The LIBOR transition: why financial organisations need to work smarter and not harder
For the last 50 years global banks have based their short-term interest rates on a market reference rate known as the London Interbank Offered Rate (LIBOR). It’s estimated that $350 trillion dollars in financial derivatives and other financial products are tied to LIBOR via contracts. This critical information is stored in scanned images of lengthy and unstructured documents within bank records.
Following multiple criminal settlements dating back to 2012 after the discovery of “rate fixing” known as the LIBOR scandal the rate is being withdrawn at the end of 2021. This leaves banks around the world with a problem – any contracts that persist beyond December next year that rely on the existence of LIBOR are not legal/valid. Now the challenge is to rewrite millions of contracts requiring a substantial legal spend and administrative effort to maintain regulatory compliance.
This is a journey that global banks and some commercial insurers have started planning and budgeting for.
Requests for information (RFIs) are issued exploring the costs of hiring law firms and resources to review each contract and draft new contracts and terms for signature by all parties. A hugely expensive and lengthy task in prospect.
More technically savvy organisations are taking a very different approach. They are looking to the very latest advances in AI and Machine Learning to solve the problem far more quickly, efficiently and with lower costs. Cognitive Machine Reading (CMR) provides the core technology at the heart of a complete end-to end-solution constructed by partners, EvoluteIQ.
This LIBOR solution replaces an army of paralegals with technology able to extract information from a 200-page document and over 140 various data points. Next, this solution determines the nature of the contract, key clauses and the nature of LIBOR exposure. After that, legal reviews and generates a new master contract with a schedule of related contracts for the counter-party bank or partner to sign electronically. This process, of course, will most likely be overseen and quality controlled by senior bankers and their lawyers, but the pain and cost of a human army of contract readers and drafters is removed.
By Mike Hobday, chief revenue officer, AntWorks
Watch the AntWorks free on-demand webinar to find out more about preparing for LIBOR with automation.