A lack in resources due to pressure from upcoming regulations, and failure by regulators and associations to come to a consensus on how to navigate the transition away from Libor means firms should ensure they have the legal technology ready to survive the next couple of months, both lawyers and legal service firms agree.
“I haven’t seen a big uptake of banks, even the big tier-one banks, in incorporating Libor fallback provision into documents yet,” Justin Ridl, global head of legal services at Cognia Law.
“With phase five of variation margin kicking in September next year, and Brexit whenever that happens, and then this Libor monster that is coming, the biggest challenge is whether there are going to be enough legal resources in the market to support all of those regulatory reform repapering,” he says.
Firms are currently preparing for the transition away from the Libor reference interest rate that has been used for several decades to the recommended alternatives.
For Jason Pugh, managing director of D2 legal technology, while many banks are looking to legal technology to assist, some continue to rely on manual processes.
“I’ve been talking to about eight or nine banks and a couple of them are doing everything manually. They are going to build an army of review,” says Pugh. “I talked to a bank last week, a big reputable tier one bank has plans in the Autumn to mobilize resources for this but haven’t really mentioned technology in their pitches.
“Derivatives will be less difficult than syndicated loans and bonds, so it depends a bit on their portfolio, but most banks I’ve talked to are looking to leverage some form of automated data extraction,” he says.
While national regulators and associations are trying to navigate away from the Libor, Stephen Allen, global head of legal services delivery at Hogan Lovells says firms shouldn’t be waiting for regulatory consensus.
“There is a multitude of regulators governing Libor some of which have made comment, and others that have not yet,” says Allen. “The other challenge is that there are a whole load of associations like the LMA, and ISDA who equally have yet to set out where they are, so it’s really difficult for banks to know what it is they need to do.”
“If you waited until you knew what every single regulator, and every single trading association or management association wanted to do, you wouldn’t be able to get the work done in time because it’s such a large piece of work,” he says.
In May, the International Accounting Standards Board published proposals to offer relief for how banks and other financial services firms treat Libor-type benchmarks on their balance sheets.
For Pugh, the scale of work necessary in the transition away from Libor cannot be underestimated.
“We’ve got a situation where many organizations across the market have been accumulating legal documents over many decades. That data has been often stored inaccurately, and not tagged.
“With Ibor what you’ve got is all of these different concepts coming together, legal data is absolutely integral for understanding the legal risk of the different permutations. In the past it has been sidelined, it has been under-invested. People have looked at the trading risk, but they haven’t looked at the underlying contractual data,” he says.