The challenge

Financial Services Institutions are facing an uncertain environment, while holding up to competition from extremely agile digitally native Fintech start-ups; also having to deal with massive regulatory changes, such as the retirement of LIBOR in 2021.

LIBOR (the basic rate of interest used in lending between banks on the London interbank market and also used as a reference for setting the interest rate on other loans1) has been the cornerstone of the global financial system since it was created, providing the foundation for over 350 trillion dollars in financial contracts worldwide.

With the retirement fast approaching, most Financial Services Institutions are making huge efforts in weaning away from LIBOR and adopting the ARRs (Alternate Reference Rates). However, it is no secret that the efforts are tedious and sometimes not very effective. Although, Financial Services Institutions have always been at the forefront of investing and adopting new technologies, and have witnessed great returns on their technology investments, they are now struggling to leverage traditional, large legacy and rule based systems to solve for the LIBOR transitions. This is due to the fact that contracting was not a central technology that these institutions invested in.

These institutions now have plans to invest billions of dollars in the transition, leveraging existing technology and a large legal team. This approach can solve the problem through brute force; however, it is a huge undertaking and will draw on both legal and financial resources, and will be extremely time consuming, and will challenge the ability to meet the transition timelines. The process will require the review of all agreements across asset classes, determining the right ARR, and running amendment operations. This effort is manually intensive, requiring coordination across functions and roles, creating challenges to manage across multiple locations and geographies. The solutions require the combination of changes to:

  1. Software systems for lending, investments, and risk
  2. Contracts that reference LIBOR rates in their fall-back clauses or conditions

The solution

AI can process millions of documents in an extremely short span of time; extracting information from contracts related to LIBOR, classifying the documents, interpreting context, deciphering intent, and validating transition requirements. Classifying contracts and documents depending on their LIBOR exposure to a certain risk and liability.

Artificial Intelligence can intelligently recommend the next course of action to experts and process owners, or it can be leveraged to automate actions such as identifying the right ARR in compliance to the companies and well as government regulations.

AI can automate the generation of appropriate amendment templates, automatically reach out to customers or syndication partners for approvals and can be applied across the entire life cycle of transition right from discovery to contract amendment and finalization – automating majority of the process steps.

The business benefits of properly leveraging Artificial Intelligence for LIBOR transition:

  • Lower costs – Adopting an AI system will drastically reduce the requirement of manual processing, restricting manual involvement to oversight and review, saving billions of dollars from reduced billing.
  • Speed – Given the variety of contracts, various functions and customer types, the variations in language across contracts, the cost to process it manually is very expensive. This whole process will be accelerated given AI’s capability to parallelly processes multiple documents, understanding context in really short time intervals, thereby accelerating the whole process.
  • Building data as an asset– Unstructured data that earlier was not accessible for analysis will become accessible for further explorations and can drive insights to be better enabled.
  • Reduce errors – With reduced manual touch points, the number of errors associated with manual processing will drastically decline, enabling better compliance and significantly improve accuracy.

Artificial Intelligence (AI) has already been recognized by many FSI as the cost-effective solution to this problem. Applying AI to the LIBOR transition is an ideal way for Financial Services Institutions to harness the technology’s power to drive positive outcomes.

Contact Exponential AI to learn more, or visit our Financial Services page.

1. https://www.investopedia.com/terms/l/libor.asp