Preparing for the end of LIBOR
LIBOR, the London inter-bank lending rate, is due to be discontinued by 2021. LIBOR is currently considered to be one of the most important interest rates in finance, affecting possibly as much as US$350 trillion of financial contracts and products. It is the most extensively used interest rate benchmark throughout the world, based on transactions where banks lend money to other banks at a certain rate, borrowed over a specific period of time. Alongside all other interbank offered rates (IBORs), the London benchmark will be phased out. The LIBOR cut-off date is less than 24 months away, and the true scale of the challenge is yet to be revealed. The impact of the end of LIBOR could be immense.
What will the end of LIBOR impact be?
There will be a potential financial impact across an array of financial products and services. Financial institutions and companies need to review every aspect of their business that uses the LIBOR and all other IBOR-based benchmarks. LIBOR’s usage is vast, buried deep in documentation ranging from student and other loans, complex derivatives, fee arrangements, threshold triggers, and hedge fund performance measures, to name a few.
It’s vital that banks begin work now to prepare for the impact and embrace technology that will speed the transition from LIBOR and other IBORs to alternate reference rates. Users of LIBOR need to prepare by transitioning to alternative, more robust benchmarks, such as overnight risk-free rates. The rates include SOFR in the US and SONIA in the UK. For many organisations, this will be a considerable undertaking, and there are many operational implications. Steven Hurley of Investec says, “This is a huge disruption. I have been in this sector for close to 25 years, and this is the largest change since the introduction of the Euro currency in 1999.”
The phasing out of LIBOR will impact cross-functional teams, and there are few areas of operation that won’t be affected. In essence, it is a problem that will need to be dealt with across legal, compliance, business, and operations. The task will take both resources and time, and anyone affected by LIBOR should start working on their transition as soon as possible.
How can you get ready for the LIBOR-less future?
Organisations now need to focus on moving new business to alternative rates and should put in place a plan to mitigate their legacy risk from older contracts. Steve Hurley from Investec also says, “Cash products cannot be offered based on LIBOR rates from the end of Q3 2020, so you have to be ready to offer new products by that time. This work has to be happening now.” Transition in loan markets is a key next step. Andy Champion, Vice President of Enterprise Sales EMEA for DocuSign, notes that, “The financial services organisations globally that survive will be those that have nimble and flexible systems and procedures that allow them to handle change.“ Those who are exposed should aim to transition comfortably before the end of 2021.
Key steps to transitioning include:
- Identify your exposure – which contracts use LIBOR?
- Use technology and consider solutions that deliver an intelligent platform to automate the identification, updates and approvals of impacted contracts.
- Transition older contracts to new rates.
According to Andy Champion, “AI can do an intelligent scan of these agreements and contracts at scale in a very efficient manner so that cross-functional teams can make informed decisions and prioritise where to take action.”
Find out more by downloading the DocuSign webinar Are you ready for the new LIBOR-less era? In this live broadcast, you can discover more about the LIBOR free economy and hear how you can best prepare. The broadcast will help you to understand how DocuSign’s system of agreement solution, the Agreement Cloud can help with this transition. The webinar features the following panel of experts:
- Andrew Dickinson, Programme Director – Legal Transformation, Barclays
- Steven Hurley, Head of Operations, Investment Banking, Investec
- John Grout, Independent Member, LIBOR Oversight Committee
- Andy Champion, Vice President, Enterprise Sales, EMEA, DocuSign