LIBOR: Luminance's AI can facilitate a smooth transition

18 June 2021 | Luke Taylor, Subject Matter Expert at Luminance

1st January 2022, the date of the Financial Conduct Authority’s full transition from LIBOR (the London Interbank Offered Rate) to alternative overnight risk-free rates (RFRs), is drawing near. However, according to an estimate this year by Barclays, approximately $200 trillion worth of contracts still rely on US Dollar LIBOR as a reference rate. With the deadline looming, and the vast numbers of contracts to review in order to assess LIBOR exposure, AI has become a critical tool for financial institutions and legal teams to prevent contractual risk and non-compliance.

Drowning in data

The explosion in data means that organisations are now handling vast amounts of data across their enterprise. Indeed, as LIBOR is so embedded in the day-to-day activities of the providers and users of financial services, the sheer volume of data involved in the necessary regulatory compliance reviews makes them a daunting – sometimes perhaps unfeasible - prospect for legal professionals in the given timeframe without the aid of technology.

Using Luminance for rapid, thorough LIBOR reviews

Luminance’s market-leading AI technology within its contract analysis platform, Diligence, presents a solution to the problems posed by extensive LIBOR-related document review. Using a powerful blend of supervised and supervised machine learning to read and form an understanding of contracts, Luminance can automatically identify key LIBOR-related provisions (for example, provisions pertaining to LIBOR definition and calculations of interest that use LIBOR as a benchmark), and label them for the lawyers to review. By identifying this key information on day one of a review, Luminance prevents the lawyer from needing to trawl through endless contracts to spot minute but crucial details, ensuring maximum compliance with the LIBOR transition. Indeed, Stéphanie De Smet, a Corporate Lawyer at ‘Big Four’ firm, Ernst & Young (EY) Law, says, “Using Luminance, we can rapidly identify non-compliant areas, drastically reducing the time and resources spent on finding and remediating LIBOR-related documents.”

This can then be taken a step further with Luminance’s revolutionary Automatic Document and Clause Compliance technology. This feature allows the user to select a model document or clause against which all others can be compared. For instance, this could be a ‘model’ provision that refers to an alternative risk-free rate like Sterling Overnight Index Average (SONIA). The other clauses will then be greenlined or redlined according to how far they comply with or deviate from the standard. This insight ensures that reviewers can quickly identify areas that require attention, ensuring maximum compliance with the transition and that nothing goes outside the scope of the review.

Now, for the first time ever, lawyers have access to a technology that integrates with Microsoft Word through Luminance’s ground-breaking Work-in-Word function. This allows the user to edit their documents seamlessly within the platform, with a visual sidebar that illustrates the insights from Luminance’s machine learning such as critical clauses and risks. For example, within the LIBOR context, the legal professional can access the contract in question in Word, and, with one click, edit and modify the document or provision to ensure compliance with the new RFRs. All changes can be saved in Luminance and the user can continue their review. This process can then be repeated as many times as necessary within the easy-to-use platform.

Using Luminance’s AI to rise to the challenge

LIBOR reviews are an example of how, through using Luminance’s AI technology to rapidly identify areas of non-compliance within huge datasets, firms can expand the range of services they offer their clients. Take Delta Capita, a London-based financial services company who have been using Luminance’s technology to deliver rapid and insightful advice to their clients in the wake of the transition. Ben Pugh, Head of Business Development at Delta Capita’s Structured Products business, says, “Using Luminance’s revolutionary technology, we can help clients ensure a seamless transition away from the LIBOR, IBOR and EURIBOR benchmarks. Luminance’s game-changing technology can be used for assurance to check complete capture of all clauses.”

The clock is ticking and the deadline for the transition away from LIBOR looms. With Luminance’s AI, financial institutions, compliance and legal teams can review the entirety of their contracts to understand their risk exposure and thus mitigate the impact of the transition. In addition, by using this technology, firms can offer their client a specialised and vital LIBOR service to guide them through the extensive, urgent compliance review process.