards need to be instituted to avoid unfairly prejudicing either party by the transition?
These first two are well understood by the legal experts in this space, if no less challenging for that. It is the third dimension of complexity that is the most deceptive; namely, the sheer scale of the endeavour.
Scale, in this context, does not necessarily provide economies but instead can create further complexity through a network of interdependencies and multiplied impacts on decision-making. For example, advancing remediation on a contract level risks contradictory outcomes or approaches in relation to common counterparties. Without extensive safeguards, controls, protocols, processes, and project management in place, there is significant risk of duplicative, delayed, or redundant effort.
It is, to some extent, analogous to the challenges faced by software developers. Most software bugs in some way arise from accidental states, where the relentless logic of the code routes an object down an unintended pathway. As the development team grows, and the codebase expands, the potential for logical cul-de-sacs increases exponentially. CAR Hoare, winner of the Turing Award back in 1981, put it best: “there are two ways of constructing a software design: one way is to make it so simple that there are obviously no deficiencies and the other way is to make it so complicated that there are no obvious deficiencies. The first method is far more difficult.”
In practice, there is no substitute for careful and thorough project planning, and investing in a structured remediation strategy and platform.
All of these challenges form the foundation for BCLP Cubed’s approach to LIBOR work, and our appreciation for these inherent complexities has allowed us to create a more effective solution as a result. We have always valued the combined strength of multidisciplinary teams working in close collaboration with legal domain expertise. We have invested heavily in a bespoke technology platform, designed to facilitate efficient LIBOR review through tailored workflows and tools, and leveraging AI where appropriate without being constrained by its limitations.
For example, we integrate contract-specific clause level extractions directly into our structured review processes, so that they are automatically prepared at the point of allocation to a reviewer, and supplied in the context of addressing the relevant question sets. This allows for convenient analysis against pre-defined criteria and by reference to guidance and keyword retrievals, putting key information at the reviewer’s fingertips without subordinating the experience and judgement of qualified specialists.
LIBOR remediation is a unique and daunting challenge, which demands unique solutions
LIBOR remediation is a unique and daunting challenge, which demands unique solutions. As we draw closer to the deadlines, businesses need to embrace solutions that bring together a range of skills, appreciating both the legal and commercial complexities and the complexity of managing these issues at scale. If they do not, they may find those complexities create delays they can ill-afford given the increasingly short timescales involved.
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This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.