WEBVTT - America Rolls Out Its Libor Replacement 0:00:03.480 --> 0:00:07.560 Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every 0:00:07.640 --> 0:00:10.440 day we bring you insight and analysis into the most 0:00:10.480 --> 0:00:13.440 important legal news of the day. You can find more 0:00:13.480 --> 0:00:18.040 episodes of the Bloomberg Law Podcast on Apple Podcasts, SoundCloud 0:00:18.320 --> 0:00:22.840 and on Bloomberg dot com slash podcasts. The Secured Overnight 0:00:22.880 --> 0:00:25.599 Financing Rate It is time to meet the Secured Overnight 0:00:25.640 --> 0:00:28.960 Financing Rate or so FAR, a new reference rate introduced 0:00:29.000 --> 0:00:32.200 by the Federal Reserve Bank of New York today. It's 0:00:32.240 --> 0:00:35.400 basically the u s is LIBOR replacement, and so fur's 0:00:35.440 --> 0:00:37.600 debut is a critical step in the effort to wean 0:00:37.680 --> 0:00:41.600 more than three d fifty trillion dollars of securities off Libor. 0:00:42.120 --> 0:00:44.720 Joining me is Eric Tally, co director of the Millstein 0:00:44.800 --> 0:00:49.080 Center for Global Markets and Corporate Ownership at Columbia Law School. Eric, 0:00:49.120 --> 0:00:51.240 we've talked a lot on the show about the rigging 0:00:51.280 --> 0:00:54.800 of Liebor by US and European lenders that were forced 0:00:54.840 --> 0:00:57.760 to pay billions of dollars to settle charges. Is that 0:00:57.800 --> 0:01:00.720 the main reason for the push to replace library or 0:01:00.800 --> 0:01:03.720 are there other reasons? I think in part it is that, 0:01:03.840 --> 0:01:05.720 but you have to remember that the reason for the 0:01:06.200 --> 0:01:10.280 rigging scandal was itself born of the very design of libor, 0:01:10.400 --> 0:01:13.679 which was to try to collect an enormous amount of 0:01:13.680 --> 0:01:17.920 information about all kinds of different tenors of borrowing in 0:01:18.040 --> 0:01:21.440 different types of securities, so much so that the banks 0:01:21.480 --> 0:01:24.160 that we're having to make the reports couldn't actually report 0:01:24.200 --> 0:01:26.600 that they were doing transactions for some of the reports 0:01:26.640 --> 0:01:28.920 that they were supposed to be talking about. So it 0:01:29.520 --> 0:01:32.360 quickly became known that this was sort of a hypothetical 0:01:32.480 --> 0:01:36.040 form of reporting. It was almost an invitation for various 0:01:36.040 --> 0:01:39.040 types of manipulation. So I think in part this is 0:01:39.120 --> 0:01:42.360 because of the scandal, the library reporting scandal, but that 0:01:42.480 --> 0:01:45.080 itself the seeds for that, I think we're sown and 0:01:45.160 --> 0:01:49.200 what was ultimately a well intentioned but poorly designed products. 0:01:49.600 --> 0:01:53.480 So what is sulfur and how is it better than library? Well, 0:01:53.520 --> 0:01:59.400 here's what sulfur does. So the sofa rate basically uses 0:02:00.080 --> 0:02:03.800 uh not just hypothetical statements about what cost of borrowing 0:02:03.840 --> 0:02:07.280 would be, but uses a specific type of borrowing, which 0:02:07.320 --> 0:02:11.240 is overnight repo or repurchase agreements. This is a very 0:02:11.360 --> 0:02:15.400 very active market and instead of basing it on a survey, 0:02:15.480 --> 0:02:19.960 you can actually benchmark the sofa rate to the you know, 0:02:20.080 --> 0:02:22.720 the actual transactions that are made in the market. That 0:02:22.840 --> 0:02:26.040 turns out to be very very helpful because it's not hypothetical, 0:02:26.120 --> 0:02:28.919 it's real, and its adjusts in a real way from 0:02:28.960 --> 0:02:31.680 a day to day basis. So so in in in 0:02:31.760 --> 0:02:35.520 going with this new benchmark rate, the New York Fed 0:02:35.560 --> 0:02:40.200 has has essentially decided that, uh, that that or that 0:02:40.280 --> 0:02:44.400 the Alternative Reference Rate Committee has decided that this was uh, 0:02:44.440 --> 0:02:46.919 you know, an area where data or quality of data 0:02:47.040 --> 0:02:50.280 was going to eclipse the you know, the heterogeneity of 0:02:50.360 --> 0:02:53.560 the product. That's also one of the weak spots of 0:02:53.600 --> 0:02:56.640 the of the new rate in that it is only 0:02:57.120 --> 0:03:01.280 relating to overnight rates in US dollars, and it's secured lending. 0:03:01.400 --> 0:03:04.560 Usually these uh, these so called repurchase agreements have a 0:03:04.600 --> 0:03:08.000 lot of collateral associated with them, and and because of that, 0:03:08.360 --> 0:03:11.280 it may not be as useful for contracts that are 0:03:11.320 --> 0:03:15.280 trying to find an appropriate benchmark for say year long 0:03:15.400 --> 0:03:18.960 or six month lending on an unsecured basis. And that's 0:03:18.960 --> 0:03:21.600 going to be one of the biggest adjustment costs in 0:03:21.800 --> 0:03:24.959 trying to trying to adapt to the new rate. Well, 0:03:25.000 --> 0:03:31.639 how complex will the transition be from live or to sofa? Well, 0:03:31.720 --> 0:03:34.320 in some ways, it will be very very quick, particularly 0:03:34.320 --> 0:03:38.560 for short term borrowing. I could certainly imagine the benchmark 0:03:38.680 --> 0:03:41.280 rate uh, you know, and it's already happened to some extent, 0:03:41.720 --> 0:03:45.720 has already transitioned within some private contracting over to the 0:03:45.760 --> 0:03:48.400 sofa rate, and and that will be a pretty easy 0:03:48.520 --> 0:03:51.200 transition to make. I think it really is when you're 0:03:51.200 --> 0:03:54.480 talking about maybe longer term instruments in which you know, 0:03:54.560 --> 0:03:56.720 the short term rates and the long term rates don't 0:03:56.800 --> 0:03:59.960 necessarily line up as well, and maybe there's more volunteer 0:04:00.120 --> 0:04:03.160 volatility in the yield curve, or there the difference between 0:04:03.200 --> 0:04:05.920 long term rates and short term rates, that you'll start 0:04:05.960 --> 0:04:08.280 to see a little bit more of a resistance to 0:04:08.400 --> 0:04:11.880 pick up these uh these uh, these new benchmarks. You 0:04:11.960 --> 0:04:17.520 have to remember, however, that by one the British regulators, 0:04:17.520 --> 0:04:20.920 the Financial Conduct Authority, is going to stop requiring firms 0:04:21.000 --> 0:04:24.600 to to make reports into liebor. So it may be 0:04:24.680 --> 0:04:26.839 that by the time we hit that point, everyone's going 0:04:26.880 --> 0:04:29.279 to realize that the jig is up and they're going 0:04:29.320 --> 0:04:33.000 to have to find some other form of of benchmarking rate. 0:04:33.120 --> 0:04:36.320 This is a reliable one is particularly good for short 0:04:36.440 --> 0:04:38.839 term UH instruments. It is not going to be as 0:04:38.880 --> 0:04:40.880 good for longer term instruments, but it maybe the best 0:04:40.920 --> 0:04:44.320 thing that's around. So the Federal Reserve began publishing the 0:04:44.400 --> 0:04:49.000 rate today, what happens next and how long? Yeah? Yeah, 0:04:49.040 --> 0:04:50.520 So so a lot of a lot of this is 0:04:50.600 --> 0:04:52.760 up to private contracting, right There is a lot of 0:04:52.760 --> 0:04:55.200 private contracts out there right now that are built on 0:04:55.320 --> 0:04:58.440 Liebor as their benchmark. Great, and that's gonna involved, and 0:04:58.480 --> 0:05:01.320 that's got a lot of network x ternalities associated with it. 0:05:01.400 --> 0:05:04.080 People are used to those sorts of contracts. Uh. Some 0:05:04.200 --> 0:05:06.560 of those uh, some of those entities that author those 0:05:06.600 --> 0:05:09.720 form contracts, such as ISDA, are going to maybe want 0:05:09.720 --> 0:05:12.440 to adapt their contracts to say, here's a new template 0:05:12.480 --> 0:05:14.839 that you could that you could use SOFA as the 0:05:14.960 --> 0:05:17.240 as the benchmark rate for And then people are gonna 0:05:17.279 --> 0:05:20.520 have to start adopting that as a benchmark rate. To 0:05:20.600 --> 0:05:23.400 some extent, that's already started to happen. And my guess 0:05:23.440 --> 0:05:26.320 is that with a greater notoriety and greater sense that 0:05:26.360 --> 0:05:28.680 other people are using this rate, people are gonna have 0:05:28.760 --> 0:05:31.800 greater degrees of comfort in in uh, in adapting to 0:05:31.920 --> 0:05:34.400 it itself. One has to remember that when labor, you know, 0:05:34.440 --> 0:05:36.720 liborar hasn't been around forever as well. It's only been 0:05:36.760 --> 0:05:39.640 around since the since the late nineteen eighties, and it 0:05:39.680 --> 0:05:42.520 really did pick up steam relatively quickly. This industry is 0:05:42.560 --> 0:05:46.680 now much larger of financial contracting. The hinges on some 0:05:46.760 --> 0:05:49.479 type of a reference benchmark, and so there's really going 0:05:49.520 --> 0:05:52.760 to be a perceived need to find something that works well. 0:05:53.120 --> 0:05:55.480 And my guess is that the shorter term instruments are 0:05:55.480 --> 0:05:58.120 going to migrate to it pretty quickly. Longer term ones 0:05:58.200 --> 0:06:00.200 may hold off for a while just to make or 0:06:00.240 --> 0:06:03.400 that that you know, their their simulations and modeling make 0:06:03.480 --> 0:06:06.200 it look like they're not bearing risks that they were 0:06:06.320 --> 0:06:09.119 unaware of, and they're they're slowly going to come on board. 0:06:09.160 --> 0:06:11.839 And by the time that that the sea stops collecting 0:06:11.880 --> 0:06:15.320 live or information, you know, in about three years, um, 0:06:14.839 --> 0:06:17.719 you know, most people will have made this transition. Now, 0:06:17.960 --> 0:06:20.280 could works go ahead? No? I was I was going 0:06:20.279 --> 0:06:23.760 to ask you, is this is libor is um so 0:06:23.839 --> 0:06:27.359 for the only benchmark in the running, let's say, or 0:06:27.400 --> 0:06:32.240 are there other countries suggesting alternatives? Yeah? And there are 0:06:32.240 --> 0:06:35.960 other countries suggesting other alternatives in There have been several 0:06:35.960 --> 0:06:38.480 alternatives that have been bandied about, and to some extent 0:06:38.760 --> 0:06:42.760 those are still being bandied about. My sense is that 0:06:42.760 --> 0:06:46.080 that some form of short term repo or other or 0:06:46.080 --> 0:06:48.680 commercial paper rates are the ones that are most likely 0:06:49.080 --> 0:06:52.280 UH to to have legs. UH though there are some 0:06:52.680 --> 0:06:56.360 UH financial authorities that are considering using the rate paid 0:06:56.400 --> 0:07:00.160 for government borrowing. That was one of the candidates that 0:07:00.160 --> 0:07:03.760 that the the Alternative Reference Rate Committee considered. One of 0:07:03.760 --> 0:07:08.320 the reasons they decided not to go with UM with UH. 0:07:08.560 --> 0:07:11.520 You know, something related to say US treasuries or other 0:07:11.560 --> 0:07:15.000 types of bank borrowing is that sometimes those are safe 0:07:15.000 --> 0:07:19.440 havens in times of gotta stop you there, Eric, we 0:07:19.520 --> 0:07:22.160 will come back to sofa. I'm sure many times. That's 0:07:22.280 --> 0:07:29.880 Eric Tallely of Columbia Law School. Jurors are getting a 0:07:29.960 --> 0:07:33.640 rare look at Washington's political intelligence industry at the trial 0:07:33.680 --> 0:07:38.360 of consultant charge with passing government information to hedge funds, 0:07:38.400 --> 0:07:41.400 the first trial of its kind. The prosecutor says, is 0:07:41.440 --> 0:07:44.320 a case about greed on Wall Street and corruption in 0:07:44.440 --> 0:07:47.400 d C. The defense attorney says, New York is the 0:07:47.440 --> 0:07:50.320 city that never sleeps, and d C is the town 0:07:50.440 --> 0:07:53.400 that never shuts up. My guest is an expert in 0:07:53.480 --> 0:07:56.880 Insider trading. Peter Henning, a professor at Wayne State University 0:07:56.960 --> 0:08:00.680 Law School, Peter David Blaze Act. The console is on 0:08:00.760 --> 0:08:04.800 trial with the former government employee who allegedly tipped him 0:08:04.800 --> 0:08:07.840 and the two partners of the hedge fund Dear Fielm Management. 0:08:08.080 --> 0:08:11.480 Tell us a little about the charges. Well, this is 0:08:11.560 --> 0:08:14.680 one part of the case is a standard insider trading case, 0:08:14.720 --> 0:08:18.560 so they're accused of securities fraud wire fraud, which is 0:08:18.600 --> 0:08:21.720 also usually brought together with this. Another part of the 0:08:21.720 --> 0:08:26.200 case is interesting though, that the defendants are also charged 0:08:26.800 --> 0:08:31.440 with illegal conversion of government property. In other words, that 0:08:31.840 --> 0:08:38.959 uh Warral, the government employee essentially improperly took government information 0:08:39.400 --> 0:08:42.560 and then passed it on to the others. This is 0:08:42.600 --> 0:08:45.360 like receiving stolen property. And so this is something you 0:08:45.440 --> 0:08:48.720 normally don't see in an insider trading case, and I 0:08:48.760 --> 0:08:52.959 suspect prosecutors have this charge in their essentially as a 0:08:53.040 --> 0:08:57.640 backup in case the insider trading part falls apart. Why 0:08:57.720 --> 0:09:02.319 is the insider trading part more difficult for prosecutors than 0:09:02.360 --> 0:09:05.440 the typical what you call the typical Wall Street insider 0:09:05.480 --> 0:09:07.840 trading cases that we've seen so much of in the 0:09:07.880 --> 0:09:12.160 Southern district. Right. Well, usually in the typical insider trading case, 0:09:12.360 --> 0:09:16.640 it's corporate information that is being taken from the company. 0:09:16.679 --> 0:09:22.040 So in earnings announcement, a deal, perhaps a new invention, 0:09:22.280 --> 0:09:25.640 something like that that's gonna bump the stock up or down. Um, 0:09:25.920 --> 0:09:30.840 what this is is about information about how the government 0:09:30.880 --> 0:09:35.520 was going to reimburse for Medicare and Medicaid procedures or 0:09:35.559 --> 0:09:39.720 procedures in which doctors would be reimbursed. And typically that 0:09:39.800 --> 0:09:44.400 type of information seeps out in advance. So an interesting 0:09:44.480 --> 0:09:48.120 question here, and that's what the defense attorney referenced. That 0:09:48.800 --> 0:09:54.559 wasn't really confidential information. Corporate information is usually kept confidential, 0:09:54.600 --> 0:09:57.559 at least until the company has to disclose it to everyone. 0:09:58.040 --> 0:10:02.640 Government information has a way of washing through the system. 0:10:02.679 --> 0:10:06.920 And you know, this idea of Washington is the culture 0:10:07.200 --> 0:10:11.120 of leaks, and everybody talks in Washington. How far do 0:10:11.160 --> 0:10:14.920 you think that defense will take them because we've seen cases, 0:10:14.960 --> 0:10:17.760 for example, the Jesse Lit back case, the bond trader. 0:10:17.800 --> 0:10:22.080 Who's that everybody does this and it doesn't always work, right, Yeah, 0:10:22.200 --> 0:10:25.360 everybody does it. It usually is not a very good appeal. 0:10:25.360 --> 0:10:27.559 It didn't work in kindergarten. It's probably not going to 0:10:27.679 --> 0:10:31.240 work in a federal court, but it'll be interesting to 0:10:31.280 --> 0:10:35.439 see how a Manhattan or or a New York jury 0:10:35.520 --> 0:10:39.200 responds to a description of how Washington works and what 0:10:39.280 --> 0:10:42.680 we know Washington is filled with leaks. But there's also 0:10:42.760 --> 0:10:47.040 an aspect here that there is a level of transparency 0:10:47.080 --> 0:10:49.680 that we expect out of the government, that the government, 0:10:50.000 --> 0:10:53.720 leaving out the national security area, the government doesn't suddenly 0:10:53.760 --> 0:10:58.520 announce a complete change in policy that this is usually signaled, 0:10:58.720 --> 0:11:02.400 And so might it be that this really wasn't the 0:11:02.480 --> 0:11:05.600 kind of market moving information that we see in the 0:11:05.640 --> 0:11:09.000 corporate context. If you're going to announce blockbuster earnings or 0:11:09.000 --> 0:11:11.880 a drop in your earnings, that usually has an effect 0:11:11.880 --> 0:11:15.520 on the stock. This was about something a step removed, 0:11:15.559 --> 0:11:18.840 even from the companies that had a stake in the 0:11:18.880 --> 0:11:23.120 amount of government reimbursement through Medicaid and Medicare. The government 0:11:23.240 --> 0:11:26.560 star witness is a former deer Field partner who pleaded 0:11:26.559 --> 0:11:30.080 guilty in as cooperating. So that's a tough witness for 0:11:30.200 --> 0:11:33.200 the defense. Are they admitting a lot of the facts 0:11:33.280 --> 0:11:37.960 here and going with the this isn't confidential line, or 0:11:38.080 --> 0:11:42.280 are they disputing Well, I think and this is typical 0:11:42.320 --> 0:11:44.800 and most insider training cases. They're admitting a lot of 0:11:44.800 --> 0:11:48.439 the facts. They all admit the deer field. The hedge 0:11:48.440 --> 0:11:52.640 fund investors say yeah, we bought the shares um blaze 0:11:52.640 --> 0:11:56.439 Ack said yeah, I passed along this information. So really 0:11:56.480 --> 0:12:00.000 what this is a fight about is figuring out um 0:12:00.280 --> 0:12:04.160 was it confidential and was it material information in other words, 0:12:04.200 --> 0:12:06.880 important to the market. And then also you have another 0:12:06.960 --> 0:12:10.400 aspect here too with the two hedge fund defendants. Did 0:12:10.440 --> 0:12:15.480 they know about the benefit that Blazak passed along to 0:12:15.720 --> 0:12:19.960 war Out the government employee. That's part of the famous 0:12:20.040 --> 0:12:24.200 Newman case that remains viable that Tippy it it's called 0:12:24.200 --> 0:12:27.839 a downstream Tippy has to know about the benefit or 0:12:27.880 --> 0:12:30.120 at least that there was a benefit provided to the 0:12:30.160 --> 0:12:33.560 source of information. So that's probably going to be another fight, 0:12:33.600 --> 0:12:36.640 at least for those defendants. So government has a lot 0:12:36.640 --> 0:12:39.040 of issues it has to deal with in this case. 0:12:39.080 --> 0:12:41.480 So I don't think this is an easy one. They 0:12:41.520 --> 0:12:44.560 have a good record in insider trading cases, but it'll 0:12:44.600 --> 0:12:47.120 be interesting to see how this one plays out. Depending 0:12:47.120 --> 0:12:51.080 on how this one plays out, does this indicate that 0:12:51.200 --> 0:12:54.440 federal prosecutors are going to trade sending Wall streeters to 0:12:54.480 --> 0:12:58.960 prison for trading on inside information to taking on Washington's 0:12:59.040 --> 0:13:03.080 culture of leak. Well, that that's interesting. Uh, this is 0:13:03.120 --> 0:13:06.520 the first one, and it's what's called a political intelligence firm, 0:13:06.960 --> 0:13:10.400 is what blazek ran Um? Are we going to see 0:13:10.440 --> 0:13:14.360 more policing in this area? This may be the start, 0:13:14.440 --> 0:13:17.240 but this also may just be the best case that 0:13:17.320 --> 0:13:20.800 they have, and they're probably hopeful that it sends a 0:13:20.840 --> 0:13:24.760 message to other political intelligence firms. You had better be careful, 0:13:25.559 --> 0:13:28.880 Peter about a minute here. But the problem seems to 0:13:28.880 --> 0:13:32.480 be that many government employees go on to become consultants, 0:13:32.520 --> 0:13:36.400 and their clients expect them to leverage their former colleagues 0:13:36.480 --> 0:13:39.640 to get heads up on information or other kinds of information. 0:13:39.720 --> 0:13:43.319 Isn't that why they're hiring them? Oh? Absolutely, I welcome 0:13:43.360 --> 0:13:46.040 to the revolving door. That I mean, we see it 0:13:46.679 --> 0:13:50.480 in every agency. An agency, I'm quite familiar with the SEC. 0:13:52.000 --> 0:13:55.200 High level people routinely go to law firms U And 0:13:55.960 --> 0:13:58.319 one of the things that you sell is your access 0:13:58.520 --> 0:14:01.920 um not in formation, but I can get to the 0:14:01.960 --> 0:14:07.200 people who have information. Um. Will this stop the revolving door? No, 0:14:07.360 --> 0:14:09.240 but it might put a little bit of a chill 0:14:09.360 --> 0:14:13.120 into companies that are looking to hire people because they 0:14:13.160 --> 0:14:16.960 want their rolodecks. It's it's a fascinating case and we 0:14:17.000 --> 0:14:20.280 are going to follow it closely with you. That's Peter Henning. 0:14:20.520 --> 0:14:22.800 Thanks so much, Peter. As always, he's a professor at 0:14:22.800 --> 0:14:25.760 Wayne State University Law School and expert in the area 0:14:25.840 --> 0:14:29.000 of insider trading in criminal white collar criminal law. Thanks 0:14:29.000 --> 0:14:32.280 for listening to the Bloomberg Law Podcast. You can subscribe 0:14:32.320 --> 0:14:35.560 and listen to the show on Apple Podcasts, SoundCloud, and 0:14:35.600 --> 0:14:40.080 on Bloomberg dot com slash podcast. I'm June Brosso. This 0:14:40.440 --> 0:14:43.800 is Bloomberg. Yeah.