Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe. So Joe. I know,
Speaker 1: I said our Library series was at an end, but
Speaker 1: as we discussed in the previous episode, I lied, and
Speaker 1: I sort of lied twice because we have two extra
Speaker 1: episodes and this is the second one. Although I promise
Speaker 1: this is actually the last one. Who knows, maybe this
Speaker 1: won't be the last one. What can I say? Library
Speaker 1: gets people fired up and everyone really wants to talk
Speaker 1: about it. But I will say some of the episodes,
Speaker 1: um that were early in our series, we actually recorded
Speaker 1: those before we had the big March sell off in
Speaker 1: all the volatility that we saw in the market. So
Speaker 1: I think we should actually have another discussion about what
Speaker 1: we've seen this year with the coronavirus crisis and what
Speaker 1: it might mean for the library transition. Yeah, no, I agree.
Speaker 1: I do think like it's it's good to talk big
Speaker 1: picture and the sort of long term trajectory of what's
Speaker 1: coming for Library and the replacement. But in the meantime,
Speaker 1: Library still exist, and so talking about how this benchmark, uh,
Speaker 1: you know, what's happened with it during the extraordinary several
Speaker 1: weeks and months for the market is a sort of
Speaker 1: a useful thing as well. I hope, yeah. And I
Speaker 1: guess the big tension that sort of emerges is should
Speaker 1: we be attempting to do this big redesign of the
Speaker 1: financial system, basically redesigning the reference rate to which trillions
Speaker 1: of dollars of assets are tied at a time when
Speaker 1: we're distracted by so much else going on in finance.
Speaker 1: Right We're in the middle of a financial or maybe
Speaker 1: not financial but an economic crisis. The Federal Reserve is
Speaker 1: rolling out all these new programs. Regulators are you know,
Speaker 1: looking at financial stability things like that. Should we be
Speaker 1: tackling library at this exact moment? So we're going to
Speaker 1: explore that tension in this discussion. And we have a
Speaker 1: guest today who is a fan favorite for sure. People
Speaker 1: we've had him on before and he had been requested
Speaker 1: a lot, and then even again I've got requests like, oh,
Speaker 1: you should talk to him again. So everything is aligning
Speaker 1: for this episode are the culmination of the series. The
Speaker 1: interest rate stars have aligned for us, all right, Well,
Speaker 1: without further ado, let's bring on Josh Younger ahead of us.
Speaker 1: Interest rate derivative strategy over at JP Morgan And as
Speaker 1: you mentioned, Joe, a previous odd lots of guests who
Speaker 1: talked a lot about some of the turmoil that we
Speaker 1: saw in the treasury market in March. Josh, it's great
Speaker 1: to have you back on Yeah, it's great to be back.
Speaker 1: Thanks for having me. So maybe just to begin with,
Speaker 1: you could give us a sort of summary of what
Speaker 1: happened to libor in March when we had the market volatility,
Speaker 1: and not just market volatility, but we did start to
Speaker 1: see the beginnings of some concerns about the banking system
Speaker 1: and that sort of reflected in the interbank lending rates.
Speaker 1: So what did we see So, so I think it's
Speaker 1: it's best to go back to two thousand eight, and
Speaker 1: and that was an environment where live Or was this
Speaker 1: really important kind of canary in the coal mine for
Speaker 1: bank funding stress and ultimately the stability of financial institutions.
Speaker 1: So when library started to move and other short term
Speaker 1: rates like FED policy expectations did not, and that spread,
Speaker 1: that difference widened out, it ended up being a really
Speaker 1: important forward looking indicator for the for the problems that
Speaker 1: we're gonna come and ultimately led to bailouts and a
Speaker 1: couple of near or actual bankruptcies, and and all of
Speaker 1: the problems that the financial system was facing we're kind
Speaker 1: of pre presaged by moves in liborary. So that's been
Speaker 1: something people have watched for a while, and there have
Speaker 1: been episode is over the past twelve years where library
Speaker 1: was once again in the spotlight. And the best example
Speaker 1: of that was the European sovereign funding stress episodes of
Speaker 1: and twelve UM, when initially Greece and ultimately Italy in
Speaker 1: Spain we're coming under stress. Their banks were either directly
Speaker 1: or or or implicitly part of the libar panel um
Speaker 1: and we can talk about that as well, but the
Speaker 1: banks in Europe were all interconnected to some extent, and
Speaker 1: problems in Italy and Italian banks were ultimately problems for
Speaker 1: German and French banks, and that went into the librar
Speaker 1: fixing and library oh I s so I s being
Speaker 1: fed funds, you know, fed policy expectations. The difference between
Speaker 1: these two rates widened out quite a bit, so that
Speaker 1: was ultimately like something people watched, is this financial stability
Speaker 1: financial conditions indicator. Uh. More recently, we we saw an
Speaker 1: even larger widening in the in library versus O I
Speaker 1: S back in March, and so that was really the
Speaker 1: largest movement that spread since two thousand eight. And it
Speaker 1: was immediately questions as to whether this was another canary
Speaker 1: in the cold mine, meaning, you know, libras is widening up.
Speaker 1: Does that mean as much as the banks are telling
Speaker 1: us that everything's fine and we're better capitalized and we're
Speaker 1: more stable and we have all this high quality liquid
Speaker 1: asset stock to rely upon to raise liquidity, like are
Speaker 1: we actually in trouble and the market knows about it,
Speaker 1: but maybe the public doesn't get and and that's priced
Speaker 1: into the library. So, um, this was one of the
Speaker 1: two or three things that was really closely watched by
Speaker 1: a variety of people and ultimately, you know, the public
Speaker 1: because you problems with banks or problems for the economy,
Speaker 1: especially in a major economic shock at the same time.
Speaker 1: Um So, so then all the questions really surrounded what
Speaker 1: was actually driving this move and librar was Librard telling
Speaker 1: us something about the banking system or was Livebrard telling
Speaker 1: us something about the way that we construct live RRE.
Speaker 1: Now that's much more technical and frankly less interesting to
Speaker 1: the broader public. Um. And it turned out to be
Speaker 1: mostly glad to explain that further. I mean, actually, when
Speaker 1: we talked to you last time, which we've actually been
Speaker 1: at the very end of March or maybe early April,
Speaker 1: we still were right in the thick of the volatility.
Speaker 1: But a lot of that conversation was about what was
Speaker 1: going on, not with the banks per se, but with
Speaker 1: other entities that were trading treasuries and trading futures and
Speaker 1: the illiquidity in that space. So from your perspective, what
Speaker 1: what was librar, What was that widening really telling us?
Speaker 1: And what did it have to do with the volatility
Speaker 1: at the time. Yeah, so's ultimately the question is what
Speaker 1: are we really seeing when we see a live RAR fixing.
Speaker 1: Let's say today library is thirty five basis points? Like,
Speaker 1: what what is that number? What goes into that number?
Speaker 1: In the pre crisis days where there was a lot
Speaker 1: of interbank trading, of of short term lending and so forth,
Speaker 1: like library had actual transactions behind it because banks would
Speaker 1: do those short term loans relative to each other. Um.
Speaker 1: But you know, somewhat tongue in cheep, we say, these
Speaker 1: days there's no eye and library. The eye stands for
Speaker 1: inter bank and there's no interbank trading. Where there's no
Speaker 1: significant interbank trading, and so the Intercontinental Exchange is that
Speaker 1: is the benchmark administrator. They put out a couple of
Speaker 1: years ago revised guidance for panelists as to how this
Speaker 1: submit their quotes, so to quickly review your library. Is
Speaker 1: this panel of banks, large international banks that are active
Speaker 1: in short term markets. Every day they're asked where they
Speaker 1: think they can borrow, and they're supposed to put in
Speaker 1: a number, And you don't have the option to just pass,
Speaker 1: so you have to put a number in every day. Um.
Speaker 1: It's easy to put in a number if you spending
Speaker 1: borrowed money that day. Um. And that was very frequently
Speaker 1: the case in in the sort of two thousand and
Speaker 1: two thousand eight period um, and even earlier than that.
Speaker 1: The problem is now, because there's not much inter bank
Speaker 1: lending and borrowing, they're forced to rely on the commercial
Speaker 1: paper market. So the question is did I issue commercial
Speaker 1: paper or a certificate of deposit today? Um? And if
Speaker 1: I did, then I've got a really great way to
Speaker 1: make my quote because I borrowed money today, let's say
Speaker 1: borrowed at forty basis points. So I tell the ice
Speaker 1: that I borrowed at forty basis points. But when we
Speaker 1: look back over the past year or so, on average
Speaker 1: of the sixteen panelists, only say four or five on
Speaker 1: average are doing that on a given day. So what
Speaker 1: do I do if I don't have a transaction to
Speaker 1: point to? And the the ICE released what they called
Speaker 1: the Waterfall, basically a prioritized list of other things you
Speaker 1: can look at, uh to come up with a number
Speaker 1: that's supposed to be like close to where you could borrow,
Speaker 1: but you're inferring it, you're not actually observing it. So
Speaker 1: one of the interesting things that happened to lieb Or
Speaker 1: in March was it it hit a pretty sharp peak.
Speaker 1: I think it was something like I want to say,
Speaker 1: one point four or one point five, and then it
Speaker 1: took quite a long time to sort of start coming down,
Speaker 1: even though the Federal Reserve was unveiling all these new
Speaker 1: programs to inject liquidity into the economy. The technical dynamics
Speaker 1: that you're describing, is that something that would um, I guess,
Speaker 1: prevent a central bank stimulus measures or monetary easing from
Speaker 1: impacting the library as well. Yeah, there's definitely a policy
Speaker 1: transmission issues. So when the Fed moves interest rates around,
Speaker 1: they're ultimately trying to stimulate the economy through the cost
Speaker 1: of loans. The problem is they target the federal funds rate,
Speaker 1: and there's not a ton of loans tied to the
Speaker 1: federal funds rate. So when the Fed moves interest rates,
Speaker 1: they rely on the relationship between that that federal funds
Speaker 1: rates and other interest rates to to actually sort of
Speaker 1: get the stimulus into the real economy. And I'm sure
Speaker 1: your other guests spoke about the live war is by
Speaker 1: far the most pervasive of those interest rates, so to
Speaker 1: some extent, if it doesn't get passed through the library,
Speaker 1: then it doesn't have nearly the same effect. And when
Speaker 1: the Fed cut rates a hundred basis points, library didn't
Speaker 1: really move in March, and so you didn't really have
Speaker 1: a ton of stimulus, at least immediately into the economy.
Speaker 1: There's also the question of whether interest rates were really
Speaker 1: the thing that was causing issues, which I think is
Speaker 1: a different conversation for somebody with more economics training than me.
Speaker 1: But but if we say the Feds trying to do
Speaker 1: what they can, lowering interest rates is the is the
Speaker 1: most straightforward and classic thing they can do. If that's
Speaker 1: not passed through the live or because of these technical issues,
Speaker 1: you've got a problem. And so you know, it was
Speaker 1: kind of alluding to earlier is that there weren't a
Speaker 1: lot of transactions. And when we talked in April, one
Speaker 1: of the issues was that the capital markets essentially shut down.
Speaker 1: So what was typically four or five panelists issuing commercial
Speaker 1: paper on a given day, which is again pretty small
Speaker 1: for action of total number of panelists. Uh, that number
Speaker 1: went to like two or three when when library was rising.
Speaker 1: So the rise in library to a large extent reflected
Speaker 1: other kinds of funding stress that are not really tied
Speaker 1: to like bank credit. So this wasn't really about the
Speaker 1: ability of banks to repay loans because of the risk
Speaker 1: of bankruptcy or failure. It was about the cost of
Speaker 1: securing dollars through other sources and just the scarcity of
Speaker 1: dollar funding in general, which is a very different thing
Speaker 1: and frankly much less concerning for overall financial stability. Because
Speaker 1: the bank credit is in question that has all kinds
Speaker 1: of knock on consequences for the economy, which we learned
Speaker 1: about in two thousand two nine. Well, so, okay, so
Speaker 1: in March, the rise in the library didn't necessarily reflect
Speaker 1: what was going on with bank credit, which is good.
Speaker 1: But in terms of its function as a benchmark for
Speaker 1: all kinds of loans and derivatives and other instruments, was
Speaker 1: it still basically serving its purpose if it was a
Speaker 1: measure of overall funding conditions or funding stress elsewhere in
Speaker 1: the financial system, that doesn't necessarily strike me as a
Speaker 1: bad measure to still use if we're going for live
Speaker 1: Or's main purpose. Well, so I guess when we think
Speaker 1: about live or, like what is it supposed to do?
Speaker 1: Like why do we make an index out of bank
Speaker 1: borrowing in the first place, Because we could have just
Speaker 1: tied everything to FED funds or or the prime rate,
Speaker 1: like we have the prime rate. That's an alternative um.
Speaker 1: And when we initially constructed live Or, the idea was,
Speaker 1: you know, I need some kind of credit components. So
Speaker 1: using Fed funds of the prime rate is not a
Speaker 1: great measure because like this is a benchmark against which
Speaker 1: loans to individuals and corporations it's getting measured. So I
Speaker 1: want some elements of underlying credit risk in this index.
Speaker 1: So who's the best credit around? Arguably it's it's the
Speaker 1: largest international banks. So the question is, if I want
Speaker 1: to borrow any I Josh, want to take out an
Speaker 1: adjustable rate mortgage, my credit is bases points worse than
Speaker 1: a good bank, right, And so I have this like
Speaker 1: benchmark that's tied to ultimately private market, you know, credit
Speaker 1: exposed institution, but one that's kind of high up on
Speaker 1: the on the scale of qualities of credit. Um so
Speaker 1: when you have live or moving because of broader funding
Speaker 1: market conditions, and that really means the ability to find
Speaker 1: those lendable dollars the very technical thing, right, I mean,
Speaker 1: if you're unconcerned about getting your money back, but you
Speaker 1: just don't have the dollars to lend because they're locked
Speaker 1: up somewhere else, so you can't pass them through the
Speaker 1: pipes effectively. Like, is that really the benchmark we want
Speaker 1: to use for adjustable rate mortgages, for corporate debt, for
Speaker 1: corporate loans, for for the main street lending facility. And
Speaker 1: so the question is is not whether or not these
Speaker 1: disruptions happened, because you know, any imperfect measure is going
Speaker 1: to have issues occasionally. The question is is this something
Speaker 1: I can expect to persist over long periods of time?
Speaker 1: Is it going to lead to a lot of volatility
Speaker 1: in interest rates that's not really reflective of the credit markets,
Speaker 1: And so am I sort of creating more trouble than
Speaker 1: it's it's worth and in tying the lending market or
Speaker 1: continuing to tie it to this bank credit index that's
Speaker 1: constructed in this in perfect way. So I think you
Speaker 1: actually coined the term zombie liabor. I think you were
Speaker 1: writing about that possibility back in September when you look
Speaker 1: at what was happening in March, where you know, you
Speaker 1: didn't have a lot of these lending transactions on which
Speaker 1: to actually base libror. Do you think the risk of
Speaker 1: ending up with zombie library, as you put it, is
Speaker 1: increased or that there's proof that we're sort of heading
Speaker 1: in that direction. Well, the zombie library outcome, and just
Speaker 1: to review that, that's a scenario in which you have
Speaker 1: this panel of sixteen banks, and starting in the beginning
Speaker 1: of two the regulators are going to allow banks to
Speaker 1: drop off the panel. They're no longer going to compel
Speaker 1: membership because at the moment, if you want to get
Speaker 1: off the library panel, it's actually not so easy to do.
Speaker 1: And they're doing that because they need a decent number
Speaker 1: of banks to get a decent sample in that in
Speaker 1: that index. And so when people talk about librars quote
Speaker 1: unquote going away at the end of two, what they're
Speaker 1: referencing is is the f c A, the Financial Conduct
Speaker 1: Authorities statement that they will no longer compel membership. And
Speaker 1: so the presumption is if you don't have to stay
Speaker 1: in that club to which you would not like to
Speaker 1: join or remain, you'll leave UM. And and there's lots
Speaker 1: of reasons why why one would want to leave that
Speaker 1: that particular panel, and so zombie Library is a scenario
Speaker 1: where a lot of banks leave, but not everybody does,
Speaker 1: and your left with a kind of small contingent of
Speaker 1: say five or six submitters, and that leads to a
Speaker 1: lot of volatility, because if you pick the wrong set
Speaker 1: of five, you could end up with a much more
Speaker 1: volatile index. What thankfully, there's kind of a regulatory solution
Speaker 1: to this. So UM if the f c A and
Speaker 1: and the benchmark Administrator coordinate to some extent um, they
Speaker 1: can come up with a scenario where the f c
Speaker 1: A deems Library nonrepresentative, and instead of continuing to post
Speaker 1: fixings because the ice the benchmark administrator, they're under no
Speaker 1: obligation to keep posting Library or to stop posting Library,
Speaker 1: but the SEA can simply say they don't think it's representative,
Speaker 1: but you can keep producing fixings. Um. They have come
Speaker 1: together and said, look, we're not going to do that.
Speaker 1: If if the f c A says Library has entered
Speaker 1: a stage where it just is no longer representative of
Speaker 1: credit markets, then we the benchmark administrator, will stop publishing
Speaker 1: it pretty soon thereafter. So I'm sort of less concerned
Speaker 1: about that at the moment because of that coordination. UM.
Speaker 1: And that's a good thing because like all of the
Speaker 1: rules and will probably talk about fallbacks and all these
Speaker 1: other things, like if Library is still getting produced, unless
Speaker 1: you specifically account for that scenario, you could end up
Speaker 1: in a situation where you keep having a reference a
Speaker 1: rate that is increasingly problematic. And Library has its problems now,
Speaker 1: but there's sixteen contributors, imagine there were five or six,
Speaker 1: and and all the problems would be magnified. So just
Speaker 1: while we're talking about the events of the last couple
Speaker 1: of months, I mean, one of the things is this
Speaker 1: series has gone on. We've talked about the various steps,
Speaker 1: the difficulty and transition. Of course, we wanted to get
Speaker 1: your broader perspective on that. But have there been any
Speaker 1: substantive ways in which what we've seen since the beginning
Speaker 1: of this crisis has changed the planning and overall trajectory.
Speaker 1: So it hasn't changed the planning. The question is how
Speaker 1: we I think it comes back to the of like,
Speaker 1: how are you actually going to do this thing? Meaning
Speaker 1: we can say we want to get off of live
Speaker 1: or we can threaten to get rid of lib or,
Speaker 1: But unless all the pieces are in place, that's a
Speaker 1: pretty risky proposition because you're now talking about ripping out
Speaker 1: one of the central elements of the financial system UM
Speaker 1: in a pretty rapid fashion. Io is not that far away,
Speaker 1: and so you've really got to make sure that you've
Speaker 1: kind of ring fence the potential risks around doing that,
Speaker 1: because I think we can all agree like, under normal circumstances,
Speaker 1: you don't want to destabilize the vast majority of the
Speaker 1: lending and derivatives markets, and you definitely don't want to
Speaker 1: do that now. So what about March has made that
Speaker 1: either more or less likely getting those pieces in place
Speaker 1: to actually get to the to the point where we
Speaker 1: can we can say we're off of live RAR and
Speaker 1: specifically stop publishing it, because if you're to do that now,
Speaker 1: you'd have a lot of problems. Um. So the first
Speaker 1: thing you gotta do is you've got to come up
Speaker 1: with fallback language, which that takes care of the fact
Speaker 1: that when most of the existing loans and derivatives were written,
Speaker 1: they didn't really contemplate a permanent end to live or. So.
Speaker 1: My my favorite example of this is in some some
Speaker 1: notes that are floating interest rate which is supposed to
Speaker 1: observe library every quarter. Um. They say, well, if there's
Speaker 1: no live or today, look at the last valid live
Speaker 1: orre fixing you can find and use that to calculate
Speaker 1: the payment, which makes total sense if you think it's
Speaker 1: a day or two, but not if it's going away forever. So. Um,
Speaker 1: if you own a security that's supposed to pay you
Speaker 1: whatever library is now and library goes away, you're taking
Speaker 1: the risk that, like library goes away at a very
Speaker 1: low interest rate level, you just don't know, like we
Speaker 1: don't know what librar is going to be in the future,
Speaker 1: and so that's rolling the dice in a way that's
Speaker 1: not particularly appealing. Um. And if you go to the
Speaker 1: drivaters market, which one of your other guests might have
Speaker 1: mentioned scales and stuff like that. But two trillion dollars
Speaker 1: is a lot of money, um, and those payments have
Speaker 1: been start to live bar. And the way those fallbacks
Speaker 1: were initially set up was they said, well, if live
Speaker 1: Board is not there today, then pick up the phone
Speaker 1: and call people and try to get them to quote
Speaker 1: you a level on a more informal basis. And I
Speaker 1: think it's fair to say that if banks don't want
Speaker 1: to be in the Liveboard panel for variety of reasons
Speaker 1: including you know, liability and so forth, um, they definitely
Speaker 1: don't want to be picking up the phone and just
Speaker 1: quoting something in an informal way. So um, in the
Speaker 1: case where you can't actually source informal quotes, then you're
Speaker 1: kind of at a dead end, which means there is
Speaker 1: no number with which to calculate the coupon payments on
Speaker 1: two trillion dollars of notional worth of derivative contracts, which, um,
Speaker 1: you know, if you were a lawyer, that would be
Speaker 1: a great set up, but for the rest of us, like,
Speaker 1: that's not a great um situation to be in. And
Speaker 1: so like, the key is to amend all of these contracts,
Speaker 1: not just derivatives and loans, but also mortgages and the
Speaker 1: variety of other things to make sure they have, you know,
Speaker 1: clauses that take care of this eventuality. And and so
Speaker 1: that's the is to fall back protocol process. It sort
Speaker 1: of serves two purposes, is that being the Derivatives UM
Speaker 1: Industry Organization is putting forward standard language for all derivative
Speaker 1: contracts take care of this. And what they're doing is
Speaker 1: they're using a historical observation of live orar versus SOFA,
Speaker 1: the secured overnight financing rate the replacement for lib orary.
Speaker 1: So look at the difference between those two things, look
Speaker 1: at its historical average, and now what you thought was
Speaker 1: gonna be library is now you know, sofur plus this
Speaker 1: spread that we're going to observe over the past five years,
Speaker 1: let's say, UM. So that's great for the derivatives market.
Speaker 1: And they're they're close to putting out the triggering terms
Speaker 1: like under what circumstances do you do this specifically, how
Speaker 1: do you actually calculate this spread, etcetera. And and they're
Speaker 1: close to being done with that. And the key there
Speaker 1: is that once you have a standard UM language, you
Speaker 1: can incorporate it into other things. So a lot of
Speaker 1: the push has been to make sure that all of
Speaker 1: the cash products, all the securities and loans and and
Speaker 1: and other non derivative instruments basically align with whatever language
Speaker 1: is that comes up with because then you have a
Speaker 1: single industry standard. That's a good thing. UM. Just less
Speaker 1: to argue about. UM. The only thing is that the
Speaker 1: hedges that are used to manage risk associated with those
Speaker 1: investments are going to have the same fallbacks because the
Speaker 1: last thing you want. You think about a large financial institution, UM,
Speaker 1: like a major commercial bank, they have you know, hundreds
Speaker 1: of billions of dollars potentially in interest rate swaps, and
Speaker 1: those are used to fund or at least their associated
Speaker 1: with the funding of assets. And so you know, if
Speaker 1: you've even a small mismatch in the way those fallbacks
Speaker 1: are triggered, that could be a very destabilizing thing as well.
Speaker 1: So you want everything everything lined up nice and nice
Speaker 1: and uniform and matched off across the whole range of
Speaker 1: things with live or exposure. So so that's the first thing,
Speaker 1: that's the first step. Shot. Let you well, it does
Speaker 1: feel like the industry is basically attempting this gargantuan feat
Speaker 1: at a very very tricky time, and we have these
Speaker 1: key deadlines coming up as well. Do you get the
Speaker 1: sense that anyone is sort of reconsidering the transition in
Speaker 1: the current environment or are are they still pushing forward
Speaker 1: um to the extent that they were earlier. So there's
Speaker 1: there's still a lot of pressure to get it done UM.
Speaker 1: The the UK Regulator has said plan on two UM.
Speaker 1: They've acknowledged the risks, but the guidance has been to
Speaker 1: plan on the original schedule. UM. The fall back stuff
Speaker 1: I was talking about, that's mostly done, so I wouldn't
Speaker 1: necessarily do that as a big concern. The issue is
Speaker 1: how are we going to jump start a new market
Speaker 1: in the middle of a market crisis? And so the
Speaker 1: sofer market is is new like, there's not that much
Speaker 1: of it out there. There's been a decent amount of
Speaker 1: issuance of securities that referenced sofur, but they're almost all
Speaker 1: from three government sponsored issuers. There's some trading in derivatives
Speaker 1: both on the exchange the futures contracts and then, but
Speaker 1: much less in the over the counter swap market, and
Speaker 1: so like, you don't have a lot of transparency and
Speaker 1: visibility into uh, that component that's going to become central
Speaker 1: to everything. Like, we don't have a great sense of
Speaker 1: of how the market would manage risk around around sofur
Speaker 1: catch flows. And the question, and this is the part
Speaker 1: that I think is is the risk factor that you're
Speaker 1: you're alluding to, Um, how do we get people to
Speaker 1: trade sof Mike, how do we actually push people in
Speaker 1: that direction? Because um, you know this book Nudge, which
Speaker 1: says you put in small incentives, people will tend on
Speaker 1: masks to go in one way. Financial markets don't have nudges.
Speaker 1: They have shops like we don't we don't do small
Speaker 1: things Crementally, there really needs to be a strong push
Speaker 1: because familiarity and liquidity and and and and you know
Speaker 1: overall risk management strategies that tied to things, it's just
Speaker 1: hard to move. And so we need some kind of
Speaker 1: lever arm to push the market from live world to sofa.
Speaker 1: And this is where there's a there's an interesting way
Speaker 1: in which we can utilize the post two eight crisis.
Speaker 1: I guess with the specify the crisis now, but the
Speaker 1: post two thousand and eight crisis regulatory regime said we're
Speaker 1: worried about interest rate swaps between two counterparties. So we
Speaker 1: want you to all use a centralized counterparty. This is
Speaker 1: this is CME and LC huh, this is the clearing houses.
Speaker 1: And so the idea was have a central counterparty to
Speaker 1: which all swaps are eventually facing. And that means that
Speaker 1: you can make sure that that entity is well capitalized
Speaker 1: and kind of transparency and and so and just a
Speaker 1: much less complicated market. And the reason I'm highlighting this
Speaker 1: is that at central counterparty now has an enormous amount
Speaker 1: of influence over how the swaps market trades, because basically
Speaker 1: everybody with very few exceptions are relatively few exceptions, has
Speaker 1: to do business with the centralized counterparties. There's two of them,
Speaker 1: to see ME and LC h so UM, the Alternative
Speaker 1: Reference Rate Committee and others have been coordinating with them.
Speaker 1: And it turns out there is an asset which is
Speaker 1: quite large, very actively hedged and um and and controlled
Speaker 1: in some sense by the decisions that these two central
Speaker 1: counterparties make. And that is the value of all U
Speaker 1: S dollar interest rate derivatives. So if I have a
Speaker 1: swap contract that I executed a year ago, it was
Speaker 1: word zero at the beginning. This is true of all derivatives, right,
Speaker 1: they have zero value at initiation. But now let's say
Speaker 1: it's worth five million dollars. So how did I come
Speaker 1: up with that number? What you do is you say,
Speaker 1: what's the what's what are the terms of this count tracked?
Speaker 1: How did they compare to the current terms of the contract,
Speaker 1: And what is my discount factor? What is the time
Speaker 1: value of money that I should assume in calculate the
Speaker 1: present value of those cash flests? And this also sounds
Speaker 1: relatively technical. The key is that the clearing houses use
Speaker 1: a particular interest rate to calculate the value of those
Speaker 1: swap contracts. The gross value of those swap contracts is
Speaker 1: something like one and a half trillion dollars at times um,
Speaker 1: and it is very heavily influenced by the choice of
Speaker 1: that interest rate, and they can in principle change that
Speaker 1: interest rate from the effective Federal funds rate, which is
Speaker 1: what it is now two so fur so. So now
Speaker 1: I've created an asset that is very highly correlated. It's
Speaker 1: values very highly correlated to the SOFA rate. It's very large,
Speaker 1: it's trillion dollars um, and its value changes a lot
Speaker 1: because its interest rates move, the value of interest rate
Speaker 1: swaps changes, and that means that if I was hedging
Speaker 1: changes in these valuations, I need to change my hedges.
Speaker 1: And banks do that a lot. So I sort of
Speaker 1: created a very highly call it convex, meaning it's value
Speaker 1: changes as interest rates move, very highly convex, pretty large,
Speaker 1: very explicitly tied to sofa asset. And now the banks
Speaker 1: are all going to have to hedge. They're going to
Speaker 1: do that with sofa swaps, and so all of a sudden,
Speaker 1: I've created an environment where there is a lot of
Speaker 1: trading and activity in sofa linked UM instruments, and I've
Speaker 1: jumped started the market. And the plan was to do
Speaker 1: this in October UM and and the clearing houses had
Speaker 1: agreed to this, they came up with a plan for
Speaker 1: it um. The problem is that plan relies in part
Speaker 1: on the willingness of the market to kind of price out,
Speaker 1: to put together expectations for what long term sofa payments
Speaker 1: would look like versus other interest rates. And the experience
Speaker 1: of the past two months has not been great for
Speaker 1: that kind of activity. So the risk is that in
Speaker 1: affecting this transition, and in affecting the transition of the
Speaker 1: valuation of interest rate derivatives, you sort of cause significant
Speaker 1: problems because there's not enough buy in from the counterpart
Speaker 1: you need, and that would be very disruptive if we
Speaker 1: were to happen. Can you just explain that last part again?
Speaker 1: Uh spelled out what the risks would be. And is
Speaker 1: there a possibility that that date in October could just,
Speaker 1: I don't know, move to early next year or something
Speaker 1: like that. Yeah. So, like if I'm a centralized counterparty
Speaker 1: and I'm going to switch my discount factor. So let's
Speaker 1: say I've got a hundred trades and they're currently worth
Speaker 1: ten million dollars using the discount factor I currently use,
Speaker 1: and I'm going to change to that from the effect
Speaker 1: of federal fundrates to sofa Well, I need to know
Speaker 1: what that not just what the sofa rate is, but
Speaker 1: what the expectation for the difference between the new discount
Speaker 1: factor and the old discount factor are going out ten, twenty,
Speaker 1: even thirty years. And so the way these expectations are
Speaker 1: usually arrived at as you have a population of specialists
Speaker 1: who really do these kinds of trades. So there's a
Speaker 1: whole market in like thirty year average difference between the
Speaker 1: federal funds rate and live work like we trade swaps
Speaker 1: like that, and there's a population of investors who come
Speaker 1: up with those expectations or a variety of means and
Speaker 1: then gets priced into the market and there's an observable
Speaker 1: benchmark UM. So if they participate in these in these
Speaker 1: discounting factors switches, then we can actually do it UM.
Speaker 1: If they don't, then you're left with a new discount
Speaker 1: factor that nobody knows well and the valuation of the
Speaker 1: whole swaps market becomes highly uncertain. It's not a great
Speaker 1: outcome UM, and you've sort of created more problems than
Speaker 1: you solved UM. And there's a risk that there are
Speaker 1: significant losses that percolate through the system and those who
Speaker 1: are most exposed to UM the small differences in in
Speaker 1: valuation are going to be you know, participants in the
Speaker 1: market who have lots and lots and lots and lots
Speaker 1: and lots of positions that are mostly netted off but
Speaker 1: has small residual differences. That's a dealer, like that's a
Speaker 1: bank because their market making and all these things. UM.
Speaker 1: So uncertainty is bad for this whole process, and if
Speaker 1: you try to push it overligned quick and you don't
Speaker 1: get the buy in from the specific participants that you need,
Speaker 1: you end up creating a lot of uncertainty. Um. At
Speaker 1: the moment, it's it's sort of full steam ahead, and
Speaker 1: you know, the thought is October is a long way away.
Speaker 1: Things look a lot better, markets mostly stabilized at this point. Um.
Speaker 1: You know, I've seen no reason to delay it. UM.
Speaker 1: I think as we get closer to the data will
Speaker 1: become clear if there is sufficient buy in from the
Speaker 1: right people. UM. But you know at the moment that
Speaker 1: the thought is I would stand schedule because if we
Speaker 1: don't do this, then we can't do the other things.
Speaker 1: And you know, when once you have people trading swaps.
Speaker 1: Then let's say you were a corporate borrower in Middle
Speaker 1: America and you've got a loan that is currently live
Speaker 1: or plus in your bank. Collegy and says, you know,
Speaker 1: we just changed this new interest rate called SOFA, and
Speaker 1: you know we need to quote you a new spread,
Speaker 1: so we're gonna make it SOFA plus three and a
Speaker 1: half percent. And your immediate response would be, I don't
Speaker 1: know what SOFA is, So explain that to me and
Speaker 1: to how did you come up with three and a
Speaker 1: half percent and the and the best way to do
Speaker 1: that is to have some derivative traded that you can
Speaker 1: point to and say, look, the market is pricing this
Speaker 1: set of expectations. So for your five year loan, the
Speaker 1: market says the difference between live or and sofa is
Speaker 1: going to be half a percent, So it's fair for
Speaker 1: me to charge you an extra half a percent because
Speaker 1: that sofa it is going to be lower on average
Speaker 1: over the next five UM. To do that you need
Speaker 1: to have trading and sofa swaps, and and to have
Speaker 1: that you need the big bank. So it's all about
Speaker 1: laying up the pieces over the next six to twelve
Speaker 1: months so that ultimately we can have a loan market
Speaker 1: that's mostly at least new loans are mostly benchmark to
Speaker 1: sofur um and you have that pricing transparency. Um, You've
Speaker 1: got you know, participants and users of interest rate derivatives
Speaker 1: moving them to the new index. You can have the
Speaker 1: mortgage market moving to the new index. For the most part.
Speaker 1: You know, you're you're starting to whittle down the population
Speaker 1: of Livebrard products that you have because at the moment
Speaker 1: it's it's still growing like the the the market's overall
Speaker 1: risk to live AR has increased, not decreased over the
Speaker 1: past year, even as the deadline has approached. And it's
Speaker 1: because people are used to Library when we write new
Speaker 1: loans now we typically do and versus Live wrary. Still,
Speaker 1: most of those credit facilities that have been drawn on
Speaker 1: in the crisis, most of them are linked to Library UM.
Speaker 1: Most of the like the FED program, was originally gonna
Speaker 1: be linked to Sofa, but they changed to the library
Speaker 1: because the market is not ready for sofa lenked main
Speaker 1: street lending loans. So you know the way we and
Speaker 1: if you if you have this thing where the risk
Speaker 1: you're trying to manage down keeps going up, it's not
Speaker 1: a good setup to get rid of Library two years.
Speaker 1: So so unless you put these pieces together in a
Speaker 1: relatively precisely sequenced fashion and quickly, you're not going to
Speaker 1: have a situation where the market's ready to get off
Speaker 1: of live or you know, on schedule with respect to
Speaker 1: the deadlines the phone, Josh, you mentioned these specialists who
Speaker 1: are very good and practiced at pricing these things out
Speaker 1: for a long time. When it comes to the just
Speaker 1: real quickly, when it comes to the switch to sofa
Speaker 1: is learning more technical challenge from their perspective, or is
Speaker 1: it again just sort of habit and inertia in terms
Speaker 1: of whether they'll be uh, you know, fully ready to
Speaker 1: do that in buying into it. I think it's a
Speaker 1: couple of things. The first is it's technical in the
Speaker 1: sense that you know, we need to have a sort
Speaker 1: of theory of SOFUR and and how it relates to
Speaker 1: other interest rates and and we have a decent sense
Speaker 1: of it over the past US five to ten years.
Speaker 1: But the world's changing pretty quickly. And so when the
Speaker 1: Treasury wants to issue five trillion dollars worth of collateral,
Speaker 1: it has implications for the repo market, which means it
Speaker 1: is implications for SOFER and so you know, what is
Speaker 1: the long term deficit outlook look like has a lot
Speaker 1: to say about how the repo market is going to
Speaker 1: behave You've got bank regulations that are changing, even on
Speaker 1: temporary basis. So it's hard. Um, that doesn't mean you
Speaker 1: can't come up with a number. The key is if
Speaker 1: you might be wrong, you have to be in a
Speaker 1: position to to wear those losses and not have a problem.
Speaker 1: And the issue is that the one of the hardest
Speaker 1: hit communities, at least in the sort of institutional investor class.
Speaker 1: UM in March was the relative value hedge fund and
Speaker 1: asset manager community. And that's precisely you're relying on to
Speaker 1: come up with these numbers. And so there's a lot
Speaker 1: less margin for error if you've had a bad year already,
Speaker 1: and the willingness to participate in saying it's voluntary, like
Speaker 1: you don't have to do this, UM if you're a
Speaker 1: hedge fund like you and just choose not to participate
Speaker 1: in so for and that's fine. UM. And so without that,
Speaker 1: by and it, it's just gonna be hard to keep
Speaker 1: the process moving along. It doesn't mean you can't sort
Speaker 1: of accept the risk of volatility and push forward and say, look,
Speaker 1: you know, things look fine. I think they'll participate, and
Speaker 1: you know, even if they don't, you know, the miss
Speaker 1: will be small, and we'll just keep things on schedule
Speaker 1: because it's more important to stay on schedule. UM, given
Speaker 1: the level of risk that we perceive. That's a perfectly
Speaker 1: valid perspective, but you know, it's it's not clear to
Speaker 1: me that will obviously be the case come October. I
Speaker 1: wanted to ask you something sort of more conceptual about SOFA.
Speaker 1: So you mentioned at the beginning of our conversation when
Speaker 1: you were talking about liebrar, the lieboard does have this
Speaker 1: credit component in the sense that it's basically a sort
Speaker 1: of interbank lending rate, and so for somewhat controversially doesn't
Speaker 1: have that credit component. How do you see that impacting
Speaker 1: the financial system and transact And does that mean that
Speaker 1: so far is inherently not a sort of perfect match
Speaker 1: for live ward. It's definitely not a perfect match. Um.
Speaker 1: I think there's no good answer to this problem. So Um.
Speaker 1: On the one hand, library has credit exposure, which sort
Speaker 1: of is perceived to be beneficial in certain ways, but
Speaker 1: you know, it kind of depends on who you are
Speaker 1: in that equation. You know, the live world tends to
Speaker 1: go up when the market when interest rates go down. Um,
Speaker 1: that's just you know, interest rates go down when the
Speaker 1: economy is worse, and that means credit, the credit outlook
Speaker 1: is worse, and so liverar should go up for aative
Speaker 1: to other interest rates. Uh. That works well if you're
Speaker 1: the lender, but not the borrower. So it sort of
Speaker 1: depends on your perspective. The other component of that is
Speaker 1: it's sort of perceived to be a good match to
Speaker 1: the other kinds of ways in which banks borrow um
Speaker 1: and and you know, that's another thing that that's arguably debatable,
Speaker 1: but it's been it's been put forward. The problem with
Speaker 1: library is that credit markets tend not to be very
Speaker 1: active crisis, which is precisely when you need the index
Speaker 1: to be its most robust. And so that's what we
Speaker 1: were looking at in March, which is at precisely the
Speaker 1: time when FED policy needed to be passed through to
Speaker 1: the real economy through live war um. The rate of
Speaker 1: transactions was dropping significantly, like markets were seizing up um.
Speaker 1: The only market that was much more active, or one
Speaker 1: of the markets that was much more active, was the
Speaker 1: repo market. So you know, the transactions that could in
Speaker 1: principle go into live ar in March were much fewer,
Speaker 1: and the transactions which went into sofare much greater, like
Speaker 1: the repo market got more active. So the advantage of
Speaker 1: this non credit link, the secure lending market so to speak,
Speaker 1: that that SOFA represents is that it is more active
Speaker 1: in a crisis, more robust in the crisis um than
Speaker 1: than in normal times. Well, this raises question to me,
Speaker 1: and I think we talked about in one of the
Speaker 1: earlier episodes. Why couldn't the new benchmark just have been
Speaker 1: something a direct policy, right? I mean, if you're getting
Speaker 1: rid of the credit opponent, why not do you know,
Speaker 1: one month or three month or overnight rates from the
Speaker 1: Fed if that's essentially what it's going to track. So
Speaker 1: the federal funds rate is actually not a direct policy, right.
Speaker 1: So the federal funds rate is market determined by the
Speaker 1: market um. In the pre crisis days, when the balance
Speaker 1: sheet was small, basically the FED would be the buyer
Speaker 1: and seller of reserves because federal funds rate is the
Speaker 1: cost of borrowing reserves on an overnight basis, so on
Speaker 1: borrowing cash from another bank um and specifically borrowing like
Speaker 1: reserves at the FED and in the pre crisis days,
Speaker 1: like the FED would sort of be the end borrower
Speaker 1: and lender to maintain a rate that was like pretty
Speaker 1: consistent with their target um. As the balance she grew
Speaker 1: in the wake of the crisis and too, that's Nate.
Speaker 1: They bought a ton of treasuries, a ton of mortgages
Speaker 1: agency the ventures, so the baluncy got a lot bigger,
Speaker 1: which meant there was a ton of cash in the market,
Speaker 1: and that meant that nobody really needed to borrow cash,
Speaker 1: be cause you would typically borrow cash to make sure
Speaker 1: that you were at your minimum reserve levels for regulatory purposes,
Speaker 1: like I need to hold Institution A needs fifty billion
Speaker 1: dollars worth the reserves, institution being needs sixty billion dollars
Speaker 1: worth the reserves. Reserves don't earn interest in that pre
Speaker 1: crisis environment, and so I want to hold as little
Speaker 1: as possible and stay as close to my minimums as possible. Now,
Speaker 1: the FED has done two things. They've increased the supply enormously,
Speaker 1: and they pay interest. So if you're a bank and
Speaker 1: you have cash at the FED, you get into positive
Speaker 1: interest right on that cash. So you actually are perfectly
Speaker 1: find holding reserves for the most part at the FED.
Speaker 1: You don't want to minimize your exposure. Um And the
Speaker 1: correlate to that is who would actually lends reserves when
Speaker 1: they're earning interest on them at a rate that that
Speaker 1: might be below the interest they earned by holding them overnight.
Speaker 1: And it turns out that the way that the regulations
Speaker 1: were changed, the way the law was changed to allow
Speaker 1: the FED to pay interest on reserves did not include
Speaker 1: non depository institutions, So who's an depository institution. The federal
Speaker 1: Homeland banking system is technically not a depository institution, and
Speaker 1: so that meant is that they don't earn interest on
Speaker 1: their reserves, but they are part of the federal reserve system,
Speaker 1: so they lend out their cash at a rate below
Speaker 1: the interest on access reserves, and the borrowers of that
Speaker 1: cash are sort of borrowing below the interest on access
Speaker 1: reserves rate and earning the spread between the two, or
Speaker 1: possibly doing it for other for more technical reasons, And
Speaker 1: so it turns out that the federal reserve policy rate,
Speaker 1: or the target policy rate, the effective federal funds rate,
Speaker 1: represents at best, on a typical day, billion dollars worth
Speaker 1: of transactions, which is better than live or um I
Speaker 1: should add, but but not a lot in the context
Speaker 1: the whole system, whereas SOFA represents more than a trillion
Speaker 1: dollars in underlying transactions, many many thousands. And most importantly,
Speaker 1: the effective federal funds rate is a pretty idiosyncraticing because
Speaker 1: it really reflects where the homeland banking system is willing
Speaker 1: to lend out cash relative to other short term investments
Speaker 1: to foreign banks, which doesn't strike me as the index.
Speaker 1: You really want to link the rest of the economy too,
Speaker 1: because it's a pretty technical, pretty idrisyncratic thing, and so
Speaker 1: SOFA represents a true market in the sense that there's many,
Speaker 1: many transactions, there are lots of borrowers and lenders, and
Speaker 1: it's it's a real price discovery process that's not sort
Speaker 1: of highly highly sensitive to to the minutia of things
Speaker 1: like you know, homeland bank liquidity management. So so it's
Speaker 1: a much more attractive right and the are sort of
Speaker 1: considered both UM when they the Alternate Reference Rate Committee.
Speaker 1: They considered both UM and came to the conclusion that
Speaker 1: that this REPO rate, for all its problems, was a
Speaker 1: much more desirable benchmark than things like fed funds. So,
Speaker 1: putting it all together and considering what we just experienced
Speaker 1: in March and April with live ar UM and sober
Speaker 1: to some extent, are you optimistic that we're going to
Speaker 1: meet the deadlines for the library transition? And I guess secondly,
Speaker 1: are you optimistic that that transition is going to be
Speaker 1: done in a way that's good for the financial system
Speaker 1: and that the ultimate outcome is going to be that
Speaker 1: the industry is in a better place than it was
Speaker 1: in the library. Is yes, sorry, optimism is an interesting
Speaker 1: way to characterize it. I am. I'm convinced we'll get there.
Speaker 1: It is going to be the beginning of two first quarter,
Speaker 1: second quarter, second half. I think there's a real risk
Speaker 1: that it gets pushed back, just because when it comes
Speaker 1: down to it, the way you get the market off
Speaker 1: of lib or is you stop publishing lib rar and
Speaker 1: hope that you've covered all your bases, and there's always
Speaker 1: gonna be a moment where you bite your lip and
Speaker 1: go I think it'll be fine. We did a ton
Speaker 1: of work. We we really looked in everything, but like,
Speaker 1: you never really know until you do it. So what
Speaker 1: what do I think I might have wrong? And and
Speaker 1: and ultimately, if if there's any concern about financial stability,
Speaker 1: you know this deadline. It's good to have a deadline.
Speaker 1: It's good to work towards a deadline. Um this deadline
Speaker 1: was not chosen for any reason other than we need
Speaker 1: a deadline that's realistic. So if financial stability is truly
Speaker 1: at risk, I think turning off the lights and walking
Speaker 1: out of the live or room wherever it is, like,
Speaker 1: it's probably not a great idea. Whether or not that
Speaker 1: point will come with the point of confidence that you
Speaker 1: know we can take this risk comes you know, on
Speaker 1: time quote unquote is in the first part of two
Speaker 1: or or six or twelve months later. It is very
Speaker 1: hard to say in advance. UM. I think it really
Speaker 1: depends on how the next three or six months ago,
Speaker 1: and especially that that discounting switch people called the big
Speaker 1: bank discounting switch. That's kind of the next big event
Speaker 1: um in that market. But you know, I'm optimistic that
Speaker 1: it will happen. I'm optimistic that, um, it will happen
Speaker 1: over a timeline that's not super long, and when we're
Speaker 1: not talking about twenty years at the end of the day.
Speaker 1: If it if it ends up happening in the second
Speaker 1: half of two or the first half of three, like,
Speaker 1: it's that a complete disaster for the market. No, we've
Speaker 1: been working on this longer than we were working on
Speaker 1: the Moon landing, So what's an extra six months? So um,
Speaker 1: you know, I think that's it gives us a little flexibility,
Speaker 1: which is not a bad thing. Um. In some sense,
Speaker 1: there's value to acting as if the deadline is is
Speaker 1: fixed because if it gets pushed back, but you're ready
Speaker 1: at the end of twenty one, you've got no problems.
Speaker 1: If you're not ready, then you then you've got a
Speaker 1: big problem. So, um, you know, I think the market
Speaker 1: will keep pushing towards these deadlines. Is it better for
Speaker 1: the financialist system overall? You know, I think a more
Speaker 1: robust benchmark is always a better thing, and in particular
Speaker 1: one that's tied to transactions, because ultimately markets are about
Speaker 1: confidence and transparency. And so when we think about benchmarks
Speaker 1: that are embedded in basically everything the market touches, um
Speaker 1: that it really have wound into the into the guts
Speaker 1: and and the sort of ether of the financial system. Um,
Speaker 1: it's really important that they'd be something that we can
Speaker 1: count on for a long time. UM. And and something
Speaker 1: like so far has a lot of features that are attractive,
Speaker 1: and the most important being that it has many transactions,
Speaker 1: very hard to manipulate. I'm sure when your prior guests
Speaker 1: talked about the manipulation scandal, it's really hard to manipulate
Speaker 1: something with that underlying transactions. It's a lot easier to
Speaker 1: do it when there are sixteen panels um. And it's
Speaker 1: a market with many participants, not just banks, So it's
Speaker 1: a it's a broad mix. You know, secure lending is
Speaker 1: only getting more important because there's plenty of treasuries around
Speaker 1: and I don't think that's going to change anytime soon either. Um. So, uh,
Speaker 1: you know, all of that's a good thing. Um, as
Speaker 1: long as the process and the arc is put forward
Speaker 1: a very clear and and very reasonable and very thoughtful
Speaker 1: and and and careful and to push this forward. I
Speaker 1: think at the end of the day, it's kind of
Speaker 1: like every new piece of significant legislation, like everyone leaves
Speaker 1: equally unhappy, and so librate transition will leave many people
Speaker 1: equally unhappy. Um. But but you know, financial stability and
Speaker 1: and and and confidence is key, and I think they're
Speaker 1: heading in that direction. Josh, that was a really great
Speaker 1: conversation as always, and it was lovely too happy back on.
Speaker 1: And I'm so glad that you were the last person
Speaker 1: to sort of crown our overarching Live Boars series. So
Speaker 1: thanks thanks for being last, but definitely not least. Yeah, totally,
Speaker 1: I'm glad it worked out and trying to keep it
Speaker 1: not too technical. I hope that worked. I think it
Speaker 1: was just perfect, right right on the edge of sophistication.
Speaker 1: But I actually I think I understand I understood them
Speaker 1: with all of it, So I thought that was thanks. Okay,
Speaker 1: So I think we're done. I'm sort of scared to
Speaker 1: say that. I think we are done with the librars here. Yeah, Josh,
Speaker 1: I think we're done for now. I mean, I do
Speaker 1: think you know, it's not the topic isn't going away.
Speaker 1: But that was a really good summary, Josh, and just
Speaker 1: so clear, and his ability to take a really sophisticated
Speaker 1: topic very detailed. I mean, when I try to read
Speaker 1: um on this topic, it's always difficult. But I think
Speaker 1: he's one of the sort of clearest articulators. So good way,
Speaker 1: good way, good good place to stop. Yeah, he definitely
Speaker 1: has a way of bringing all these sort of various
Speaker 1: threads in the financial system together in a coherent way.
Speaker 1: So I guess I don't know about you, but the
Speaker 1: overarching takeaway is how difficult it is to sort of
Speaker 1: retool the underpinnings of the financial system, and especially to
Speaker 1: try to do that at a moment like this. And
Speaker 1: of course, when everyone embarked on the why or transition,
Speaker 1: it was right after the two thousand eight crisis, and
Speaker 1: I'm sure most people were hoping that we weren't going
Speaker 1: to get another crisis for some time, and yet you know,
Speaker 1: here we are and we're basically trying to end the
Speaker 1: process in the midst of the biggest economic recession that
Speaker 1: we've seen for many years. Yeah. Absolutely. It was just
Speaker 1: yesterday's episode, so speak we were talking about that, that
Speaker 1: moment with the clearinghouses coming up in October, and it's like, Okay,
Speaker 1: this is when they're going to switch over to this
Speaker 1: new benchmark. But hearing Josh talk about why even that
Speaker 1: is going to be a challenge and how you need
Speaker 1: to get the buy in of people who are experts
Speaker 1: at pricing this stuff, that really is sort of illuminating
Speaker 1: about illuminating example of how just even one step it's
Speaker 1: extremely complicated, and of course there are numerous other steps involved. Yeah,
Speaker 1: and I love that anecdote from Josh as well, about
Speaker 1: you know, language in the contracts that talks about, well,
Speaker 1: if there is no available library rate, you just go
Speaker 1: back to the previous one. And most people were expecting
Speaker 1: that to be you know, a day or two previously,
Speaker 1: but if you actually sunset libar, then you could be
Speaker 1: going back years and years and years. And it's all
Speaker 1: stuff that people never really considered. They would have to do. Yeah, no,
Speaker 1: it was really great and maybe we should do another
Speaker 1: librar series, but like a year, you know, or six
Speaker 1: months or something, and then we'll see how it goes.
Speaker 1: We need to title this the Never Ending Library Series.
Speaker 1: That should be the name. I like it. Okay, all right, well,
Speaker 1: this has been another episode of the A Thoughts Podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway and I'm Joe wi Isn'tal. You can follow
Speaker 1: me on Twitter at the Stalwart. Definitely be sure to
Speaker 1: follow our producer Laura Carlson, who had to book and
Speaker 1: edit all of these podcasts, all of the series to
Speaker 1: get him out in a single week. She's at Laura M. Carlson.
Speaker 1: Follow the Bloomberg head of podcast on Twitter, Francesca Leavi
Speaker 1: at Francesca Today, as well as all of our podcast
Speaker 1: at Bloomberg under the handle at podcasts. Thanks for listening.