Wealth management firms need to face an ever changing regulatory landscape: GDPR, MiFID II and more recently, the retirement of the LIBOR benchmark interest rate, which can make compliance complicated. Can artificial intelligence-powered contract analytics technology help? Wait…what is contract analytics?
The Problem for Portfolio Managers
In 2021, the London Interbank Offered Rate – LIBOR is set to expire. The rate is included in a large number of financial agreements – which will need to be reviewed, interpreted and possibly amended.
Many financial institutions, including wealth management firms, need to tackle the transition from LIBOR to alternative rates.
The problem and the risk associated with it, is that this process implies reviewing a very large number of documents: fund holdings, investment agreements, associate fund documentation and the likes. The task is made more challenging because you need to identify not only documents that contain express references to LIBOR, but also the ones which are directly or indirectly linked to those contracts – i.e. credit agreements, bond indentures, derivative confirmations.Last but not least, documents are very rarely in a machine readable format – more often they consist of scanned files of paper documents.
If you work in wealth management you are probably already aware of all this. The situation seems quite bleak, doesn’t it?
How automated contract analytics can help wealth management firms
The good news is that Contract Analytics technology can accelerate the review phase and reduce the overall compliance risk associated with document review. Enters the hero… (Sorry for replicating the same patterns of many celebrative blog posts.)
Contract analytics is a machine learning powered technology that can review a large number of agreements and identify explicit or implicit instances of LIBOR – or any other benchmark – in the contract.
The process would look something like this.
A triage phase would be needed to risk assess the existing documents and divide them into different groups.
Triaging may consist of dividing contracts into:
- Contracts which are terminating before 2021 – as LIBOR is ending after that date, these contracts would expire naturally;
- Contracts that expressly identify a replacement benchmark, such as SOFR or SONIA;
- Contracts that do not identify a replacement rate;
- Contracts that are linked to agreements containing a LIBOR rate.
The triage phase is the most critical and can be streamlined using artificial intelligence- powered contract analytics technology. Best contract analytics software makes it possible to recognize variance in standard contracting language – “understanding” when a contract is referring to LIBOR or an alternative rate – even when that specific wording is not used.
Contract Analytics technology is able to:
- Convert all documents – pfd, word, pngs, jpegs – into machine readable formats;
- Identify all the clauses containing occurrences of LIBOR or of alternative references;
- Identify the contracts set to expire before 2021;
- Identify clauses that referred to external, connected agreements.
Once automatically subdivided into risk groups, contracts also need to be interpreted: for instance, if existing rate adjustment provisions provide sufficient guidance on replacement rates, or whether the contract must undergo an amendment or full repapering process.