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Preparing for the LIBOR Phase Out: Contract Remediation Starts with Contract Intelligence
The New York Times called it the "most important number in finance." The London Interbank Offered Rate (LIBOR) has long been the global basis for agreements that include a variable interest rate component. In 2018, in eventual response to scandals during the financial crisis, the Federal Reserve and regulators in the U.S. and UK confirmed that LIBOR would be replaced by other benchmarks by the end of 2021.
Now, with less than two years until the phase out, the U.S. Securities and Exchange Commission (SEC) and the UK Financial Conduct Authority (FCA) are advising public companies and regulated entities to assess their risk exposure, quantify the financial impact, develop remediation plans and communicate material information to stakeholders. Doing so will require significant efforts across numerous business units within impacted corporations. Key among them will be the identification, analysis and remediation of LIBOR-based contracts.
Representative of an estimated $400 trillion in financial contracts, LIBOR will not be easy to phase out. By the time it is retired, any contracts that either lack a fallback provision or have not been renegotiated, will be left without a rate benchmark. As a result, legal, compliance and treasury teams at financial institutions are now under pressure to make substantial progress in identifying contracts subject to transition, determining how they are impacted and remediating agreements according to new and evolving standards or face potential litigation exposure post-transition.
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