Financial services organizations, industry working groups and regulators around the globe are working against the clock to successfully replace long-established London Interbank Offered Rates (LIBORs) with alternative risk-free rates (RFRs).
LIBOR's decommission will significantly affect — and pose risks to — a diverse array of business functions being conducted by today's global financial institutions. More than US$370 trillion worth of contracts are said to be tied to LIBOR and other soon-extinct benchmarks such as EURIBOR and TIBOR. RFRs have been designed to overcome the pitfalls of these rates — from minimizing reliance on expert judgement and ensuring a better reflection of the risk-free rate to avoiding past rate-related scandals.
LIBORs currently support a vast range of financial products and valuations across multiple jurisdictions — from loans, mortgages and leases to securitizations, derivatives and more. Global regulators have made it clear the current construct underpinning LIBOR is unsustainable and a threat to global financial stability. The Financial Conduct Authority has gone so far as to no longer compel banks to submit estimates for LIBOR. This shift in attitude towards the prodigious rate has effectively created a deadline of the end of 2021 to implement an alternative. Finance sector players are finding it challenging to navigate an uncertain environment and the transition's potential impact on their products, infrastructure, services, customers — and reputation.
Larger firms, in particular, face the overwhelming challenge of scrutinizing hundreds of thousands — if not millions — of contracts to identify LIBOR-based references, and problematic legal language and develop a solution on time. And beyond how well banks make the transition, how effectively they communicate those changes to the market is deemed critical. Ultimately, we believe financial organizations should be looking at this challenge through four lenses: strategy, legal requirements, operational readiness and client communication.
...automation is being seen as the obvious practical solution, promising huge time and cost savings thanks to a level of speed and accuracy that manual processes simply cannot hope to match.
Given the sheer enormity of the problem, automation is being seen as the obvious practical solution, promising huge time and cost savings thanks to a level of speed and accuracy that manual processes simply cannot hope to match. Ultimately the LIBOR transition opens the door to a fundamental rethink on the use of data and machine-learning techniques to better provide products and services to customers. We are advising clients to viewthe current LIBOR challenge as a 'once-in-a-lifetime' opportunity — a catalyst to making major advances toward innovative digital solutions that will transform their front-to-back infrastructure and processes.
While many firms are taking a 'wait-and-see' approach pending greater transparency from regulators, the good news is that a growing number of smart sector players have begun moving strategically toward artificial intelligence (AI) solutions as the clock ticks down to the transition deadline.
These organizations are structuring LIBOR transition plans that encompass enterprise-wide governance, contract identification, strategic planning, and the inventory of systems, infrastructure and functions that require change. We believe that the use of cognitive technologies — including natural language processing, machine learning and other AI capabilities — will be critical to success.
By automating repetitive, rule-driven processes combined with AI-enabled contract management and workflow, financial firms can quickly unlock an accurate and reliable solution to the transition challenge. Audit trails associated with this process, meanwhile, will provide the starting point to help any organizations facing future claims of misconduct and manipulation.
Beyond making the leap to RFRs successfully, businesses turning to AI will simultaneously position themselves to unlock abilities to streamline documentation making it more consistent, allowing for quicker changes (amendments) and ensuring that documentation and information systems are truly aligned. This will present opportunities to be competitive, significantly reduce costs, enable higher accuracy, faster deployment, improved compliance and risk management. The LIBOR transition presents the opportunity to deliver new functionality transforming a largely manual and error prone process. In addition AI opens up opportunities to better process and analyze data which in turn can translate into competitive advantages.
At KPMG we've brought together two market-leading assets to automate contract analysis and remediation — solving the immediate LIBOR challenge while also creating opportunities for significant future business benefits through transformational digital technology: