Forty percent of the 100 million London interbank offered rate-based contracts have no alternative rate specified for when the benchmark calculation is phased out at the end of 2021, according to a study by legal solutions firm Factor published Tuesday.
With the use of artificial intelligence-driven technology, Factor found that across loan and bond contracts referencing LIBOR, less than 60% had specific language outlining what rate to use when LIBOR ceases to become available. In addition, half of those contracts that did feature the "fallback" language — the wording that clarifies what rate should be used when LIBOR is not available — would effectively default to a fixed rate.
When the calculation of LIBOR stops, money managers offering bond and loan strategies will have to rely on the fallback language in their contracts with banks and clients to determine the valuation, pricing or cost of the underlying LIBOR-based products in the portfolios.
"With less than two years until the end of LIBOR, financial services firms are now actively gearing up large-scale initiatives to amend their contracts to move to new rates," said Chris DeConti, head of strategy at Factor.
"The LIBOR transition impacts so many contracts and lines of business that the challenge is insurmountable with legacy models," Mr. DeConti said.