LIBOR Benchmark Reform and Regulation in Lyncs

Document remediation projects are not new.  Anyone working in Capital Markets in recent years can probably describe the steps involved as they tend to be similar each time.  Recent battle scars in the derivatives world include Uncleared Margin Reform (UMR) where large volumes of derivatives documents had to be amended – first for variation margin and more recently (and ongoing) for initial margin.

The LIBOR, EURIBOR, EONIA challenge (if you’re still reading you know what this stands for) has similar characteristics.  A market event (typically), leads to some regulatory change that is well publicised and has a deadline requiring industry wide action.

The flow is often something like this:

Planning Phase

  1. Panic about the size of the challenge
  2. Assume it will go away and ignore it (often not a bad plan, based on some regulations)
  3. Watch the industry bodies talk about it
  4. Assume they will come up with a solution
  5. Wait for the deadline to get pretty close
  6. Realise that no protocol or industry solution is either coming, or that if it is it won’t meet your needs
  7. Panic about the time left
  8. Seek a magic technology solution – after all can’t AI solve everything?
  9. Realise there is still work to do and that technology is only part of it
  10. Assemble a team and with the short time left make a plan and start executing it

Doing Phase

  1. Perform impact assessment (scoping the size of the problem – contracts and counterparty relationships affected)
  2. Retrieve all the documents and supporting reference data
  3. Process them in some way (this could involve information extraction from the documents), but perhaps you can skip straight to the remediation for some
  4. Remediate the affected documents and relationships, either through a protocol, a standard contract, or custom negotiation
  5. Capture the newly remediated data in the relevant systems (ideally a contract database, and operational systems)
  6. Close the project ready for the next regulation.

Ok – so that’s a little flippant but probably still somewhat familiar.

Impact Assessment

For LIBOR there are a number of ways to perform the ‘Doing Phase’ step 1.  Reducing the initial size of the problem can probably be performed most effectively using your operational systems (transaction databases / trade platforms for example).  If the benchmark rates are material to the contracts, then you almost certainly hold them in digital form somewhere, alongside the entities in the relationship and importantly for LIBOR, the termination date.  Using this information you can reduce the overall problem size considerably, weeding out those that will expire or ‘roll-off’ before the deadline.

Prioritisation and Document Retrieval

Next you should prioritise.  LIBOR is more challenging than some recent remediation efforts. It affects so many contract types and therefore business areas, that you probably want each one to do their own work where possible and manage this as a programme.  Prioritisation could be based on deadlines firstly (which benchmarks die the soonest) and then a secondary aspect such as size of exposure, or importance of relationship.

At this point you need to collate your in-scope documentation.  If you are lucky, you will have key documents in a repository somewhere, but either way you need to pull it all together.  For derivatives contracts this could include Master agreements, collateral annexes, amendments and confirmations but you may also have bonds, loan documents and others. 

Processing and Remedial Action Determination

The processing task on these documents for LIBOR is to determine if the benchmark is mentioned and if it is, how it is used within the contract and whether the language context it is used in has fallback language and if it does, whether it is suitable.  Many do, but often just in anticipation of a technical glitch in the rate being available temporarily on the market data platforms rather than what is happening with benchmark reform.   Naively you might think you can examine the contracts scan by scan, but this won’t really work – you need to organise the chronology of amendments by contract type and entity to be certain you are dealing with the latest data and that you are processing at a contract level.

At this stage rules must be applied based on all this data to determine what should happen next: is the contract in the clear?  Does the contract contain sufficient fallback language that it can be left alone? Or does the contract need to be amended?  In the case of amendment, the rules may also identify the type of amendment required.  

Lyncs to the Rescue

The processing part just described is where Lyncs can help.

LIBOR in Lyncs

Processing your contracts, organising them into families, arranging amendments in chronological order, identifying and extracting the rates and how they are used and where there are fallbacks, and implementing your rules or decision tree to derive the ‘what-next’.

Remediation and Outreach

Reports and the API can then be used to output this data, ready for the outreach and remediation phase, perhaps feeding into a document generation and outreach platform.

See Regulation as a Chance to Improve

A clear benefit of using Lyncs for this task is that at the end of the process you have a large number of your contracts organised, dated, grouped by entity, searchable and with data captured against the underlying contracts.  If you process the remediated amendments as a post-execution phase, this also means you will have an up-to-date contract database ready as a springboard for the next remediation challenge.

Closure and Business as Usual

Because Lyncs has been designed to support ongoing use (not just a single point-in-time problem) you can also process these same contracts for additional data points, leveraging the rich models we already have for trade documentation, and providing added value across business areas that depend on the terms of those contracts.

In summary, Lyncs isn’t a magic solution that solves the entire remediation challenge – there really isn’t one;  all of the technology platforms need people and process to sit around them.  No, instead Lyncs is your gateway to managing your contracts properly while solving the latest remediation challenge in the most efficient way.