What LIBOR Sunset Taught Us About Contract (Mis)Management in Financial Services

November 9, 2022

Banking and financial services organizations operate in a marketplace defined by disruption. Economic turbulence, evolving customer expectations, and new technologies have placed increasing pressure on banks and financial services to ensure compliance enterprise-wide. 

Today, a wave of digital and operational transformation has swept across banking and financial services companies – forcing each to evaluate and optimize each area of the business.

Contracts govern each interaction banks have with their customers, suppliers, partners, and employees. However, as the world around them grew more digital, contracts remained untouched – leaving the data hidden within them static – creating risk while hampering all areas of the business. 

LIBOR Emphasized the Importance of Contracts

The recent sunset of LIBOR illustrates the importance of contracts and contract data to banking operations. The London Interbank Offered Rate was used as a reference rate in an estimated $200 trillion worth of financial contracts.

For banks and financial services organizations, LIBOR raised fundamental questions about an estimated $200 trillion worth of contracts.

Which contracts had LIBOR language? Did they have fallback language to be used in lieu of LIBOR? Where were they located? How would changing to another index impact the commercial terms of the contract? How would banks go about updating thousands of active agreements? 

For many banks, the unsettling answer to all these questions was: “We don’t know.” They simply did not have a centralized source of truth for what was in their contracts, or a mechanism to execute a mass update of the language. Different banks responded to this challenge in different ways—from bespoke discovery activities to brute force updates involving untold hours of billable legal support. 

As indicated by the repeatedly extended deadlines for banks to update their legacy contracts, the effort has been slow and painful. Ultimately, the remaining “tough legacy” contracts were bailed out by support from Congress.

Prepare for Inevitable Disruptions

The discontinuation of LIBOR emphasized the importance of contracts to how banks and financial services operate – and more importantly, that many of them are ill-prepared for the next disruption. 

When financial institutions have poor control over their contracts, and the critical data within them, they leave themselves exposed to unnecessary risk, poor performance, and slower response times. While the sheer scale of LIBOR may be an outlier, there is no doubt that more disruption can be expected in the years ahead, and banks and financial services must evaluate where they stand with contract visibility and intelligence. 

Contract Intelligence What’s the Benefit?

LIBOR proved that banks and financial institutions need more than contract management; they need contract intelligence that can address all their challenges.

Without the ability to quickly surface contract information and operationalize insights, banks simply cannot move at the speed of risk in today’s market.

Contract intelligence solutions begin by centralizing and streamlining contract management – providing visibility into all contract data , thus empowering the organization to efficiently monitor all contractual and regulatory compliance obligations . However, contract intelligence offers so much more.

When fully utilized, contract intelligence for financial services helps to simplify contract creation by empowering users to create contracts within preset guidelines – ensuring consistency in both language and terms of every business agreement. 

Managing obligations and compliance and easily supporting mass modifications are two other benefits contract intelligence delivers . Both of which simplify how financial institutions respond to market disruptions like LIBOR.

Conclusion

The discontinuation of LIBOR emphasized the need for banks and other financial institutions to digitize and gain full visibility into all their contracts. In a landscape defined by economic turbulence, financial institutions must prepare for the next market disruption before it occurs to remain compliant and avoid exposing the organization to unnecessary risk. 

To learn more, download a free copy of our eBook: Contract Intelligence for Banking and Finance: Drive Compliance and Speed with Structured and Connected Contract Data.