Lawyers are supposed to always have all the answers. But there can be exceptions. In a complex industry like financial services, there are regulatory changes that hit in-house legal teams like an avalanche. This is why, when Howard Wassall, principal sales engineer at software provider Apttus+Conga, laid out the urgency and complexity of tackling the incoming end of LIBOR rates as part of a roundtable for The Lawyer’s In-house Financial Services conference, attendees were all ears.
Wassall, since 2018 an expert at Conga, a company recently purchased by Apttus, sought to soothe their worries by showing how the right technology can help speed up and simplify the repapering process required to implement the changes brought about by the discontinuation of LIBOR.
The history of LIBOR goes back a long way. Launched during the eighties, the term stands for London Interbank Offered Rate. It was originally calculated based on the interest rates large banks said they would pay other financial institutions for borrowings over a period of time. But these rates became the result of estimates, and traders realised banks could incorrectly report figures, game the system and sign new business. The regulators got wind of the conspiracy and ordered that, from the end of 2021, the use of LIBOR as a base rate should end and be replaced by alternatives.
As a result, all contracts with LIBOR interest rates need to be remediated. While some contracts already have alternative rates in place, others will require repapering and amendments. But the Bank of England anticipates that a number of large, complicated contracts cannot be remediated. If nothing is done, it is estimated that by the end of 2021 twelve trillion pounds worth of contracts referencing Libor will still be in circulation across a number of currencies — and some of these contracts run until the 2030s.
The associate general counsel of one of the largest UK banks has set up a working group to tackle the issue across different geographies. “It is affecting everybody,” he said. “So many contracts have LIBOR reference rates. We thought it would be wise to prepare ourselves when there is still time.”
The remediation process is so demanding that large banks are designing extensive internal programmes, Wassall explained. First, they need to find the LIBOR-bearing contracts, which are often scattered across document management systems, file systems and old cabinets. Then, they need to put in place technology platforms to handle the repapering and include new rates.
One in-house lawyer voiced his concern at the complexity of the process. He doesn’t work in the financial industry, but his contracts carry high interest rates. How long does it take and what do we have to do?, he wondered. The truth is, Wassall noted, that it depends on the amount of contracts. The standard programme tends to last ten to twelve months. But the right tools can speed up the process and avoid mistakes.
Technology platforms such as contract lifecycle management systems, set up and configured in about two months, handle the entire repapering process. Tech providers like Wassall’s Apttus+Conga work alongside banks and consultancies to gather all those documents and digitise them. Once a contract is digitised and brought into the platform, machine learning technology scans files to recognise LIBOR clauses, rates, dates and values.
But how does the artificial intelligence work?, another in-houser asked Wassall. Apttus+Conga, for instance, partnered up with AI company Kira Systems, whose platform can be trained by feeding it examples of clauses so that it learns to identify and recognise them overtime.
Once the clauses have been identified, they are processed by the contract lifecycle management system, so that new agreements are generated. In this context, the platform generates templates highlighting the clauses and conditions that need to be replaced. The first new draft is then moved to a negotiation phase so that the clauses can be replaced with new ones based on the playbook created by legal teams.
Throughout the process, team members can calculate risks and track the stage of each contract in the system. This helps adding new clauses and agreeing on margins before approving the final version. “The idea is that a lot of work can be taken out from the legal team,” Wassall said, with the lawyers signing the contracts that are later stored in a single repository.
The technology allows to prepare reports and predict the cycle times for the repapering process. Asked for an example of this analysis capability by an in-house lawyer, Wassall said the platforms can highlight which clauses tend to be modified more often during the negotiation process, and based on the length of each phase they draw insights on why it takes longer and how it can be made quicker. Gathering these analysis, another lawyer suggested, might help crystallise and share best practices with the in-house community. “We may learn from processes and share information,” she said.
An associate general counsel acknowledged how an organised LIBOR workstream makes things easier. “If changes are already reflected in the documentation, it is very helpful to make contractual partners accept clauses and convince internal stakeholders,” he said.
Still, some GCs grapple with concerns. One counsel in a mid-size company doesn’t know if the business needs to embark on such a gigantic effort by bringing in external platforms. “I don’t know if we would have the volume for something like this,” she said. Each business has to judge whether a platform is the right investment, Wassall explained. But he added that even just providing a single place to find all contracts proved to be a helpful solution for many organisations in which contracts were dispersed in a plethora of folders and databases.
Meanwhile, another lawyer was worried that the rates replacing LIBOR as a market standard might turn out to be different than the ones they include in the contracts. “How do customers running programmes on these systems feel about the fact that, by the time they get through it their rates might not lead the market? What if you invest this time and then find out the market uses something else three months before 2021?,” he asked. Wassall said most countries have already expressed preferences on the rates they will use, with the UK opting for SONIA, a rate that the Bank of England estimates it is included in about £50bn worth of contracts on a daily basis.
The lawyers at the roundtable are not alone in finding themselves with more questions than answers. “The banks we are working with are mostly at the beginning,” Wassall explained. “They have set out the remediation programme and picked partners.” In these early stages, most of them are taking on the first steps of the repapering process and selecting which tranches of contracts they want to prioritise.
LIBOR was a big enough problem even before a global pandemic hit. But if coronavirus prompts quick reactions, LIBOR calls for strategic planning and long-term investments. “I can say first-hand that it’s a major exercise and a big task,” said the bank’s associate general counsel responsible for setting up the LIBOR working group last year. “And the deadline is coming closer.”
Any contracts not including fallback language and alternate rates will need to be remediated and this remediation program will be one of the largest regulatory programs undertaken by any financial services Institution with heavy dependence upon the legal team.
A key part of the remediation program will be the re-papering of contracts to include new rates. During the roundtable, we discussed how a contract lifecycle management platform can enable this re-papering process reducing the load on the legal team.