Gearing Up for LIBOR Transition

The Next Steps — What does the new paradigm mean? How can financial institutions keep the lights on?
Review, Repapering, and Remediation for smooth LIBOR transition

The world’s most important number and benchmark interest rate in finance will phase out by 2021. Are you ready for a post-LIBOR world?

As the global financial markets brace themselves for a major change in 2021 — the phasing out of the London Interbank Offered Rate (LIBOR) — leading financial services company are looking for an end-to-end solution for a seamless LIBOR transition.

Financial services must accelerate their efforts to transition from LIBOR to mitigate future risks, avoid uncertainties, and build actionable solutions.

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What is LIBOR? Why is it so important?

London Interbank Offered Rate (LIBOR) is the interest rate at which banks lend money to one another for short term loans. It’s a globally accepted benchmark rate which is used to develop and offer a wide range of financial products. It is used to calculate the base rate for pricing loans and debts and is published in 5 currencies and 7 different tenors. Post considerable uncertainties in LIBOR supervision and administration, the Financial Conduct Authority (FCA), planned to phase out LIBOR by the end of 2021.

With $350 trillion in financial contracts linked to LIBOR, transitioning to risk-free rates is a massive challenge. The FCA’s announcement requires banks, risk professionals, capital markets, and other financial institutions to review and update trillions of contracts with new reference rates. As the deadline fast approaches, it’s time financial services providers develop and execute a robust LIBOR transition plan.

The impact of transitioning from LIBOR on the financial services sector

  • Who is impacted?

    • Commercial Lending

    • Capital Markets

    • Wealth Management

    • Retail Banking

    • Investment Management

    • Insurance

    • Corporate Treasury

    • Market Infrastructure

  • Which products?

    • Commercial Loans

    • Syndicate Loans

    • Derivatives

    • Bonds/Debt Instruments

    • Securitized Products

    • Mortgage Loan

    • Interest Rate /Swaps

  • Which areas/functions?

    • Trading & Booking

    • Pricing & Valuations

    • Post Trade Services

    • Loan Accounting

    • Data Management & Reporting

    • Risk Analytics

    • Credit Administration

    • Legal & Compliance

    • IT

  • Commercial Lending

  • Capital Markets

  • Wealth Management

  • Retail Banking

  • Investment Management

  • Insurance

  • Corporate Treasury

  • Market Infrastructure

  • Commercial Loans

  • Syndicate Loans

  • Derivatives

  • Bonds/Debt Instruments

  • Securitized Products

  • Mortgage Loan

  • Interest Rate /Swaps

  • Trading & Booking

  • Pricing & Valuations

  • Post Trade Services

  • Loan Accounting

  • Data Management & Reporting

  • Risk Analytics

  • Credit Administration

  • Legal & Compliance

  • IT

Infosys BPM & EdgeVerve’s LIBOR services

An end-to-end modular solution to support financial institutions navigate LIBOR transition

Infosys BPM and EdgeVerve have come together to help financial institutions chart a new course with the discontinuation of LIBOR in 2021. We have developed LIBOR methodologies and tools in consultation with clients, former regulators, banking chief risk officers, and financial services policymakers.

Customizable for clients’ specific needs, our LIBOR services have three key pillars:

  • Impact Assessment
  • Contract Review and Repapering
  • Remediation

As the world prepares for LIBOR transition, this PoV helps answer key questions on the road ahead post-LIBOR and how our LIBOR program can help financial service providers transition seamlessly.

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The three key pillars that offer an end-to-end solution

Enabling financial institutions to manage the LIBOR transition successfully

  • Impact Assessment
    Impact Assessment
  • Repapering

    Repapering
  • Remediation

    Remediation
Impact Assessment

Need for exhaustive assessment for all contracts that reference LIBOR and carry a risk because of exposure

To understand the impact of the transition, we have built an exhaustive library of 350 questions to carry out an in-depth Impact Analysis.

A significant phase of LIBOR transition, the primary objective of Impact Assessment, is to quantify the LIBOR exposure at each product and portfolio level in terms of financial exposures.

Identifying all the contracts that carry LIBOR risk is an enormous challenge and involves:

  • Identifying the contracts that have an expiry date beyond 2021

  • Identifying all the contracts that reference LIBOR among those contracts

  • Creating the alternate contract language needed for renegotiating contracts and replacing LIBOR with a new reference rate in all financial contracts/agreement documents

XtractEdge Contract Analysis

An AI powered contract review solution that helps in the digitization, extraction & risk-review of LIBOR contracts.

XtractEdge Contract Analysis, an enterprise-grade AI offering, utilizes advanced Machine Learning techniques such as Computer Vision & NLP to enable business users to find the contracts, which have referenced LIBOR for base rate calculations, quickly and accurately. XtractEdge Contract Analysis also brings the speed of processing 12,500 contracts per hour and scale of processing volumes of contracts up to millions.

Why XtractEdge Contract Analysis?

  • Bespoke capability to extend across domains and a very modular solution

  • Can understand the historical context and specific contractual language of customers

  • Can create sophisticated and highly accurate AI models with only 25 sample documents

Case Study:

How XtractEdge Contract Analysis helped a US-based financial services company reduce the contract cycle time by 60%

Challenge: A leading financial services company in the US was looking to process a historic load of over 25000 global procurement contracts along with risk scoring for all contracts, suppliers, and document types.

Solution: XtractEdge Contract Analysis leveraged advanced Machine Learning techniques such as NLP and Computer Vision to quickly and accurately extract terms and clauses from the historic load of procurement contracts. It also helped the client assess the risk profile of their contracts, suppliers and document types by scoring them.

Outcome: 10X increase in productivity | Accuracy of over 90% | 60% reduction in contract cycle time.

Repapering

Automated review and repapering of contracts

Depending on the nature of contracts, i.e., standardized or customized, technology will play a significant role at this stage in terms of implanting fallback provisions and letting customers know the change, in some cases recollecting the countersigned documents to store in the document repository with an audit trail.

AssistEdge

An automation solution for repapering contracts

Why AssistEdge RPA?

  • Helps enterprises to scale in their automation journey

  • Includes a team of legal experts/smes to help financial service providers draft a new clause

  • Can help in customer communications

AssistEdge, a cohesive RPA platform, leverages automation capabilities to generate a new contract with a new clause or generate an addendum to the existing contract. It also helps to send out automated customer communications along with redrafted contracts.

Remediation

Remediate systems, procedures, and policies

Remediating processes will be critical to eliminate potential operational risks, which may lead to unlimited financial risk/losses. Remediation comprises activities such as defining target operating models at each sub-process that may include infrastructure or systems and operations change, e.g., refreshed Standard Operating Procedures (SOPs), training materials, etc.

Case Study:

Our client, one of the largest bank-holding companies in the world, headquartered in Tokyo, Japan, had a challenge in identifying all the contracts that use LIBOR for base rate calculation and to find out which of those contracts are going to expire before 2021. The contracts whose due date is beyond 2021 needed to be renegotiated.

The solution:

XtractEdge Contract Analysis was proposed to transform the process of analyzing and reviewing contracts by leveraging advanced Machine Learning techniques such as Computer vision, semantics, & language sequence.

As some of the contracts spanned multiple paragraphs, the XtractEdge Contract Analysis team took a sample of those paragraphs, tagged the clauses, and built the AI model based on them. XtractEdge Contract Analysis trained the AI model on a sample set of 15 documents to automate the detection of all the clauses (intents), including those that had LIBOR and other base rates. XtractEdge Contract Analysis also detected all the contracts that had end-dates beyond 2021. This was critical as all the contracts must be redrafted to reference alternative base rates.

Outcome:

XtractEdge Contract Analysis was able to achieve a 98% hit ratio in terms (intents) detection for all the relevant clauses, exceeding the expectations of our client. Our client’s staff used the Business User Search feature of XtractEdge Contract Analysis to quickly find the contracts which have referenced LIBOR for base rate calculations quickly and accurately.

With the time saved by switching to automated contracts processing, the client was able to improve their negotiation posture while renegotiating the LIBOR contracts that go beyond 2021.

Learn more about how our solution can help unlock business opportunities, minimize disruption, and reduce the cost and risk of addressing the transition. 

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