WEBVTT - This Is The Index That's Supposed To Replace LIBOR 0:00:10.840 --> 0:00:14.320 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:14.400 --> 0:00:18.639 I'm Tracy Allaway and I'm Joe. Wisn'tal so, Joe. We 0:00:18.680 --> 0:00:23.919 are on part two of our epic library series. Yeah, 0:00:23.960 --> 0:00:27.400 I'm this is I'm very excited about this series. I'm 0:00:27.680 --> 0:00:30.720 you know, I always learn a lot from doing these 0:00:30.720 --> 0:00:33.879 podcasts with you, but this is one area that I 0:00:33.960 --> 0:00:38.600 know is a incredibly important to the way the financial 0:00:38.720 --> 0:00:42.720 system works library and the transition away from it, and 0:00:42.760 --> 0:00:45.919 also an area that I don't know nearly enough. So 0:00:46.000 --> 0:00:49.120 I'm very excited that we are moving on to part 0:00:49.159 --> 0:00:53.599 two of this year. Yeah, and just as a reminder, 0:00:54.040 --> 0:00:57.640 if you haven't listened to the first episode, you definitely should. 0:00:58.240 --> 0:01:02.080 But we basically spoke about everything that went wrong with libror, 0:01:02.400 --> 0:01:06.120 sort of pre and post financial crisis, So just as 0:01:06.120 --> 0:01:09.840 a quick reminder, there was a huge library scandal. The 0:01:09.920 --> 0:01:15.080 idea of having banks submit the reference rate for basically 0:01:15.080 --> 0:01:18.720 an unsecured loan that would be made between dealer banks 0:01:19.160 --> 0:01:22.639 was really thrown into doubt and q OR. Fast forward 0:01:22.640 --> 0:01:25.319 to where we are today and there's a huge effort 0:01:25.400 --> 0:01:29.480 underway to try to replace libraor with a brand new 0:01:29.560 --> 0:01:33.160 reference rate, right and just I mean, I assume everyone 0:01:33.200 --> 0:01:35.280 should have listened to the first episode, but just a 0:01:35.280 --> 0:01:39.440 reminder why we care in part is because so many 0:01:39.600 --> 0:01:45.160 financial contract derivative loans, etcetera. Are priced in some way 0:01:45.200 --> 0:01:48.120 off this singular reference rate. And so when it was 0:01:48.160 --> 0:01:51.200 sort of everyone realized that the old one had flaws 0:01:52.160 --> 0:01:54.120 in terms of how it was constructed, and it was 0:01:54.160 --> 0:01:57.960 open to manipulation and so forth. There is now the 0:01:58.040 --> 0:02:01.520 effort underway to get all all these contracts and debts 0:02:01.520 --> 0:02:07.800 and everything else to price around new singular stand Yeah. 0:02:07.960 --> 0:02:11.240 So in this particular episode, we're going to focus on 0:02:11.320 --> 0:02:13.360 what that new reference rate is, and we have really 0:02:13.400 --> 0:02:16.600 the perfect person to talk about it, someone who's been 0:02:16.639 --> 0:02:20.760 covering the short term dollar funding markets for years now, 0:02:20.800 --> 0:02:23.600 and I've certainly been reading his research for years. It's 0:02:23.800 --> 0:02:28.360 Joe Abote, Barclay's analyst. Joe, thanks so much for coming 0:02:28.360 --> 0:02:33.120 on the show. Thank you. How's the library transition going. 0:02:33.240 --> 0:02:35.960 How would you characterize where we actually are at this 0:02:36.040 --> 0:02:42.320 moment in time. I'd say that we're making progress. Um, 0:02:42.360 --> 0:02:46.520 you know, within the last two years, we obviously decided 0:02:46.600 --> 0:02:50.880 on what kind of benchmark replacement rate to use. I 0:02:50.919 --> 0:02:53.920 think the challenge at this point is to get people 0:02:53.960 --> 0:02:59.399 to actually use it. We're seeing developments of in futures 0:02:59.440 --> 0:03:04.519 market and term rates that reference this. We've seen people 0:03:04.760 --> 0:03:10.360 start to issue off of the rate itself. But you 0:03:10.360 --> 0:03:15.720 know this is still, relatively speaking, early days in the process. 0:03:15.960 --> 0:03:19.120 You know, we need to see volumes in particular and 0:03:19.840 --> 0:03:24.600 a number of different sectors, whether it's issuing front in 0:03:24.680 --> 0:03:28.200 terms of borrowing, whether it's in terms of hedging. We 0:03:28.240 --> 0:03:30.720 need to see that activity pick up at this point. 0:03:30.840 --> 0:03:37.000 So I'd say early days, but hopefully optimistic. So just 0:03:37.080 --> 0:03:41.240 to back up for a second, we know that after 0:03:41.600 --> 0:03:45.400 after we sort of agreed upon that Libel couldn't be sustained, 0:03:45.960 --> 0:03:50.600 what are the regulatory demands and from whom were these 0:03:50.640 --> 0:03:55.080 regulatory demands made on the financial system to find and 0:03:55.160 --> 0:04:00.400 develop a new reference rate? So um, pretty much it 0:04:00.440 --> 0:04:04.760 was a global effort, but largely it came from out 0:04:04.800 --> 0:04:10.320 of the UK where they were regulating the p r 0:04:10.400 --> 0:04:15.480 A was regulating the live AR and you know, obviously 0:04:15.520 --> 0:04:17.800 they had done the work, you know, in terms of 0:04:17.839 --> 0:04:23.039 the identifying the deficiencies in the unsecured rate, and so 0:04:23.400 --> 0:04:26.760 you know they were leading the effort. It was adopted 0:04:26.760 --> 0:04:30.039 by the fellow reserve. I think back in two thousand 0:04:30.000 --> 0:04:35.440 and fourteen and the FED effectively convened a committee called 0:04:35.480 --> 0:04:39.520 the Alternative Reference Rate Committee, which then began work to 0:04:39.720 --> 0:04:44.280 find an alternative reference rate, and then once that reference 0:04:44.360 --> 0:04:49.600 rate was decided, the Alternative Reference Rate Committee would move 0:04:49.760 --> 0:04:54.560 to kind of the adoption phase, right, so speaking to 0:04:54.960 --> 0:04:57.480 end users, if you will, to get them to start 0:04:57.560 --> 0:05:00.320 using the new rate. So it's been a you know, 0:05:00.360 --> 0:05:03.279 to your point, it's been a multi multi year process 0:05:04.000 --> 0:05:10.320 begun with regulators. So the alternative reference rate that they 0:05:10.400 --> 0:05:13.080 eventually settled on, and we spoke a little bit about 0:05:13.120 --> 0:05:15.320 this in the first episode, but it's something called the 0:05:15.400 --> 0:05:19.520 Secured Overnight Financing Rate or s o f R. So 0:05:19.680 --> 0:05:23.359 for how did they settle on that one, and what 0:05:23.520 --> 0:05:27.360 in your view is the key difference between it and 0:05:27.839 --> 0:05:34.800 the predecessor LIBOR. They essentially gave the Alternative Reference Rate 0:05:34.800 --> 0:05:38.279 Committee marching orders and told them, you know, find a 0:05:38.320 --> 0:05:43.560 replacement rate. It must be based on transparent liquid and 0:05:43.640 --> 0:05:47.839 deep market um so that you wouldn't have a submission 0:05:47.880 --> 0:05:52.360 process as is the case with live OR, and there 0:05:52.360 --> 0:05:56.800 were certain rates that you were not allowed to use 0:05:57.240 --> 0:06:01.039 basically policy instruments, right, So you could use the FED 0:06:01.120 --> 0:06:06.479 funds rate for example, and you know, after much deliberation, 0:06:07.040 --> 0:06:13.120 the Alternative Refeinary Committee settled on the SOFA. And the 0:06:13.200 --> 0:06:16.840 key difference is that I think between sofur and libor 0:06:17.640 --> 0:06:22.560 are really threefold. Right. One is that the SOFA rate 0:06:22.640 --> 0:06:26.680 is an overnight interest rate, and of course libor as 0:06:26.720 --> 0:06:31.599 a three month rate with a forward looking component. The 0:06:31.680 --> 0:06:35.760 second is that sofur is a treasury repo rate, so 0:06:35.800 --> 0:06:39.800 again it's a secured funding rate and libor is an 0:06:39.839 --> 0:06:44.760 unsecured bank borrowing rate. And then the third element of this, 0:06:44.960 --> 0:06:48.920 which is tied to that, is the fact that libor 0:06:49.000 --> 0:06:56.039 incorporates bank credit risk, which is not present in sofur. Right, 0:06:56.160 --> 0:07:01.240 So as a treasury repo rate, essentially your boring money 0:07:01.360 --> 0:07:06.080 by pledging treasury collateral, it should be especially on an 0:07:06.080 --> 0:07:09.920 overnight basis, should be risk free. So again you have 0:07:10.000 --> 0:07:13.920 a credit component a term component that are not present 0:07:14.120 --> 0:07:19.520 in the in in in so fur. So you mentioned 0:07:19.840 --> 0:07:24.320 that the the sort of benchmark rate couldn't be just 0:07:24.480 --> 0:07:28.560 a pure policy rate, So we can't just say, oh, 0:07:28.640 --> 0:07:32.440 based on Fed funds, But isn't a system that sort 0:07:32.480 --> 0:07:36.880 of de facto if it's based on the repot prices 0:07:36.960 --> 0:07:40.920 and reposing credit free treasuries, isn't it. It sounds to 0:07:41.000 --> 0:07:45.640 me like kind of a backdoor policy rate. Nonetheless, I 0:07:45.680 --> 0:07:50.960 think that's correct. I think that, you know, so FUR 0:07:52.240 --> 0:07:57.360 moves in tandem with UH with changes in the policy rate. 0:07:57.440 --> 0:07:59.840 So when the FED cuts rates, so FUR goes down, 0:08:00.320 --> 0:08:03.040 and generally speaking, it goes down by about the same amount. 0:08:03.920 --> 0:08:08.640 I think the difference is that the FEDS policy rate, 0:08:08.760 --> 0:08:12.200 the FED funds rate, is based on a fairly small 0:08:12.280 --> 0:08:19.920 market and there's only effectively one lender in that market. 0:08:19.960 --> 0:08:23.920 You know, the FED doesn't want to tie its policy 0:08:24.040 --> 0:08:27.760 to a benchmark interest rate where it's possible in the 0:08:27.760 --> 0:08:30.800 future that, let's say the FED decides that the Fed 0:08:30.800 --> 0:08:33.680 funds market is too small and wants to use a 0:08:33.679 --> 0:08:38.360 different policy instrument. If all of these a hundred trillion 0:08:38.400 --> 0:08:40.560 dollars or so in terms of live or exposure for 0:08:40.600 --> 0:08:42.840 all of that was based on FED funds, you know, 0:08:42.920 --> 0:08:45.040 moving to a different policy rate would be a much 0:08:45.080 --> 0:08:49.000 more complicated issue than just deciding on, you know, the 0:08:49.040 --> 0:08:52.719 communications strategy that the FED is going to adopt. So 0:08:53.640 --> 0:08:58.000 I agree it's kind of a back door approach, but again, 0:08:58.160 --> 0:09:02.080 so far is based st on you know, a huge 0:09:02.200 --> 0:09:07.320 volume of transactions. One final point that I want to 0:09:07.360 --> 0:09:10.640 make too, is that in an ideal world, the FED 0:09:10.720 --> 0:09:16.120 has complete control over the FED funds rate in REPO 0:09:16.200 --> 0:09:22.760 and in sofur. The FED doesn't have complete control over sofur. 0:09:23.600 --> 0:09:28.040 It can influence sofur and is very effective in doing that, 0:09:28.160 --> 0:09:33.040 but you know, sometimes sofur moves um, you know, kind 0:09:33.040 --> 0:09:39.560 of independent of FED actions. I wanted to bring up 0:09:39.920 --> 0:09:43.200 exactly this point, which is, in September of last year, 0:09:43.559 --> 0:09:48.199 we saw REPO the REBO rate shoot up, and then 0:09:48.240 --> 0:09:51.960 we saw the sofur rate basically spike along with it. 0:09:52.080 --> 0:09:54.120 And there were some people at the time who made 0:09:54.160 --> 0:09:56.280 the point that maybe you don't want a reference rate 0:09:56.360 --> 0:10:00.480 that can be that volatile UM. What's your away from 0:10:00.520 --> 0:10:04.839 that experience? My takeaway from the experience is that yes, 0:10:05.000 --> 0:10:07.480 that you know, as I was saying before, you know 0:10:08.040 --> 0:10:11.360 so for if it can influence it but can't control it, 0:10:11.640 --> 0:10:14.840 you know, on a high frequency basis day by day. 0:10:15.280 --> 0:10:19.800 I think the volatility in the overnight sofa rate is 0:10:20.520 --> 0:10:23.880 a little bit misleading, in part because the expectation is 0:10:23.920 --> 0:10:30.320 that when people you know moved to a sofa world, 0:10:30.360 --> 0:10:35.040 they're going to be using an average of daily SOFA quotes. 0:10:35.280 --> 0:10:38.400 So you're gonna be looking at you know, whether it's 0:10:38.400 --> 0:10:41.839 a three month average, one month average, You're going to 0:10:41.920 --> 0:10:45.480 be taking that as as your benchmark reference rate as 0:10:45.480 --> 0:10:48.520 opposed to the overnight interest rate. So that should take 0:10:48.640 --> 0:10:51.360 some of the volatility out of the out of the 0:10:51.440 --> 0:10:55.760 overnight rate that you know people are concerned about. But again, 0:10:56.200 --> 0:10:59.520 you have to take an overnight interest rate and convert 0:10:59.600 --> 0:11:03.760 that to a term rate like library, which means that 0:11:03.840 --> 0:11:07.480 you're doing some averaging. The question is am I doing 0:11:07.559 --> 0:11:11.760 averaging from a backward looking perspective or am I doing 0:11:11.800 --> 0:11:15.559 the averaging from a forward looking perspective? And that's a 0:11:15.640 --> 0:11:21.360 key difference between libor and SOFER right where library is 0:11:21.720 --> 0:11:24.040 you know, kind of what do I think the average 0:11:25.520 --> 0:11:27.800 bank funding rate is going to be over the three months? 0:11:28.440 --> 0:11:33.240 If I'm looking at so FUR, I'm basically saying, you know, 0:11:33.559 --> 0:11:38.240 at least at this point, what's the average overnight interest 0:11:38.320 --> 0:11:43.960 rate over the past three months? Right, And that's a 0:11:43.960 --> 0:12:02.920 little bit different than libor. Mhm h Joe. I have 0:12:03.040 --> 0:12:06.240 a quick question and then a follow up question. The 0:12:06.320 --> 0:12:11.800 quick question is what is the official deadline? Remind me 0:12:11.960 --> 0:12:15.160 for when this transition is supposed to have been complete. 0:12:15.960 --> 0:12:19.720 So the official deadline for the end of publication of 0:12:19.880 --> 0:12:26.480 libra ar is December. Okay, So the longer question I 0:12:26.520 --> 0:12:30.280 have is explained to us the complexity why is it? 0:12:30.679 --> 0:12:33.040 And I you were just talking a little bit about 0:12:33.080 --> 0:12:34.920 it in terms of the depth of this market and 0:12:34.960 --> 0:12:38.680 the challenge of converting an overnight rate into a term rate. 0:12:39.280 --> 0:12:42.680 Talk to us about the specific difficulties of you have 0:12:42.760 --> 0:12:46.760 all these contracts that are denominated in lib or, why 0:12:47.000 --> 0:12:50.360 we can't just go through all the contracts, scratch out 0:12:50.360 --> 0:12:53.880 the line lieb or replaced them with so fur and 0:12:54.160 --> 0:12:57.439 the new world is here. Yeah, I mean, I wish 0:12:57.440 --> 0:13:00.320 it were that simple. Uh turns out and I where 0:13:00.320 --> 0:13:02.679 it's not. Otherwise we wouldn't even be having this conversation. 0:13:02.760 --> 0:13:06.320 But yeah, I mean, I think, first of all, there's 0:13:06.320 --> 0:13:11.439 a technological challenge, right that in many cases there's hundreds 0:13:11.440 --> 0:13:18.080 and thousands of different instruments or references that a single 0:13:18.160 --> 0:13:21.760 bank may have that refers to library. You can take 0:13:21.760 --> 0:13:25.880 the example of of an oil company, for example, where 0:13:26.840 --> 0:13:31.240 it's not really using libor as a boring rate, it's 0:13:31.360 --> 0:13:35.480 using it as a penalty rate for people who you know, 0:13:35.640 --> 0:13:38.320 hypothetically don't make a delivery, they have to pay a 0:13:38.400 --> 0:13:42.320 charge that's equal to libor plus five hundred, and you 0:13:42.320 --> 0:13:44.720 have to go through and find all of those references, 0:13:44.760 --> 0:13:49.080 which is a monumental task. The second element of this, 0:13:49.679 --> 0:13:54.280 I think is that when you look at most financial 0:13:54.320 --> 0:13:59.880 market contracts, they have not been you know, written with 0:14:00.080 --> 0:14:04.680 fallback clauses or adequate fallback clauses for situation in which 0:14:04.720 --> 0:14:09.439 live board doesn't exist. So you know, they were kind 0:14:09.440 --> 0:14:17.040 of developed without a replacement rate in mind. And because 0:14:17.080 --> 0:14:22.000 of that there are certain things that can happen. So 0:14:22.480 --> 0:14:27.320 if you had, you know, some contracts where you know 0:14:27.400 --> 0:14:32.520 the default assumption if libralar is not available, is the 0:14:32.560 --> 0:14:37.640 floating rate on your instrument becomes whatever the last posted 0:14:37.720 --> 0:14:42.720 libel rate was, and your security becomes effectively a fixed 0:14:42.800 --> 0:14:47.160 rate security. So let's say that you've hedged yourself, or 0:14:47.240 --> 0:14:51.520 you think you've hedged yourself against interest rate risk. You're 0:14:51.560 --> 0:14:54.160 now going to have an instrument where you know the 0:14:54.240 --> 0:14:58.800 final years of its maturity, it's fixed, and that interest 0:14:58.880 --> 0:15:02.400 rate is whatever happened to be the last posted libelry rate. 0:15:02.480 --> 0:15:06.760 So if we're in a super high interest rate environment 0:15:07.560 --> 0:15:11.640 at some point and you fixed it at whatever that 0:15:11.800 --> 0:15:15.600 rate is and rates fall, you're going to be experiencing 0:15:16.240 --> 0:15:19.600 payment shock of some kind. So I think that that 0:15:19.600 --> 0:15:23.080 that's the problem. And again it's a big legal challenge 0:15:23.160 --> 0:15:26.000 to kind of go through and write these or rewrite 0:15:26.000 --> 0:15:30.760 these fallbacks. And that's just that's floating rate notes. I'm 0:15:30.760 --> 0:15:36.120 not talking about mortgages or syndicated loans and things like that, 0:15:36.240 --> 0:15:39.240 where you know, in some cases you need to have 0:15:39.320 --> 0:15:42.960 a approval of all the investors to agree to change 0:15:42.960 --> 0:15:45.760 the coupon on a security. It's a much much bigger 0:15:45.840 --> 0:15:49.440 challenge than just cutting and pasting. Are there any operational 0:15:49.680 --> 0:15:54.240 risks in the meantime during this time when we're actually 0:15:54.280 --> 0:15:59.000 making the transition from libor to sofer? For instance, a 0:15:59.040 --> 0:16:01.400 few people have been to talking about the prospect of 0:16:01.920 --> 0:16:06.600 zombie libor, which is this reference rate that is sort 0:16:06.600 --> 0:16:10.720 of dead but basically still operational and haunting the market 0:16:10.760 --> 0:16:14.040 in many ways and might not be totally reflective of 0:16:14.280 --> 0:16:17.640 what's actually going on in funding markets. Is that a risk? 0:16:18.280 --> 0:16:21.440 I think it's a potential risk, although I think that 0:16:22.440 --> 0:16:27.200 regulators are you know, realizing that that's a challenge, and 0:16:27.320 --> 0:16:32.400 so you know, the they've been kind of recommending people 0:16:32.480 --> 0:16:35.880 put in kind of what's known as pre cessation clauses, 0:16:36.920 --> 0:16:41.760 and the pre cessation clause would basically, you know, kind 0:16:41.760 --> 0:16:45.200 of trigger itself in the event that regulators deem that 0:16:45.360 --> 0:16:51.240 libor itself is not a representative interest rate. Once that happens, 0:16:51.520 --> 0:16:55.200 you know, the expectation is that publication of library would cease. 0:16:56.000 --> 0:16:59.880 To your point about the zombie situation, you might have 0:17:00.200 --> 0:17:04.000 a scenario, let's say, where you know, regulators have said 0:17:04.000 --> 0:17:10.359 the rate is no longer representative, but it's still being published. 0:17:10.640 --> 0:17:13.160 So you now have kind of a published interest rate 0:17:13.240 --> 0:17:18.320 that people can you know, legally still use, but it's 0:17:18.359 --> 0:17:21.520 been deemed unrepresentative. And that that's kind of your zombie 0:17:21.560 --> 0:17:27.960 lib or situation. You know. Zombie libor in other cases 0:17:27.960 --> 0:17:31.639 would require banks to kind of continue to contribute to 0:17:31.760 --> 0:17:37.199 the libor panel. And I struggled to see situations in 0:17:37.200 --> 0:17:42.920 which banks would willingly contribute to uh AN index when 0:17:43.400 --> 0:17:47.080 they don't have to and when there's an alternative benchmark 0:17:47.200 --> 0:17:50.440 that other people are using. So to me, I think 0:17:50.480 --> 0:17:56.760 that zombie library risk is is a low probability, but 0:17:57.000 --> 0:17:59.879 you know there's probably other operational risk that we need 0:18:00.119 --> 0:18:03.080 consider that. You know, people are working on right now, 0:18:04.640 --> 0:18:10.600 so just in terms of hitting regulatory benchmarks in demands, 0:18:10.600 --> 0:18:13.960 how realistic are they in your view in terms of 0:18:14.000 --> 0:18:18.560 making this changeover and what other kind of forbearance or 0:18:18.880 --> 0:18:22.000 moves might regulators be forced to make, you know, in 0:18:22.119 --> 0:18:25.119 the coming months ahead to deal with the question of 0:18:25.119 --> 0:18:29.600 whether we can actually UH Sunset Library as planned. You know, 0:18:29.640 --> 0:18:31.919 you could probably make the case that there should be 0:18:32.000 --> 0:18:39.040 a legislative approach that prevents you know, a litany of 0:18:39.520 --> 0:18:45.240 UM lawsuits that could follow, you know, triggering of fallbacks 0:18:45.280 --> 0:18:49.240 and the replacement of the of LIB or we might 0:18:49.320 --> 0:18:52.560 see something along those lines UM in the future right 0:18:52.600 --> 0:18:55.800 to kind of speed the process along and to kind 0:18:55.800 --> 0:18:59.800 of prevent it from getting gummed up. Banks are probably 0:19:00.960 --> 0:19:04.399 the furthest along in terms of the transition and making 0:19:04.440 --> 0:19:08.919 the necessary language and fullbacks and things like that. I 0:19:08.960 --> 0:19:13.760 think the non financial sector is probably not quite as 0:19:14.520 --> 0:19:17.920 far along in this process, and you know that might 0:19:18.040 --> 0:19:25.800 require you know, more education and urgency from ARC and regulators. 0:19:26.280 --> 0:19:28.560 I'm not sure how that gets done, to be honest. 0:19:29.600 --> 0:19:34.120 How much does UM the creation of things like um 0:19:34.359 --> 0:19:38.200 SO for futures actually help, because I think the Creme 0:19:38.400 --> 0:19:41.639 has been rolling out those contracts UM and we've actually 0:19:41.680 --> 0:19:46.080 had a few trades. Does that help with adoption? I 0:19:46.119 --> 0:19:50.000 actually think it's necessary for adoption. Right. You need to 0:19:50.040 --> 0:19:53.760 drive it as market that you can rely on for 0:19:54.040 --> 0:19:58.439 two reasons. One is to develop that term forward looking 0:19:59.200 --> 0:20:02.879 so for rate that I mentioned earlier. The second is 0:20:02.960 --> 0:20:06.120 that you need this market to be able to hedge. Right, 0:20:06.200 --> 0:20:08.880 you need to be able to know that I can 0:20:08.920 --> 0:20:13.040 convert a series of floating rate payments into fixed rate payments. 0:20:13.080 --> 0:20:15.879 If I want to go in the other direction, you 0:20:15.920 --> 0:20:18.640 need to be able to kind of to your point earlier, 0:20:18.680 --> 0:20:22.639 I want to hedge against changes in FED policy, for example, 0:20:23.240 --> 0:20:24.760 so I want to be able to use an interest 0:20:24.840 --> 0:20:27.600 rate that allows me to do that. So the ruts 0:20:27.680 --> 0:20:34.160 market is absolutely crucial for adoption of SOFA. Just remember 0:20:34.240 --> 0:20:38.679 that the your dollar market is massive compared to the 0:20:38.760 --> 0:20:44.440 size of the actual underlying trades that go into lib or. 0:20:45.119 --> 0:20:48.800 So if you think about just the size of your 0:20:48.840 --> 0:20:51.520 dollar futures, and I think it's something like two or 0:20:51.520 --> 0:20:55.800 three million UH contracts that get traded on a daily basis, 0:20:57.000 --> 0:21:00.960 you compare that to what really am ouns to about 0:21:01.040 --> 0:21:03.480 a hundred and fifty million dollars a day in double 0:21:03.520 --> 0:21:07.959 a financial cp issuance. You get to see how the 0:21:08.000 --> 0:21:12.280 derivatives market is actually far more significant, at least in 0:21:12.359 --> 0:21:15.399 terms of size, than the actual cash market. In the 0:21:15.480 --> 0:21:19.520 case of Sofur, it's the opposite. We have a much 0:21:19.600 --> 0:21:24.200 bigger cash market, right, so for volumes about a trillion 0:21:24.240 --> 0:21:28.159 dollars and you know, something like I don't know, and 0:21:28.200 --> 0:21:30.160 I'm gonna probably gonna get this wrong, but a few 0:21:30.240 --> 0:21:33.800 hundred thousand contracts are trading on a daily basis, and 0:21:33.800 --> 0:21:36.639 so for future so again, you know, I think the 0:21:36.720 --> 0:21:39.600 perspective here is the same, which is that the cash 0:21:39.680 --> 0:21:44.080 market a lot of volume futures market needs to develop 0:21:44.920 --> 0:21:47.679 in order for the for broader adoption is so fur. 0:22:05.440 --> 0:22:09.119 So just talking about the transition and potential problems is 0:22:09.640 --> 0:22:14.159 halfhearted transition a place where we could see some difficulties. So, 0:22:14.240 --> 0:22:17.680 for instance, if a company is borrowing at a libor 0:22:17.800 --> 0:22:23.040 based rate but they're getting money from a SOFER based swap, 0:22:23.640 --> 0:22:26.520 that could end up being like quite a bad mismatch. 0:22:26.640 --> 0:22:30.840 I would imagine, does that come up at all? That 0:22:31.000 --> 0:22:37.320 comes up frequently. So the issue is particularly acute for 0:22:38.080 --> 0:22:42.359 certain types of banks, who's you know, lending activity is 0:22:42.400 --> 0:22:45.399 all based off kind of libor and their funding is 0:22:46.000 --> 0:22:48.160 also off of lib or if they have to start 0:22:48.200 --> 0:22:51.280 making loans off and so for, but their funding is 0:22:51.400 --> 0:22:56.439 kind of all off of library. There's a mismatch, you know. 0:22:56.600 --> 0:23:01.000 The the big concern that people have is that, you know, 0:23:01.040 --> 0:23:05.800 you've got a lending rate that implicitly includes a bank 0:23:05.840 --> 0:23:11.439 credit component, and you know, a borrowing rate let's say 0:23:11.480 --> 0:23:14.960 that's based off of a risk free rate. What happens 0:23:15.000 --> 0:23:19.040 in an environment, let's say where there's a flight to 0:23:19.160 --> 0:23:25.080 quality and people are piling into treasuries and repo and 0:23:25.160 --> 0:23:28.720 those rates are falling, but you're borrowing is all based 0:23:28.760 --> 0:23:31.680 off of lie or, and that's moving in the other 0:23:31.720 --> 0:23:35.720 direction because bank credit risk is going up and there's 0:23:35.720 --> 0:23:39.600 no easy solution to that. To be honest, you can 0:23:39.720 --> 0:23:42.560 again rely on the derivatives market to kind of hedge 0:23:42.600 --> 0:23:46.280 some of that. But you know, the concern that people 0:23:46.320 --> 0:23:50.199 have is that there's a mismatch there. And you know 0:23:50.240 --> 0:23:52.520 the answer to this is that there will be a 0:23:52.600 --> 0:23:57.960 market that develops and picks up volume to kind of 0:23:57.960 --> 0:24:01.160 offset that rally risk if you want to call it. That. 0:24:01.440 --> 0:24:04.280 There will be a cost associated with it. My dealers 0:24:04.280 --> 0:24:06.639 are going to charge people for that. But again, it 0:24:07.000 --> 0:24:12.200 does add to the cost of transitioning to sofer. Last question, Joe, 0:24:12.240 --> 0:24:14.760 because I know you have to go, but as all 0:24:14.800 --> 0:24:19.440 these issues crop up, doesn't make you maybe more sympathetic 0:24:19.600 --> 0:24:22.840 to the library process as it was like, maybe there's 0:24:22.880 --> 0:24:28.040 a benefit to having banks come up with interest rates. Uh, 0:24:28.080 --> 0:24:30.720 you know, clearly it's embedded in the financial system as well. 0:24:30.760 --> 0:24:33.600 But maybe maybe you can make an argument even that 0:24:33.800 --> 0:24:37.520 it's countercyclical. I'm being a little bit facetious by the 0:24:37.520 --> 0:24:42.160 way I suppose you could, But to be honest, I'd 0:24:42.240 --> 0:24:45.440 much rather have an interest rate that's based on transactions 0:24:45.960 --> 0:24:50.960 UM and transparent transactions that I can look at. I 0:24:51.119 --> 0:24:55.280 struggle because you know, I can look at REPO and 0:24:55.560 --> 0:24:58.840 I think I have a decent understanding of what, you know, 0:24:58.880 --> 0:25:02.240 are the factors that move and drive repo. I have 0:25:02.760 --> 0:25:08.880 little or no transparency into bank boring rates beyond what 0:25:08.960 --> 0:25:11.960 I can see in you know, the commercial paper market, 0:25:13.040 --> 0:25:17.919 and oftentimes I'm I see movements in library of you know, 0:25:18.640 --> 0:25:22.480 in some cases a couple of basis points, and I 0:25:22.520 --> 0:25:26.119 have no explanation for that move That to me, makes 0:25:26.160 --> 0:25:31.440 it a difficult benchmark interest rate to use. If you 0:25:31.440 --> 0:25:33.879 you know, if you can't understand why it's moving on 0:25:33.920 --> 0:25:37.200 a day by day basis so far. On the other hand, 0:25:37.240 --> 0:25:40.359 I can kind of get I kind of understand why 0:25:40.400 --> 0:25:42.840 it moves up and down. I may not be able 0:25:42.880 --> 0:25:46.480 to forecast it on a daily basis with precision, but 0:25:46.560 --> 0:25:49.320 at least kind of understand what's going on in that market. 0:25:50.240 --> 0:25:53.800 There's a lot less transparency and um, you know, in 0:25:53.960 --> 0:25:58.680 the markets that are underlying Library, and I don't want 0:25:58.680 --> 0:26:01.720 to get into the all of the details, but Library 0:26:01.760 --> 0:26:06.040 is increasingly relying on Level three submissions, which basically require 0:26:06.119 --> 0:26:10.600 inputs from various different markets and different waitings attached to them. 0:26:10.640 --> 0:26:14.280 So you're getting even less transparency in the submission process 0:26:14.720 --> 0:26:19.119 as the library moves further and further closer and closer 0:26:19.160 --> 0:26:22.840 to its um it's deadline. Well, Joe, I think that's 0:26:22.840 --> 0:26:25.040 a good place to leave it. Thank you so much 0:26:25.119 --> 0:26:28.840 for coming on the show. We really appreciate it. Thank you. 0:26:29.640 --> 0:26:39.840 Thanks sure, that was great. I learned a lot. I 0:26:39.920 --> 0:26:42.720 enjoyed that conversation. I know we got a little bit 0:26:42.840 --> 0:26:46.040 um detailed in some parts of it, but I think 0:26:46.080 --> 0:26:48.240 that's the way to go, given that so much of 0:26:48.280 --> 0:26:54.280 the transition away from Library is actually all about those technicalities, 0:26:54.680 --> 0:27:00.280 like how do you the contracts which never foresaw this 0:27:00.320 --> 0:27:02.520 notion that one day we would be moving away from 0:27:02.560 --> 0:27:06.200 live horror? Yeah, exactly right. I mean I do think 0:27:06.320 --> 0:27:09.880 like in my mind this idea that's like, okay, well, 0:27:10.040 --> 0:27:14.320 libra or roughly trades in line with every other interest 0:27:14.400 --> 0:27:17.639 rate most of the time, and so for more or 0:27:17.720 --> 0:27:21.520 less trading in line with policy rates except for some 0:27:21.680 --> 0:27:25.760 occasional deviation. So why can't you just swap them? And 0:27:25.840 --> 0:27:29.800 I thought Joe did a great uh job explaining why 0:27:30.000 --> 0:27:34.119 nothing is remotely that simple when you're talking about rewriting 0:27:34.160 --> 0:27:39.679 contracts that never had this kind of one step shift 0:27:39.760 --> 0:27:43.960 in mind. Right. And the other thing that this really 0:27:43.960 --> 0:27:47.119 puts me in mind of is that zombie librar ideas. 0:27:47.119 --> 0:27:50.560 So not only do you have a shrinking pool of 0:27:50.640 --> 0:27:56.000 banks that are actually submitting their library estimates, as Joe mentioned, 0:27:56.400 --> 0:28:00.480 but you also have those estimates getting priced off level 0:28:00.680 --> 0:28:04.200 three assets, which I don't know people remember, but those 0:28:04.200 --> 0:28:07.359 are the things that are the most difficult to sort 0:28:07.400 --> 0:28:10.520 of price. So there's this notion that library is getting 0:28:10.600 --> 0:28:14.879 sort of sketchier and sketchier while the entire world is 0:28:14.920 --> 0:28:17.680 still trying to get to a place where so far, 0:28:17.960 --> 0:28:20.600 so far is the default. Right? You know what, this, 0:28:20.920 --> 0:28:23.879 this whole transition debate really reminds me of tracing. Are 0:28:23.920 --> 0:28:28.400 you gonna see a bitcoin? I'm really worried? No, no, no, no, no, no, nothing, 0:28:28.560 --> 0:28:31.040 nothing like, okay, go on, what does it remind you? Um? 0:28:31.200 --> 0:28:33.480 You know how? Like ever, once in a while, like 0:28:33.600 --> 0:28:36.679