If You’re a Financial Institution, Here are 400 Trillion Reasons Why Need to Update Your Contracts: Contract Management Trends

That’s a lot of reasons!  But as this article from Compliance discusses, hundreds of millions of financial institution contracts representing as much as 400 trillion dollars (yes, with a “T”) need to be updated because of a change in the interest rate used for lending.

In their article Financial Institutions, We Have 400 Trillion Reasons Why You Need to Update Your Contracts!, Compliance begins by letting us know that, for more than 40 years, the London Interbank Offered Rate (LIBOR) was the benchmark interest rate at which major global banks lend to one another. After extensive investigation, LIBOR is being replaced because of its role in the 2008 financial crisis as well as scandals in 2012 involving LIBOR manipulation among rate-setting banks. The LIBOR rate has been used in numerous financial services industry contracts for calculating interest on payments and derivatives, and measuring risk return calculation and annuities, among other things.

Most recently announced was its implication on the US Dollar LIBOR. Literally, hundreds of millions of contracts representing approximately 400 trillion dollars worldwide use the LIBOR rate for these calculations and measurements.  Many of those contracts will have to transition to the Secured Overnight Financing Rate (SOFR), which is a secured interbank overnight interest rate and reference rate established as an alternative to LIBOR.

How can financial institutions address this HUGE undertaking to apply this change to so many contracts?  And are we likely to see more large-scale impacts on contracts in the future?  Hint: look at what happened last year. 😉 The answers to these questions (and more) are available in their article here.  And please share any comments you might have or if you’d like to know more about a particular topic.

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