The London Interbank Offered Rate (LIBOR) refers to a series of widely used reference rates that underpin interest rates for a range of financial products and instruments for more than 40 years.
With a potential impact on financial assets worth more than $400 trillion, the LIBOR transition program presents a significant challenge to banks and financial services firms. From identifying exposures to multiple contracts, to defining new rates strategies and products, to recalibrating models, and client outreach, the LIBOR transition represents an enormous undertaking.
Contract management and remediation—a significant task
The management and remediation of existing contracts is perhaps one of the most complex, costly, and time-consuming tasks facing the financial industry as a result of the LIBOR transition. Banks and financial institutions may have hundreds of thousands of contracts linked to LIBOR. The majority of these contracts, which will come for maturity after 2021, may not contain fallback language or language that significantly defines the economic implications underlying the transactions in the event of LIBOR cessation.
The process of updating these contracts involves switching potentially hundreds of thousands of LIBOR-based contracts to Risk Free Rates (RFRs). A systematic transition with effective contract management and remediation strategy is key to the financial stability of enterprises. Enterprises will need to perform legacy contract analysis and remediation, requiring resources to identify the complete impacted contracts, digitize the contracts, and analyze contractual fallback language provisions that can be triggered upon cessation of LIBORs.
Three key steps to LIBOR contract remediation
The end-to-end process for LIBOR contract remediation can be broken down into three distinct yet closely interdependent steps:
Document filtration: Contracts with different file formats (such as PDFs, docs, scanned images, and faxes of contracts) are ingested or crawled at scale for extracting information and insights. The impacted contract population is identified by applying machine learning models.
Contextual uniqueness: Once the impacted contracts are identified, an intelligent workflow is triggered. This step leverages machine learning models along with pre-built taxonomy, domain dictionary, and business rules to isolate and interpret subtle terms and bring out the contextual uniqueness of each contract. After analyzing these results and applying business rules, a recommended decision path is provided for each contract.
Remediation for LIBOR cessation: As a final step, affected contracts are remediated based upon approvals and stored back in the enterprise repository. It is essential that human judgement is a part of this process, ensuring all automated decisions are reviewed and audited.
Addressing the challenge
To address LIBOR contract management and remediation, enterprises can look to IBM partners such as TCS, a leading global IT services organization. TCS has worked with IBM to build Jumpstart, a solution that contains AI solutions and workflow management capabilities for contract management and remediation.
Jumpstart is pre-trained with LIBOR contracts and advanced rules, enabling an intelligent and automated remediation of LIBOR contracts with minimal customization. The solution is built using a combination of IBM technologies and open source tools, and it provides the flexibility to bring in third-party workflow products.
The inherent strength of IBM Cloud Pak® for Data enables Jumpstart to provide data control, ensuring that customers maintain complete ownership of their data. This helps them to quickly adapt and leapfrog their competitors by leveraging ready-to-use tools, accelerators, and pre-built AI engine and workflow, thereby greatly reducing the cost of transformation and total cost of ownership.
TCS is a member of the IBM hybrid cloud ecosystem, a new initiative to support Global System Integrators (GSIs) and Independent Software Vendors (ISVs) to help clients modernize and transform mission-critical workloads with Red Hat OpenShift for any cloud environment.
Nishi Nair is Solution Architect in TCS Sydney Office; Ramanathan Perinkolam is Enterprise Architect in TCS New Jersey Office; Hitesh Bhatia is Alliances Lead in TCS London office; and Chintamani Chatre is IBM Cloud Solutions Lead with IBM GSI Labs Pune Office.
The authors would like to thank Vijay Rangan – TCS LIBOR Transition Industry Offering Lead, Arpita Paul, and Arindam Ganguly for their contributions to this note.