2. Build A LIBOR Response Strategy
Once the scope of impacted documentation has been identified, organizations can assemble a comprehensive strategy covering end-to-end contract remediation and drafting for both existing contracts and new contracts on an ongoing basis.
This strategic “playbook” should include preferred alternative reference rates, model language, fallback positions and guidance on dealing with counterparty pushback on legal language and questions about the new/alternate reference rates. Incorporate all best practices, guidelines and document templates into the strategic playbook.
A well thought out strategy that standardizes the approach and gives consideration to potential issues while maintaining flexibility and crystal-clear language will help minimize risks, costs and delays associated with the next and final step.
3. Drafting & Preparing for Negotiation & Execution
Implementing the LIBOR strategy can be the most time and resource intensive portion of the endeavor. An organization can speed up the process through a mass outreach to counterparties, distributing amendments to in-scope contracts. These amendments, and sometimes fully repapered documents, would contain language changes deemed necessary by the organization (typically updated reference rates, fallback provisions and any additional language required for regulatory compliance).
Some delay is an inevitable part of a transition exercise as counterparties take time to review, responds and ask questions. Some counterparties will require multiple follow ups, so planning and building buffers ahead of deadlines will go a long way toward ensuring a smooth transition. A commonly predicted communication challenge is that counterparties may not be fully aware of the new reference rates being inserted and require clarification (e.g. LIBOR+100 basis points is comparable to SOFR+130 basis points), as reviewers for counterparties may assume that their rate is being increased. Negotiations are variable, with some wrapping up quickly and others requiring extensive back-and-forth or follow-up. Effective management of the exercise will alleviate many issues associated with delay.
With a wide variety of documents affected by these changes, organizations can benefit greatly from uploading new contracts into a contract lifecycle management platform or repository with the key terms entered in a structured data format. While having such a system in place can be highly beneficial, the lack of it will not completely derail a transition exercise.
Now is the Time to Begin
We predict that the majority of market participants will wait for additional information and recommendations from the FCA and other regulatory bodies, while keeping a close watch on potential impacts to their organizations. As authorities continue to grapple with the details surrounding a LIBOR transition, we recommend taking transition steps early. The steps outlined above will help an organization prepare early and plan for the necessary resources, both internal and external, to launch and implement an appropriate response.
Navin Mahavijiyan is Senior Manager of Contracts, Compliance and Commercial Services at Integreon.
Patrick Won is Manager of Contracts, Compliance and Commercial Services at Integreon.