Banks must turn to AI to meet Libor deadline, Paul Hastings/GBRR webinar hears

Banks must make use of artificial intelligence technology for outstanding Libor contracts or risk their transition away from the benchmark stretching past its end-2021 cut-off, heard attendees of a webinar co-organised by GBRR and Paul Hastings.

The ‘End of Libor: what you need to do now’ webinar took place on 10 November, and is still available to view.

In a live poll conducted during the interactive talk, 40% of respondents  they do not plan to use technology solutions to support their firm’s transition away from the Libor benchmark.

But Nicola Shaver, managing director of innovation and knowledge at Paul Hastings, said that financial firms risk falling behind in their Libor transition process if they do not embrace new technologies.

“This may be a controversial position, but if your organisation is dealing with many contracts that reference Libor, I would go so far as to say you must be looking at technology solutions if you want to get this done and rectified economically before Libor is phased out,” she said.

Machine learning and natural language processing can be trained to rapidly categorise contracts, allowing for “more effective revision” for fallback provisions.

“Instead of having to read every contract to identify certain clauses, the technology highlights relevant clauses itself and exports them to a spreadsheet ready for human review,” Shaver said, noting that this is particularly useful for Libor remediation work.

“You can ask vendors to pilot tools before licensing them to determine which works best for Libor provisions. The precision of the tools and their recall are the two most important factors in understanding the efficacy of the tool.”

The presence of certain fallback provisions could also pave the way for litigation, according to Michael Spafford, who said the sheer number of “ambiguous or ineffective” fallbacks in legacy contracts offer counterparties the opportunity to refuse to amend them, or turn to litigation.

“One potential fallback provision is in many consumer loans and adjusted rate mortgages – the reference to comparable replacement rate. What is ‘comparable’ is not defined, which could give way to disputes about what this entails,” he said.

Spafford also said that “cost of funds” – which is a common phrase used in fallback provisions – could be a stumbling block. “Quite frankly, several counterparties are going to be unwilling to disclose their internal cost of funds to other counterparties or competitors.”

Michael Baker, co-chair of Paul Hastings’ leverage finance practice, said that one reason for the lack of take up for any fallback agreement for syndicated and bilateral loans is because they already have such agreements. “The unavailability of Libor will mean an automatic fallback to the use of base rate instead,” he said.

The webinar was chaired by Paul Hastings partner Joyce Sophia Xu, and co-organised by GBRR and Lexology.

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