LIBOR -- the longstanding benchmark interest rate at which banks loan each other money -- is transitioning out. A new standard -- in most cases, the Secured Overnight Financing Rate (SOFR) -- will be in place in 2021.
Banks of all sizes must assess their contracts that contain LIBOR provisions and fallbacks, and address that exposure with new language and conduct communications and negotiations with clients regarding SOFR. The timeline is now tight, so we thought we’d lay out how many of our financial institution clients are tackling the challenge head on.
The LIBOR Solution
As with most modern legal matters, the solution is a combination of people, processes and technology. To conduct the comprehensive contract review, abstraction and negotiation initiatives required from LIBOR changes, we use robust artificial intelligence technology and small teams of deeply experienced financial services attorneys to quickly transition these clients’ LIBOR provisions in a consistent manner, typically with a two-step process:
Step 1: Review, Capture, Abstract
- Identify if client documents already include any fallback provisions that would allow for a different interest rate once LIBOR sunsets, and abstract that fallback provision;
- Identify which contracts do not have any fallback provisions;
- Capture party name, notice provision, address fields, etc., for abstraction; and
- Identify opportunities to set up the fields to create a mail merge
Step 2: Remediation
This stage is dependent on the universe of documents and content found during Step 1, where Legility attorneys have divided the contracts into buckets of those with fallback provisions and those without. From that point, we assist the client in sending out appropriate notices to the parties that have fallback provisions to trigger that provision. For those without fallbacks, we work with the client on the remediation and negotiation of that gap in language.
With the clock ticking on the 2021 sun-setting of LIBOR and the implementation of SOFR, financial institutions must be able to efficiently assess their exposure and risk with a consistent, quality driven process. The expediency of the review, capture and abstraction process not only gives these clients more time to communicate and negotiate with their clients, but reduces the drain on internal resources and provides an accessible database that displays key provisions for ongoing and future needs.