Benchmark Reform: The Rosetta Stone for New and Old Law

Chris DeConti, Head of Strategy at Factor, explores the difference between ‘old’ and ‘new’ law and how they are highlighted in benchmark reform.

As anyone affected is painfully aware, the discontinuation of LIBOR presents a huge challenge to legal departments of large financial institutions. Most organisations are already making progress against the enormous task of transitioning agreements based on LIBOR to an alternative rate. Spanning millions of impacted financial contracts across a wide range of business areas, these LIBOR projects represent a formidable challenge even to those financial institutions who have successfully managed past mega-projects related to uncleared derivatives, Brexit and others. With this much scale and complexity, the reflexive reaction – throw a mix of in-house and outside counsel at the task – was always going to be grossly inefficient, impractical and risky.

The legal and operational complexity of the task requires the best of ‘old’ law (think expert advisory and market know-how) and the best of ‘new’ law (think process excellence, technology enablement and smart resourcing), without anything getting lost between the two. Successfully bridging these two worlds can not only take the trauma out of LIBOR transition, but also provide a blueprint for optimizing the legal function of the future.

What’s so tricky about benchmark reform?

Two things. One, the complexity. It’s not just a matter of moving away from LIBOR, a uniformly understood and accepted standard across jurisdictions and types of agreements but moving toward a variety of different alternative rate options, which are still evolving as the market comes to a consensus. Understanding the risks – financial, operational, and legal – requires sophisticated, in-depth experience. Two, the scale. LIBOR has been such an industry standard for so long that decoupling the massive volume of agreements directly and indirectly tied to LIBOR represents a Herculean project management task for any organisation.

Understanding the risks – financial, operational, and legal – requires sophisticated, in-depth experience.

These two challenges work to the respective strengths of old and new law. The old law model of trusted advisors with extensive market knowledge gained from advisory activities across multiple clients is vital in the dynamic and ambiguous context of benchmark reform, where most organisations want to meet, not make the market. The evolving nature of the project exacerbates the scale problem as market uncertainty will condense timelines. This is where the advantages of ‘new law’ come into their own, with process excellence, project management, technology-enablement and smarter resourcing.

Lost in translation

While GCs have proven increasingly receptive to new law, it has generally been in relation to specific, lower complexity bodies of work, separate from old law scope. LIBOR projects present the most urgent and compelling opportunity for old law and new law approaches to be integrated, but doing so requires translating between two very different dialects of legal work:

• Old law focuses on divergence (i.e. looking for outliers and edge cases) and provides advice to risk mitigate against it. It looks for outliers, aiming to find what’s potentially novel in any document, regulation or market context, and then advise on how clients should react.
• By comparison, new law focusses on convergence (i.e. looking for similarities and patterns). It aims to find what’s the same within a body of work, while recognising the limits to this, and how these similarities can be utilised to design a process.

Without paying due attention to this phenomenon, expert old law lawyers and new law practitioners (or in-house program teams) could end up talking past each other.

LIBOR projects present the most urgent and compelling opportunity for old law and new law approaches to be integrated.

In a dynamic and uncertain environment, the movement of work between these worlds needs to be nimble and built into the very core of how they work together, to maximise efficiency, minimise risk and ultimately reach the end of 2021 in one piece. Our experience has taught us to focus translation efforts in two crucial areas: playbooks and the process around them, and governance.

Playbooks for the unprecedented

You might think that a movable feast like benchmark reform renders playbooks redundant. After all, aren’t these instructions on the treatment for contracts at each stage of the process? If that isn’t fixed, how can they be useful? This would be to misunderstand how powerful these can be as an artefact for translation between the two worlds. But, as with any translation, these take expertise.

A well-designed playbook serves as the bridge between legal advice and implementation. It maps the paths that each contract will take, with the knowledge that these will shift as the market develops. It sets out the touchpoints between advisory and implementation actions in a way that closes every process loop between the two. For example, when a novel issue arises in negotiation, as you can frequently expect from benchmark reform, it isn’t enough to simply raise an escalation to an advisory level. Instead, this needs to be reflected in ongoing templates, negotiating guidance and training, to ensure that even ad-hoc advisory becomes part of the collective intelligence of a combined solution.

Ongoing governance and transparency

Strong governance and transparency between advisory and implementation keep the bridge between the two open and active, enabling structured communication between the new and old law components of the transition team and the stakeholders of the organization on a regular, but not intrusive schedule (usually monthly). It also means having insight available on a more frequent basis in the form of weekly directional operation meetings. Finally, close daily monitoring of the actual executing team members means rapid identification and resolution of challenges to the process or specific transactions. Too often, organisations rely on informal working practices and casual communication channels. That might work in the normal flow of day-to-day operations, but not in a complex, dynamic, large-scale event like benchmark reform.

Building for the Future

If you’re dealing with benchmark reform, time is running out, but by combining the best of new and old law, with special attention to the translation between the two, you can successfully achieve your goal with less pain.

But this won’t be a one-time benefit. While benchmark reform represents the ‘burning platform’ for integrating new law and old law approaches, doing so opens new potential for BAU legal work and can form the basis of a modernised vision of legal. Bringing together old law virtues like legal expertise and market know how with new law’s tech-enabled efficiency brings the benefits of new law to much broader categories of more complex work.