The progressive transition away from legacy benchmark rates such as Libor is likely to be a key area of CTB expenditure for many Capital Markets organizations in the next 3 years. Benchmark transition will have a broad product, functional and technology impact, with the burden falling mainly on banks with significant Rates trading businesses. Market participants will be required to undertake significant operational work to prepare for a transition, including the review and amendments to existing trade contracts run into 2022 and beyond in order to confirm suitable replacements to LIBOR as the reference rate. This article outlines the implications for firms and provides an insight into trade documentation impacts and available solutions.

Often described as the world’s most important number, LIBOR serves as the benchmark interest rate for a wide range of financial products, from complex derivative contracts and fixed-income trades to syndicated loans and variable-rate mortgages. In all, more than $350 USD trillion of loans and other instruments around the world are currently tied to this rate.

But after the UK regulator (FCA) has indicated that the current mandate for the daily process of setting Libor rates across currencies and maturities will be discontinued by the end of 2021, there is now a clear global direction of transition away from legacy rates towards alternative risk free rate benchmarks (RFRs).

Market participants are undertaking significant work to prepare for a transition away from LIBOR. Legacy rates are in the process of being reformed for the five primary LIBOR markets (USD, EUR, GBP, CHF and JPY), as well as other jurisdictions such as Singapore, Switzerland, Canada and Australia. However, LIBOR-based products are still being created and sold on a daily basis. A large book of financial instruments is likely to endure past 2021 after LIBOR is discontinued.

So what happens to existing LIBOR-based products when LIBOR is no longer available?

Many of existing LIBOR-based products currently use the legacy fall-back language which is frequently inconsistent across different institutions, and intended to address a temporary unavailability of LIBOR, in cases of operational issues or temporary market disruptions, not LIBOR’s permanent discontinuation.

In the event of LIBOR discontinuation, the fallback language in existing trade contracts will produce unintended results that can dramatically affect the structure of the product causing real economic and potentially other risks. In some cases, floating rate products will become fixed, while in other cases, interest rates for the borrower may increase substantially.

Given the potential consequences users of LIBOR have to be prepared to either switch existing trade contracts from the current basis of LIBOR or to ensure that their contracts have robust fall-backs in place, which allow a smooth transition from LIBOR to the corresponding new RFR. This will lead to a significant operational workload requiring thousands of contracts to be reviewed and adjusted in order to confirm the transition away from legacy benchmarks.

What are the key concepts for trade documentation management solution to allow for a smooth benchmark transition?

The following steps would be expected from market participants to confirm the legacy benchmark replacement in trade contracts:

  • Review trading documentation to fully understand company’s legal position if LIBOR and other IBORs are permanently discontinued
  • Identify benchmark clauses in master agreements, trading contracts and supporting documentation across products, for example, ISDA contracts & CSAs for OTC Derivatives
  • Amend legacy contracts to reflect;
    • Adoption of new alternative reference rates,
    • Fall-back rate provisions for open bilateral trades – in the event that a legacy benchmark rate is discontinued
  • Amend confirmation templates in line with revised ISDA standards
  • Change product development, authorisation and control processes to reflect new benchmark regimes
  • Implement appropriate documentation storage and archiving arrangements, as well as reporting capabilities on top of the trade documentation management system

Processing, synchronizing and scrutinizing of ISDA documents and master agreements can be both laborious and repetitive and will require tools to assist. Typical trade documentation management challenges on the trade business market would be:

  • Numerous systems and data sources, no integration or central storage available
  • Data quality issues (legacy applications with complex business logic residing in database stored procedures)
  • High maintenance and extensibility costs of existing management systems
  • Absence of or poor document workflow controls in existing tools
  • Poor documentation for existing systems and workflows, little SME presence
  • No or poor search capabilities
  • Operational losses due to unavailability of codified trading agreement attributes for systematic risk assessment
  • Lack of reporting capabilities and documentation of risk and regulatory internal systems

In order to address these challenges, we defined the following solution options aimed to support trade documentation management function and apply changes in legal agreements workflows where required:

  • Decommissioning of legacy documentation management systems and replacement with modern technology stacks using either vendor solutions (Excelian-built solutions such as Trading Agreement Data Hub, BoS, 3rd party vendor’s Data Management Platforms) or modernization of existing technologies and process flows
  • Integration of contract management tools with up- and downstream systems and data sources
  • Creation of a ‘golden source’ of codified, detailed trading agreement data
  • Building of a highly available document store with OCR and full text search capabilities
  • Workflow tools to manage the life cycle of document registration, inquiry, output, distribution, transfer, disposition and deletion
  • Integration of the new tools with reporting platforms to enable management of regulatory reports and systematic risk assessments

Excelian has a proven approach to large-scale operational and functional system implementation as well as post-implementation support across business and technology, both inter-entity and across country jurisdictions.

Our cross-domain expertise and in-depth knowledge of trading systems as well as capabilities in development of post-trade functions such as documentation management systems can be readily deployed to address key LIBOR transition challenges.

We have a proven track record in many trade documentation management system-related assignments, including implementation projects delivered by our teams within the last year to Tier-1 Investment Banks, in particular:

  • Building a trading agreement ‘data hub’ to support the legal negotiation workflow of ISDA contracts and supporting trade documentation
  • Creating a “Where is my trade?” web application aimed at monitoring trades and enabling full trade data and documentation support
  • Developing of Middleware STP applications to interpolate MarkitWire and Finastra APIs, supporting FpML and ISDA standards and many others

Our teams have the required knowledge and expertise in addressing key trade documentation management challenges and are ready to deploy at any scale and phase.
Olga Ovinnikova
Olga is a Service Delivery Manager at Excelian – a change management professional with extensive functional & operational migration experience. She is responsible for establishing an off-shore program management office for the Excelian customers as part of delivering company’s workforce and location strategy. She led the engagement with a Tier-1 bank to hire & train the team of over 40 staff to support the bank's complex change portfolio. This involved defining & implementing the operating model, optimizing and standardizing processes, including a PMP-aligned service catalogue.