Litigation and Investigations Data Analytics Quarterly – October 2019

October 24, 2019

Navigating the LIBOR Transition:  Why You Need More Than An Artificial Intelligence Based Contract Review Tool

By Vineet Sehgal and Travis Phelan

With the impending phase-out of LIBOR, financial institutions are rightly looking to AI based tools to help facilitate the transition away from LIBOR in a controlled and efficient manner. There are several existing contract analytics tools in the market that have enhanced their review workflow capabilities by adding a LIBOR-specific module. These enhancements help in extracting some information relevant to the transition process. However, these contract analytics tools are only one aspect of the holistic process required to successfully navigate the LIBOR transition.

There are several areas where Financial Institutions (“FIs”) can realize significant benefits and conversely, deal with significant issues if close attention is not given:

  1. Knowledge and Data Acquisition: Contracts relevant to the LIBOR transition must be complete and accurate. FIs face a major risk by not identifying all of the data repositories and the universe of contracts that may be affected by the LIBOR phase out.
  2. Quality Assessment and Remediation: AI and Machine Learning based tools are highly dependent on the quality of text they receive. FIs require capabilities to quickly identify and efficiently remediate discrepancies between the contract language and the embedded text.  
  3. Document Lineage: FIs will encounter ancillary documents related to contracts (e.g., annexes, amendments, supplements) and require capabilities to efficiently collate documents ensuring the totality of the document is being reviewed.
  4. Textual Analysis: Vast portions of contracts are not applicable to the LIBOR transition process. FIs can benefit from utilizing contract parsing technology to target LIBOR specific areas. In addition, significant value can be realized by clustering technologies which compress documents based on similarity and thus minimize human review.
  5. Document Review: FIs will likely have a vast amount of contracts relevant to this process. With tight deadlines to determine the appropriate course of action, they will require an efficient review processes aided by technology to ensure a through yet efficient review.
  6. Reporting: A process as complex as the LIBOR transition requires robust reporting to ensure transparency, accuracy and progress. Reporting capabilities, at a minimum, should include contract level reporting, provision level reporting and metrics for the PMO. The process should allow for full extraction of all LIBOR related provisions as well as the review attorney notes and assessments.

AI-based contract review functionality will certainly assist the LIBOR transition process but FIs should not lose focus of the aforementioned areas. Paying close attention to these areas will yield major benefits.


Managing Director Matt Evans and Director Lilly Goldman discuss the upcoming LIBOR transition:

Q: Provide an overview of the LIBOR transition.

Lilly: LIBOR, the most frequently used interest rate in the world, is being phased out following multiple scandals surrounding the rate-setting process. The U.K.’s top regulator, tasked with overseeing LIBOR, announced that the publication of LIBOR is not guaranteed beyond 2021. Any contract that references LIBOR beyond 2021 will be affected, including corporate loans, mortgages, interest rate derivatives, bonds, and mortgage backed securities. Computer systems and models that use LIBOR for calculations will also be affected. There is speculation regarding an industry-wide rate that may replace LIBOR but no concrete guidance has been provided. Regardless, contracts that reference LIBOR still need to be identified, analyzed and classified in order to determine the appropriate next steps.

Q: What are the risks?

Matt: Firstly, failing to identify all LIBOR-linked contracts and related LIBOR dependencies across your institution, and second neglecting to set up and execute a flexible process for the analysis and remediation of transition issues as they emerge in the near future.  Additionally, there is a threat of litigation or investigation inquiries by not addressing these issues.   

Lilly: There is also risk of the unknown. It is still unclear how the transition process will unfold. There is no clear road map currently and banks are preparing for what will likely be a protracted and bumpy two or more years ahead. As more becomes known about potential market-wide solutions, banks must be flexible to accommodate such solutions but ultimately be prepared for more extreme contingencies which are not necessarily spelled-out under contractual provisions.

Q: How should companies address the transition?

Matt: Companies should start by identifying the stakeholders and assembling a transition team who can help navigate through the various departments. Raise awareness regarding the transition. Understand the organization of the company and determine where your LIBOR exposures are. Leverage technology for bulk contract review including processes to confirm accuracy and completeness, data remediation, document lineage and analysis. Understand what is going to happen to those contracts and systems if LIBOR goes away, who is responsible for determining the replacement rate, and what risks are involved.

Q: What are some of the key success factors for this complex transition?

Matt: Issues as complex as the LIBOR transition require close collaboration between operations, compliance, technology and legal personnel. Each group will play a critical role in defining a successful outcome. This can be tough for large, multinational corporations but failure to do so could result in the addition of significant issues to an already complex process. If you do not have the appropriate in-house skills or your teams do not have the bandwidth to devote a good amount of their time to this process, get help from the subject matter, legal and technology experts.

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