LIBOR (London Interbank Offered Rate) is the standard interest rate that banks will charge each other for loans of any amount of time. It is the benchmark bank rate all over the world. However in 2017, it was announced that LIBOR would be retired by 2021.
Why would arguably the most important financial benchmark be retired? It has the potential to upheave the entire financial system. The biggest reason: scandal.
In 2012, there were several international investigations into LIBOR that revealed efforts to manipulate the set rates every day in order to then help banks profit. The scandal ended with billions of dollars in fines paid along with a nagging sensation that LIBOR was susceptible to manipulation and no longer a viable index rate.
There are several others regulations that are being evaluated at to fill the void of LIBOR, including the Secured Overnight Financing Rate (SOFR) that the New York Federal Reserve started in 2017 or the Sterling Overnight Index Average (SONIA) that was published by the Bank of England, but no final decisions have been made.
The other glaring issue here is the existing and legacy contracts. Over $350 trillion dollars worth of contracts, including derivates, mortgages, bonds, retail and commercial loans, have their interest rates tied to LIBOR. Since LIBOR will no longer be the standard, companies across the world will be required to understand the impact on these documents.
As of right now, financial institutes are gathering as much information as possible on current and legacy documents to determine where LIBOR language exists and what, if any, fallback language allows. While some documents, contracts, and agreements might be safe, most will have to be reviewed to understand what amendments need to be made.
Early Heretik client GravityStack has been working with clients on pro-actively tackling this problem. Bryon Bratcher, Managing Director at GravityStack had this to say about the market’s existing LIBOR solutions: “We have met with many of the top financial bank institutions in the US and Canada and received unanimous feedback that our Diligence product, which uses the power of Heretik’s Analysis, is the most complete LIBOR solution on the market. GravityStack has seen a lot of success using our product in attacking LIBOR projects.”
Curious how it works? Keep reading!
Heretik allows you to dig into your potentially affected contracts immediately. Once you have an organized data set (example), you can analyze, extract and review a document and understand what is within it.
This then allows you to implement the most efficient review strategy, in turn being able to get through an enormous amount of documents to understand where attention may be required.
LIBOR’s retirement is going to be a shock to the financial systems of the world. What comes next, we are unsure of. However, what we can be sure of is that many documents including loans and securitizations are going to be effected. Being prepared, understanding what’s in your contracts, and using that knowledge to take the next steps will put you in a position to make the best decision, no matter LIBOR’s outcome.
Want to learn more about how Heretik can help your firm attack LIBOR projects? Click below to set up a LIBOR demo.
Claire is a Marketing Coordinator at Heretik. She recently graduated from Miami University Ohio with a double major in Journalism and Mandarin Chinese. Prior to Heretik, Claire worked at Amdur Productions and for Miami University College of Arts and Science.