A research report from SDL, part of RWS Holdings plc, highlights the immense pressure that major financial services organizations are under to ensure they are ready to transition away from the London Inter-bank Offered Rate (LIBOR) – which underpins approximately $400 trillion worth of contracts – by the end of 2021.
The research, involving tier one financial organizations across APAC, EMEA and North America, explored how they are preparing to transition away from the LIBOR interest rate-setting mechanism to the Risk Free Rate regulatory framework.
• 54% have experienced disruption to their LIBOR transition due to the impact of Covid-19, placing them behind schedule or requiring assistance to meet the deadline.
• Despite 88% needing to update documentation in multiple languages for at least one region globally, 40% only started planning for the transition within the past year or have not yet started the process.
• 82% of respondents said they also use additional Inter-Bank Offered Rates (IBORs) in other international markets, particularly in the Americas and EMEA, which will increase the workload and extend the complexity of the transition for years to come.
• 54% said they will need third-party assistance from legal advisors with 22% working with translation specialists to make the deadline and meet the complex regulatory cross border document challenges.
“The global pandemic has made an already mountainous undertaking even more difficult for investment banks, market-makers and asset managers to get their internal processes aligned and ready for this change,” said Jon Hart, President of RWS’s Regulated Industries division. “While it is encouraging that the majority of respondents have been transition planning for over a year, 40% have struggled with the implementation timelines or have not yet started to plan. The task at hand should not be underestimated, but the impact that the transition will have on operations can still be mitigated with assistance from external agencies - companies like ours stand ready to help.”
Managing LIBOR Content Risk
Risk around LIBOR comes in many forms and the technical, legal and transactional challenges of unravelling 40 years of complex LIBOR operations have been well documented, but there are other areas of risk that have been neglected. One of these is content risk, a key consideration when operating in heavily regulated sectors such as financial services.
The content challenges for the LIBOR regulatory transition can be demarcated into two key areas:
• Accumulated content built up over 40 or so years of LIBOR operation. Organizations will need to identify areas of documentation that are still relevant and the technical changes that require updates, often in multiple languages.
• New content that needs to be created to support the transition - the majority of respondents said that their external communications (from customer contracts to external policies) will need to be included in their organizations’ initiatives to update their materials.
Increased complexity surrounds content provision in financial services - changing regulations, increasing demands for optimizing customer experience, the drive to communicate consistently across digital channels and, impacting all of these areas, the steady growth in global markets for multinational organizations most at risk from the LIBOR transition.
Jon Hart concludes: “Although much LIBOR content has been written in English to accommodate financial transactions in London and New York, critical documentation, including contracts and policies, are often global in nature. It will be a huge undertaking to avoid the risk of misinterpretation. Regulatory language needs to be translated properly at local and international levels by expert linguists in both the language and context of that material, so it’s critical that companies immediately identify and prepare their content for treatment to avoid being squeezed as the deadline approaches.”