1 00:00:11,240 --> 00:00:14,640 Speaker 1: Hello, and welcome to another episode of the Odd Thoughts podcast. 2 00:00:14,720 --> 00:00:18,680 Speaker 1: I'm Tracy Alloway and I'm Joe. Wasn't all so Joe. 3 00:00:18,800 --> 00:00:22,599 Speaker 1: This is the third episode of our Live Bard series. 4 00:00:23,120 --> 00:00:24,520 Speaker 1: You know, I said it in the beginning, and it 5 00:00:24,600 --> 00:00:27,240 Speaker 1: was a big, facetious This is one of those things 6 00:00:27,320 --> 00:00:30,600 Speaker 1: that I felt was extremely important to understand that I 7 00:00:30,640 --> 00:00:33,880 Speaker 1: didn't have much knowledge on, and so I'm very happy 8 00:00:33,920 --> 00:00:36,760 Speaker 1: that we finally working through all that. You know, our 9 00:00:36,800 --> 00:00:40,839 Speaker 1: first episode we sort of talked about the problems with 10 00:00:40,960 --> 00:00:45,160 Speaker 1: librar pre financial crisis and post financial crisis, and then 11 00:00:45,159 --> 00:00:47,320 Speaker 1: in the second episode we talked a lot about the 12 00:00:47,360 --> 00:00:52,200 Speaker 1: transition away from library and how that's going. In this episode, 13 00:00:52,400 --> 00:00:55,720 Speaker 1: we are going to talk to someone who's actually actively 14 00:00:55,840 --> 00:01:00,520 Speaker 1: trying to come up with an alternative reference rate. Yeah. 15 00:01:00,560 --> 00:01:03,760 Speaker 1: It's interesting because I know that there is a very 16 00:01:03,800 --> 00:01:06,640 Speaker 1: big push a foot to move you know, as we've 17 00:01:06,640 --> 00:01:10,960 Speaker 1: talked about from libor over to so FUR, and they're 18 00:01:11,000 --> 00:01:15,120 Speaker 1: all kinds of efforts going on for that front. But 19 00:01:15,240 --> 00:01:20,400 Speaker 1: I guess that is not the only theoretical alternative approach. Yeah, exactly. So, 20 00:01:20,440 --> 00:01:23,960 Speaker 1: even though there's this regulatory push towards the security overnight 21 00:01:24,000 --> 00:01:28,080 Speaker 1: financing rate or so fur there are well, there is 22 00:01:28,120 --> 00:01:31,760 Speaker 1: the potential for alternative rates to enter the market, and 23 00:01:32,040 --> 00:01:35,000 Speaker 1: we have the perfect person to talk about this. We're 24 00:01:35,000 --> 00:01:38,319 Speaker 1: gonna be speaking with Richard Sandor. He's the chairman and 25 00:01:38,440 --> 00:01:42,679 Speaker 1: CEO of the American Financial Exchange, also someone who occasionally 26 00:01:42,720 --> 00:01:46,400 Speaker 1: is referred to as the father of financial futures, has 27 00:01:46,440 --> 00:01:49,840 Speaker 1: a lot of experience in the derivatives market and has 28 00:01:50,240 --> 00:01:54,520 Speaker 1: well invented quite a few contracts over the years. So again, 29 00:01:54,560 --> 00:01:58,200 Speaker 1: the perfect person. I'm really looking forward to this. Okay, 30 00:01:58,280 --> 00:02:00,920 Speaker 1: let's bring him on. Richard, thank you so much for 31 00:02:01,160 --> 00:02:05,400 Speaker 1: coming on offts. Oh, it's my pleasure. Thank you for 32 00:02:05,440 --> 00:02:09,760 Speaker 1: the invitation, and I'm happy to be here with both 33 00:02:09,800 --> 00:02:14,560 Speaker 1: of you. Thank you, thank you. So I gave a 34 00:02:14,560 --> 00:02:17,040 Speaker 1: little bit of an intro just then. Um, but it's 35 00:02:17,080 --> 00:02:20,560 Speaker 1: kind of hard to summarize your career because it's quite 36 00:02:20,600 --> 00:02:24,440 Speaker 1: expensive and you've done quite a few things. Can can 37 00:02:24,480 --> 00:02:27,080 Speaker 1: you try to summarize it in a in a nutshell 38 00:02:27,160 --> 00:02:30,079 Speaker 1: for our viewers, viewers, for our listeners. I should say, 39 00:02:30,440 --> 00:02:33,840 Speaker 1: it's really hard to talk about yourself. I leave that 40 00:02:34,040 --> 00:02:37,760 Speaker 1: to others generally, But let's say I'm a serial and 41 00:02:38,080 --> 00:02:43,079 Speaker 1: the inventor and the financial innovator. I get it wrong 42 00:02:43,120 --> 00:02:46,760 Speaker 1: a bunch of times and then get it right too. 43 00:02:46,919 --> 00:02:54,360 Speaker 1: So I've spent forty five years trying to observe capital 44 00:02:54,440 --> 00:03:02,600 Speaker 1: markets and see what instruments can be developed to minimize 45 00:03:02,720 --> 00:03:11,160 Speaker 1: transaction costs and achieve social objectives. And Library and its 46 00:03:11,240 --> 00:03:18,560 Speaker 1: successors fit into that. And like most inventive activity, there's 47 00:03:18,600 --> 00:03:23,280 Speaker 1: a spark. And we had sold our last exchange, which 48 00:03:23,520 --> 00:03:27,760 Speaker 1: was a series of market based solutions to global warming, 49 00:03:28,320 --> 00:03:34,079 Speaker 1: two ice in twenty ten. UM. It was very successful. 50 00:03:34,160 --> 00:03:37,720 Speaker 1: Our investors made seven and a half to fifteen times 51 00:03:37,800 --> 00:03:41,760 Speaker 1: their money between oh three and ten. A sale price 52 00:03:41,920 --> 00:03:46,080 Speaker 1: was six hundred million. And we had developed exchanges in 53 00:03:46,240 --> 00:03:54,040 Speaker 1: North America, the UK and China, and we reformed the incubator, 54 00:03:54,680 --> 00:03:59,040 Speaker 1: which is something called the FP because we were looking 55 00:03:59,200 --> 00:04:04,840 Speaker 1: for new markets and we started to look at water. UM. 56 00:04:04,960 --> 00:04:07,520 Speaker 1: We had a contract with the state of New Mexico, 57 00:04:07,840 --> 00:04:12,360 Speaker 1: California looking at China because we thought that water would 58 00:04:12,360 --> 00:04:15,840 Speaker 1: be and still do think the commodity of the twenty 59 00:04:16,000 --> 00:04:20,760 Speaker 1: first century. I picked up a newspaper in twenty eleven 60 00:04:21,160 --> 00:04:25,280 Speaker 1: UH and read that the Royal Bank of Scotland fired 61 00:04:25,600 --> 00:04:31,160 Speaker 1: four people for manipulating library. Uh called the team in 62 00:04:31,640 --> 00:04:37,480 Speaker 1: and even I know it takes two to manipulate. So 63 00:04:37,640 --> 00:04:40,440 Speaker 1: if there was one, then there was going to be 64 00:04:40,480 --> 00:04:45,400 Speaker 1: a second, and we by no really expanded too. Would 65 00:04:45,480 --> 00:04:50,159 Speaker 1: go to four, four, would go to eight, etcetera. And 66 00:04:50,240 --> 00:04:54,880 Speaker 1: that ultimately we thought that there would be a demise 67 00:04:55,160 --> 00:04:58,480 Speaker 1: in library, it would end, and that we would set 68 00:04:58,520 --> 00:05:06,000 Speaker 1: off on a ten year odyssey to develop a replacement 69 00:05:06,279 --> 00:05:14,240 Speaker 1: to librar. Library was unusual and in that it was 70 00:05:14,320 --> 00:05:18,960 Speaker 1: the only asset class that I knew about that had 71 00:05:19,000 --> 00:05:24,080 Speaker 1: a single benchmark, all because of alone in the sixties 72 00:05:24,160 --> 00:05:26,880 Speaker 1: to the shah Iran. If you take a look at 73 00:05:26,960 --> 00:05:30,400 Speaker 1: crude oil, it's got w t I, it's got brand, 74 00:05:31,240 --> 00:05:34,920 Speaker 1: it's got Dubai, it's now gonna Shanghai. If we look 75 00:05:34,960 --> 00:05:41,680 Speaker 1: at the equity markets, they have Nastack SMP, Dow Russell 76 00:05:42,000 --> 00:05:48,760 Speaker 1: Value Line, more stock indexes than there are stocks, and 77 00:05:48,920 --> 00:05:53,400 Speaker 1: the same with fixed income. So what is this anomaly 78 00:05:53,800 --> 00:05:59,760 Speaker 1: called library? And how could we have hundreds of trillions 79 00:06:00,160 --> 00:06:05,800 Speaker 1: dollars tied to a pole that would be like electing 80 00:06:06,560 --> 00:06:09,799 Speaker 1: the president of the United States based on the Wall 81 00:06:09,839 --> 00:06:14,640 Speaker 1: Street Journal poll. It made no sense whatsoever that it 82 00:06:14,760 --> 00:06:19,400 Speaker 1: was the only benchmark, and it wasn't even market determined. 83 00:06:20,000 --> 00:06:24,039 Speaker 1: So we set out and said, let's develop something that 84 00:06:24,560 --> 00:06:32,279 Speaker 1: is everything that Libor isn't. Let's make it transparent, let's 85 00:06:32,320 --> 00:06:37,520 Speaker 1: make it regulated, let's make it based on transactions only, 86 00:06:38,480 --> 00:06:43,080 Speaker 1: and let's make it American. London has lib Or, Europe 87 00:06:43,080 --> 00:06:48,919 Speaker 1: as Europe, or even Hong Kong as UH high bor. 88 00:06:48,960 --> 00:06:53,000 Speaker 1: How could it be that the world's largest economy didn't 89 00:06:53,000 --> 00:06:58,800 Speaker 1: have its own benchmark. So UM I got on a 90 00:06:58,880 --> 00:07:04,160 Speaker 1: plane and instead of going to London, Parish, Shanghai, Hong Kong, 91 00:07:05,000 --> 00:07:14,040 Speaker 1: uh and Vienna, etcetera, I ended up in Bentonville, Arkansas, Tupelo, Mississippi, 92 00:07:14,440 --> 00:07:20,600 Speaker 1: San Antonio, Texas, Green Bay, Wisconsin and visited a hundred 93 00:07:20,600 --> 00:07:26,560 Speaker 1: and twenty five small banks with my colleague. So if 94 00:07:26,600 --> 00:07:29,240 Speaker 1: it was going to be a benchmark, it would be 95 00:07:29,720 --> 00:07:38,840 Speaker 1: one that was based on American banks overnight, unsecured lending 96 00:07:38,920 --> 00:07:44,680 Speaker 1: to each other. We were naturally viewed with some skepticism. 97 00:07:44,840 --> 00:07:50,360 Speaker 1: Interest rates for zero. People said library is never gonna 98 00:07:50,400 --> 00:07:55,800 Speaker 1: go away. You don't understand, Dr Sandor, this is the 99 00:07:55,920 --> 00:08:01,360 Speaker 1: bedrock of all finance, and your climbing up a mountain 100 00:08:01,720 --> 00:08:04,960 Speaker 1: and you need to go back to Chicago, because not, 101 00:08:05,680 --> 00:08:12,240 Speaker 1: that's not the way it works. We felt quite opposite, 102 00:08:12,280 --> 00:08:17,280 Speaker 1: and actually as a contrariant and as an inventor, that 103 00:08:17,400 --> 00:08:23,360 Speaker 1: was really bullish because everybody thought that there was no 104 00:08:23,480 --> 00:08:27,720 Speaker 1: need for it. And oftentimes in my experience, whether it's 105 00:08:27,800 --> 00:08:33,080 Speaker 1: financial futures, the derivatives, everybody said no need for it. 106 00:08:33,160 --> 00:08:36,000 Speaker 1: Whether it was acid rain and the mark and no 107 00:08:36,120 --> 00:08:40,760 Speaker 1: need for it, catastrophe bonds, no need for it, climate 108 00:08:40,840 --> 00:08:44,720 Speaker 1: change no not happening, no need for it. So whatever 109 00:08:44,880 --> 00:08:51,679 Speaker 1: small success I've had, it's been where the lights and 110 00:08:51,880 --> 00:08:55,960 Speaker 1: beacon of the industry has told me that there's no 111 00:08:56,080 --> 00:09:11,880 Speaker 1: need for it. So talk to us about your approach. 112 00:09:12,000 --> 00:09:15,520 Speaker 1: You mentioned the sort of absurdity that the world operated 113 00:09:15,800 --> 00:09:18,400 Speaker 1: on a single benchmark, even though most things, whether it's 114 00:09:18,440 --> 00:09:23,200 Speaker 1: doctor or multiple benchmarks all around the world. What is 115 00:09:23,240 --> 00:09:28,720 Speaker 1: it about the way that UM your index would be 116 00:09:28,800 --> 00:09:33,760 Speaker 1: constructed that's a better for use. Why regionalization is good 117 00:09:34,080 --> 00:09:37,760 Speaker 1: but also less prone to some of the manipulation issues 118 00:09:37,840 --> 00:09:41,760 Speaker 1: that of course accelerated or caused live worth of mine 119 00:09:42,480 --> 00:09:47,800 Speaker 1: great questions. So we again we thought that we would 120 00:09:47,840 --> 00:09:54,520 Speaker 1: stay away from siffy UM the systemically important financial institutions, 121 00:09:54,600 --> 00:09:59,920 Speaker 1: and we would go to recruit the five thousand by 122 00:10:00,000 --> 00:10:06,800 Speaker 1: inks Um that were non citfies and not go after 123 00:10:06,960 --> 00:10:10,240 Speaker 1: the fifteen Ciffy. So our market was going to be 124 00:10:10,320 --> 00:10:15,719 Speaker 1: five thousand banks that have approximately nine tribuon and assets 125 00:10:15,760 --> 00:10:19,640 Speaker 1: about half of that and floating rate, and that would 126 00:10:19,640 --> 00:10:24,839 Speaker 1: be Regional's mid sized community banks. And if we had 127 00:10:25,040 --> 00:10:31,400 Speaker 1: breath as well as depth that the competitive markets like 128 00:10:31,600 --> 00:10:37,480 Speaker 1: wheat and soybeans and gold, et cetera, that were regulated 129 00:10:37,600 --> 00:10:43,840 Speaker 1: and we're transaction based, manipulation could not occur. And if 130 00:10:43,840 --> 00:10:47,719 Speaker 1: it occur, if it was regulated, we had policing and 131 00:10:47,880 --> 00:10:52,120 Speaker 1: enforcement powers. So we hooked up with sea Boat. We said, 132 00:10:52,280 --> 00:10:56,560 Speaker 1: here's our algorithm, here's our benchmarks. You have a big 133 00:10:56,600 --> 00:11:01,840 Speaker 1: compliance department, you're an s R. Oh want to securities exchange, 134 00:11:01,880 --> 00:11:07,000 Speaker 1: you own a commodities exchange. Why don't you be our 135 00:11:07,160 --> 00:11:11,880 Speaker 1: compliance folks and take a look at every single transaction, 136 00:11:12,080 --> 00:11:16,000 Speaker 1: have the complete tape, have a complete compliance thing, and 137 00:11:16,080 --> 00:11:21,840 Speaker 1: we will make sure that that we are not manipulable 138 00:11:22,120 --> 00:11:27,200 Speaker 1: and we will have to anti spoofing rules. Concentrations will 139 00:11:27,280 --> 00:11:32,239 Speaker 1: be limited, we will be able to speak to anybody. 140 00:11:32,280 --> 00:11:35,200 Speaker 1: We have a business conduct committee, we have a hundred 141 00:11:35,280 --> 00:11:38,959 Speaker 1: and twenty five page rule book of students, and don't 142 00:11:39,000 --> 00:11:42,000 Speaker 1: we have the ability to bring up a bank that 143 00:11:42,880 --> 00:11:48,080 Speaker 1: misbehaves and before a business conduct committee. We know how 144 00:11:48,120 --> 00:11:51,200 Speaker 1: to do this. So we set in place all of 145 00:11:51,320 --> 00:11:58,240 Speaker 1: the things that traditionally regulated and transportent markets perform. So 146 00:11:58,320 --> 00:12:02,920 Speaker 1: we started with four banks, we traded thirteen million a day. 147 00:12:03,080 --> 00:12:06,559 Speaker 1: We're up to a hundred and forty three banks, another 148 00:12:06,679 --> 00:12:11,400 Speaker 1: twelve hundred correspondents, so we have about thirty percent of 149 00:12:11,440 --> 00:12:15,400 Speaker 1: America's banks. We trade two and a half billion dollars 150 00:12:15,520 --> 00:12:20,760 Speaker 1: a day after four years, and we have eighty participants 151 00:12:20,880 --> 00:12:25,920 Speaker 1: in any given quarter a month, so we are deep 152 00:12:26,440 --> 00:12:31,199 Speaker 1: and we are broad. We also brought in iasco because 153 00:12:31,240 --> 00:12:35,320 Speaker 1: we thought it was important that we get independently audited 154 00:12:35,400 --> 00:12:42,040 Speaker 1: with regard to liquidity, concentration, etcetera. So an independent audit 155 00:12:42,280 --> 00:12:46,640 Speaker 1: was accurred by a major accounting firm that said we 156 00:12:46,640 --> 00:12:51,520 Speaker 1: were AYASCO compliant. When we hit a billion dollars a day, 157 00:12:51,679 --> 00:12:54,640 Speaker 1: we went and got to see FDC approval. They have 158 00:12:54,760 --> 00:12:58,240 Speaker 1: to make sure the index is viable before they allow 159 00:12:58,320 --> 00:13:02,800 Speaker 1: you to trade a future. And we have broadened the 160 00:13:03,040 --> 00:13:07,000 Speaker 1: market from not only hundred forty three banks, they include 161 00:13:07,240 --> 00:13:12,240 Speaker 1: all of the big regionals Regions, Northern Trust, the fifth Third, 162 00:13:12,320 --> 00:13:16,680 Speaker 1: et cetera, fifty percent of the banks just under between 163 00:13:16,760 --> 00:13:21,400 Speaker 1: five and sixty billion, and the twelve hundred community banks. 164 00:13:21,440 --> 00:13:26,600 Speaker 1: We also have Jefferies, the Progra dealers, insurance companies like 165 00:13:26,720 --> 00:13:31,960 Speaker 1: Northwestern Money Managers, Goggenheim just joined, and now we have 166 00:13:32,080 --> 00:13:37,600 Speaker 1: companies like John Deere. We feel that a transparent, regulated 167 00:13:37,880 --> 00:13:43,319 Speaker 1: market that has eighty participants, that does billions a day 168 00:13:44,160 --> 00:13:49,439 Speaker 1: is an adequate benchmark, and how you can see the tape. 169 00:13:50,240 --> 00:13:54,880 Speaker 1: Every trade is transparent, it can be monitored, it can 170 00:13:54,920 --> 00:13:59,920 Speaker 1: be audited, and so we feel we've just taken an 171 00:13:59,840 --> 00:14:05,679 Speaker 1: age old tradition that exists in Chicago, provide many buyers 172 00:14:05,760 --> 00:14:14,840 Speaker 1: and sellers of a broad commodity financial instrument, and the 173 00:14:15,080 --> 00:14:20,240 Speaker 1: rest will take care of itself. Richard, I want him 174 00:14:20,240 --> 00:14:23,720 Speaker 1: to go back to UM. I guess this's the notion 175 00:14:23,800 --> 00:14:25,600 Speaker 1: that you had that you you didn't have to have 176 00:14:25,680 --> 00:14:28,640 Speaker 1: a reference rate, a sort of one size fits all 177 00:14:28,800 --> 00:14:31,720 Speaker 1: reference rate. You could have shades of it. I have 178 00:14:31,840 --> 00:14:35,040 Speaker 1: maybe a stupid question, but some people would perhaps argue 179 00:14:35,320 --> 00:14:38,120 Speaker 1: that one of the good things about having a benchmark, 180 00:14:38,160 --> 00:14:43,160 Speaker 1: a single benchmark, is the simplicity how would you respond 181 00:14:43,280 --> 00:14:47,640 Speaker 1: to that idea? That's great. Simplicity is fine. If you're 182 00:14:47,640 --> 00:14:51,880 Speaker 1: willing to roll the entire world economy on simpleness, then 183 00:14:51,960 --> 00:14:56,760 Speaker 1: you get what you would get a total breakdown. You 184 00:14:56,840 --> 00:15:03,240 Speaker 1: get simplicity, you just get a financial crisis. Why would 185 00:15:03,280 --> 00:15:07,320 Speaker 1: you want Look, well, I'm a professional economist. I teach 186 00:15:07,360 --> 00:15:10,600 Speaker 1: at the University of Chicago. I've been doing it for 187 00:15:10,600 --> 00:15:16,680 Speaker 1: forty five years. The economists don't know anything. Okay, we 188 00:15:16,880 --> 00:15:22,240 Speaker 1: can't forecast, we haven't foreseen two major crisis is meltdowns 189 00:15:22,720 --> 00:15:25,880 Speaker 1: things of this thing, there's only one thing you could 190 00:15:25,880 --> 00:15:29,680 Speaker 1: probably get every economist. So if you go to China, 191 00:15:29,840 --> 00:15:32,920 Speaker 1: you go to London, Roxford, you go to the University 192 00:15:32,920 --> 00:15:37,000 Speaker 1: of Chicago, one and only one thing will everybody agree on, 193 00:15:37,880 --> 00:15:43,960 Speaker 1: and that is diversification. Right, that's you probably will get. 194 00:15:44,120 --> 00:15:49,800 Speaker 1: Nobody will argue against diversification. R Right. It's the one 195 00:15:49,840 --> 00:15:52,200 Speaker 1: thing we know. I don't know whether the market is 196 00:15:52,240 --> 00:15:55,400 Speaker 1: going to go up or down, whether it's gonna crash, 197 00:15:55,600 --> 00:15:59,520 Speaker 1: fall apart. We don't know anything in finance. And he 198 00:15:59,640 --> 00:16:05,600 Speaker 1: can which other than choice and diversification is good. So obviously, um, 199 00:16:05,640 --> 00:16:09,800 Speaker 1: you know, as you say, diversification of things are good. 200 00:16:10,400 --> 00:16:14,960 Speaker 1: The dependent on a single librlar proved to be problematic. 201 00:16:16,040 --> 00:16:19,880 Speaker 1: As we set up in the intro, regulators are pushing 202 00:16:20,040 --> 00:16:23,560 Speaker 1: for this Libel replacement SOFA which we've discussed based on 203 00:16:23,920 --> 00:16:29,280 Speaker 1: overnight secured financing. Your you take a different approach. Can 204 00:16:29,320 --> 00:16:34,120 Speaker 1: your vision, your index thrive in a world in which 205 00:16:34,160 --> 00:16:37,280 Speaker 1: regulators are pushing for everything out or pushing for another 206 00:16:37,400 --> 00:16:41,920 Speaker 1: sort of universal Libel replacement? And can we have this 207 00:16:42,000 --> 00:16:45,040 Speaker 1: sort of diversification even if regulators sort of have the 208 00:16:45,080 --> 00:16:52,240 Speaker 1: specification we I don't think regulators are as singular in 209 00:16:52,360 --> 00:17:00,800 Speaker 1: their attitudes and thought processes as the popular press with indicate. 210 00:17:01,160 --> 00:17:07,760 Speaker 1: For the financial press, we have spoken to them and uh, 211 00:17:08,240 --> 00:17:12,119 Speaker 1: that is that we've brief because this is how we operate. 212 00:17:12,280 --> 00:17:15,439 Speaker 1: We for the last five years, we go down in Washington, 213 00:17:15,560 --> 00:17:17,879 Speaker 1: we brief the FED, the O C C B F 214 00:17:18,040 --> 00:17:23,240 Speaker 1: D I C B SEC, that's the FDC. And when 215 00:17:23,800 --> 00:17:27,680 Speaker 1: I say to them what I am sharing with you, 216 00:17:28,520 --> 00:17:32,600 Speaker 1: that there should be a free market for ideas and 217 00:17:32,760 --> 00:17:38,760 Speaker 1: competition for ideas, not one, not a singular one, said 218 00:17:38,880 --> 00:17:44,640 Speaker 1: that's a bad idea. Okay, they have not said they 219 00:17:44,680 --> 00:17:50,040 Speaker 1: are officially neutral. Um, we already have our premise from 220 00:17:50,080 --> 00:17:54,359 Speaker 1: twenty eleven being validated. We got so Fur, we got Sonia, 221 00:17:54,520 --> 00:17:58,520 Speaker 1: and we got Tona. We did Esther. We're already breaking 222 00:17:58,600 --> 00:18:02,920 Speaker 1: down the idea. It a simple idea. Now, why would 223 00:18:03,000 --> 00:18:06,240 Speaker 1: you have only a risk re rate. You need a 224 00:18:06,400 --> 00:18:09,959 Speaker 1: risk rate because in fact, what we've learned in the 225 00:18:10,080 --> 00:18:15,080 Speaker 1: last two crisises, there's a flight to quality and interest 226 00:18:15,200 --> 00:18:21,359 Speaker 1: rates between government guaranteed paper and private uh borrowing non 227 00:18:21,520 --> 00:18:29,000 Speaker 1: public diverge on crisis is and secularly when there's a recession. 228 00:18:29,160 --> 00:18:33,679 Speaker 1: So you need a credit component in an index. We 229 00:18:33,800 --> 00:18:38,000 Speaker 1: are the only index that has a credit component. Five 230 00:18:38,080 --> 00:18:46,360 Speaker 1: thousand American banks want to develop assets which reflect their 231 00:18:46,440 --> 00:18:50,360 Speaker 1: borrowing costs so they can match the two in an 232 00:18:50,400 --> 00:18:55,080 Speaker 1: asset liability management process. So if you want to make 233 00:18:55,119 --> 00:19:00,840 Speaker 1: the banking system stable, you should develop floating rate assets 234 00:19:00,920 --> 00:19:07,720 Speaker 1: that reflect the floating rate costs. And for five thousand 235 00:19:07,840 --> 00:19:14,440 Speaker 1: American banks, the risk free rate is fabulous. We believe 236 00:19:14,520 --> 00:19:17,800 Speaker 1: in So for we think it's a great thing, it's terrific. 237 00:19:17,960 --> 00:19:21,840 Speaker 1: For the money center banks it doesn't fit and the 238 00:19:22,040 --> 00:19:27,000 Speaker 1: five thousand small banks. Getting back to my opening comment 239 00:19:27,119 --> 00:19:31,800 Speaker 1: about social purpose, we had Jeremy Stein with who is 240 00:19:31,840 --> 00:19:35,200 Speaker 1: the chair of the Harvard Economics Department. We funded a 241 00:19:35,320 --> 00:19:40,800 Speaker 1: lecture at Northwestern two years ago, and it's unambiguous that 242 00:19:40,800 --> 00:19:47,400 Speaker 1: that these midsize, regional, and small banks disproportionately create jobs 243 00:19:47,440 --> 00:19:51,640 Speaker 1: in America. This is a critical time in our economy 244 00:19:51,880 --> 00:19:58,240 Speaker 1: in the world. Why would one be against the institutions 245 00:19:58,280 --> 00:20:06,840 Speaker 1: that function and provide financing to America's businesses, small businesses 246 00:20:06,880 --> 00:20:13,240 Speaker 1: which disproportionally create jobs. I don't get that opposition. It's 247 00:20:13,320 --> 00:20:18,560 Speaker 1: like being in a Madrid painting. It's surreal. Richard, you're 248 00:20:18,600 --> 00:20:22,040 Speaker 1: talking about the importance of having a credit component in 249 00:20:22,520 --> 00:20:25,840 Speaker 1: uh this benchmark reference rate. I wanted to ask you, 250 00:20:27,119 --> 00:20:31,320 Speaker 1: I think the loans that you're looking at include not 251 00:20:31,440 --> 00:20:36,239 Speaker 1: just loans between banks, but also between broker dealers and 252 00:20:36,680 --> 00:20:40,359 Speaker 1: private equity as well. UM. I think that's right. Could 253 00:20:40,359 --> 00:20:43,080 Speaker 1: you maybe talk a little bit about why you thought 254 00:20:43,119 --> 00:20:47,480 Speaker 1: it was important to include those entities as well. Yeah, 255 00:20:47,640 --> 00:20:50,679 Speaker 1: I I think the job is not only to create 256 00:20:50,840 --> 00:20:55,600 Speaker 1: liquidity in the banking system, but it is the bridge 257 00:20:55,760 --> 00:20:59,840 Speaker 1: the market between the banking system and the capital market. 258 00:21:00,080 --> 00:21:04,120 Speaker 1: And if you have Serberis or Jefferies or John Deere 259 00:21:04,320 --> 00:21:10,879 Speaker 1: or Northwestern Mutual that also resources of liquidity, then you 260 00:21:11,080 --> 00:21:15,720 Speaker 1: bring to bear the power of more and more players 261 00:21:15,840 --> 00:21:21,159 Speaker 1: and greater breath to the market. So that's why we 262 00:21:21,880 --> 00:21:25,919 Speaker 1: and all of those folks either have floating rate assets, 263 00:21:26,119 --> 00:21:30,399 Speaker 1: they have asset liability management, they have capital market debt. 264 00:21:31,000 --> 00:21:38,000 Speaker 1: So there's a natural nexus. And why libar was confined 265 00:21:38,119 --> 00:21:44,200 Speaker 1: only to banks again is a historical accident. And if 266 00:21:44,200 --> 00:21:47,800 Speaker 1: you wanted to design it was like saying, Okay, I'm 267 00:21:47,800 --> 00:21:50,320 Speaker 1: gonna design a car, and it's going to be a 268 00:21:50,359 --> 00:21:54,720 Speaker 1: two wheeler like a bicycle, because everything before has two wheels, 269 00:21:54,760 --> 00:21:57,480 Speaker 1: and therefore I don't care if it's a car and 270 00:21:57,560 --> 00:22:00,680 Speaker 1: needs four wheels. It's like a bicycle, So let's make 271 00:22:00,720 --> 00:22:04,960 Speaker 1: it a two wheeling. If you broke down almost anything 272 00:22:05,080 --> 00:22:09,440 Speaker 1: you do, and if you look at inventive activity, you 273 00:22:09,600 --> 00:22:12,880 Speaker 1: tailor it to what the more it needs and wants. 274 00:22:13,400 --> 00:22:17,600 Speaker 1: And again we're struck by well, that's the way. You know, 275 00:22:17,840 --> 00:22:20,960 Speaker 1: my grandfather used to do it, so I'm gonna do 276 00:22:21,040 --> 00:22:35,359 Speaker 1: it the same way. Richard. Here's what I'm trying to 277 00:22:35,720 --> 00:22:38,600 Speaker 1: still wrap my head around, because what you're saying makes 278 00:22:38,640 --> 00:22:42,159 Speaker 1: a lot of sense that it doesn't necessarily benefit the 279 00:22:42,359 --> 00:22:46,640 Speaker 1: country as a whole to have a lending index. That's 280 00:22:46,640 --> 00:22:50,840 Speaker 1: heavily skewed towards built around the big banks, that smaller companies, 281 00:22:50,920 --> 00:22:55,600 Speaker 1: real economy companies like dear local banks key for job creation. 282 00:22:56,640 --> 00:23:02,040 Speaker 1: All that big said, how does it in practice? How 283 00:23:02,160 --> 00:23:07,600 Speaker 1: does the use of a mirrabor your index improve actual 284 00:23:07,680 --> 00:23:11,840 Speaker 1: business functioning versus some of these other benchmarks when it 285 00:23:11,880 --> 00:23:16,120 Speaker 1: comes to the actual writing of loans and other deals 286 00:23:16,160 --> 00:23:20,240 Speaker 1: that need some index to be built up. Two ways. 287 00:23:20,440 --> 00:23:25,040 Speaker 1: I remember that the banks lend not based on a 288 00:23:25,160 --> 00:23:31,640 Speaker 1: risk free rate, right, so if you if they are 289 00:23:31,760 --> 00:23:38,359 Speaker 1: forced to create assets that are are risk free, then 290 00:23:39,280 --> 00:23:43,600 Speaker 1: there will be volatility in their assets and liability. It 291 00:23:43,760 --> 00:23:49,560 Speaker 1: will create uncertainty, it will reduce profitability, and therefore it 292 00:23:49,640 --> 00:23:55,639 Speaker 1: will cause interest rates and profitability of banks to be 293 00:23:55,800 --> 00:23:58,760 Speaker 1: lowered or account for the risks they take, and interest 294 00:23:58,840 --> 00:24:03,240 Speaker 1: rates to be high for borrowers to reflect the increase 295 00:24:03,920 --> 00:24:15,880 Speaker 1: volatility associated with running the business. It's just like competition narrows. 296 00:24:16,040 --> 00:24:22,840 Speaker 1: They spread between wholesale and retail prices. And it's true 297 00:24:22,920 --> 00:24:27,760 Speaker 1: for supermarkets, car dealers, and it's true for interest rates. 298 00:24:27,880 --> 00:24:32,920 Speaker 1: The more you get and the more the commodity becomes homogenious, 299 00:24:33,600 --> 00:24:38,840 Speaker 1: the greater the benefits to the institutions. Through higher probability 300 00:24:39,040 --> 00:24:42,959 Speaker 1: and to the consumers through lower costs. It's no different 301 00:24:43,040 --> 00:24:47,680 Speaker 1: than any other commodity. Richard, you spoke a little bit 302 00:24:47,720 --> 00:24:51,840 Speaker 1: about adoption of a marabor. I guess I'm curious, what's 303 00:24:51,920 --> 00:24:55,320 Speaker 1: the what's the next step for the reference rate to 304 00:24:55,440 --> 00:25:00,800 Speaker 1: Joyce to Joe's point, when does like what would it 305 00:25:00,840 --> 00:25:03,720 Speaker 1: take for adoption to really sort of take offer? What 306 00:25:03,800 --> 00:25:08,880 Speaker 1: are you aiming for? Great question, You guys are super 307 00:25:09,160 --> 00:25:13,200 Speaker 1: gonna smile on my day. So so in twenty eleven 308 00:25:13,200 --> 00:25:17,280 Speaker 1: when we did this why experience, whether it was bond 309 00:25:17,400 --> 00:25:21,080 Speaker 1: futures or as IT rate or anything, it takes a 310 00:25:21,160 --> 00:25:24,480 Speaker 1: decade to develop a market. So in twenty eleven we 311 00:25:24,600 --> 00:25:28,920 Speaker 1: said this is going to take ten to fifteen years. 312 00:25:29,320 --> 00:25:33,320 Speaker 1: Zero to two is toddler, two to five is kind 313 00:25:33,320 --> 00:25:39,680 Speaker 1: of teenager and young adult, and five to fifteen is adulthood. 314 00:25:39,800 --> 00:25:44,400 Speaker 1: We're eight years into the process. We got lucky when 315 00:25:44,440 --> 00:25:48,200 Speaker 1: we said ten years that the and it was no judgment. 316 00:25:48,240 --> 00:25:50,560 Speaker 1: It was a stroke of luck that we called for 317 00:25:50,600 --> 00:25:56,040 Speaker 1: a ten year arise and just when live or ended one. 318 00:25:56,960 --> 00:26:01,080 Speaker 1: So we now have an it. This is true whether 319 00:26:01,119 --> 00:26:06,199 Speaker 1: it's the personal computer you know, or or the iPhone 320 00:26:07,119 --> 00:26:10,400 Speaker 1: these things take a generation to go. So we are 321 00:26:10,440 --> 00:26:16,760 Speaker 1: now getting banks that are starting to price the loans 322 00:26:16,960 --> 00:26:20,560 Speaker 1: that they make based on a Merra board fifty million, 323 00:26:21,000 --> 00:26:27,160 Speaker 1: twenty million hred midion. They show on their graphs that 324 00:26:27,280 --> 00:26:31,480 Speaker 1: they have a high correlation to the old librar, so 325 00:26:31,520 --> 00:26:38,520 Speaker 1: it's very easy days to educate customers. Equally, as we 326 00:26:38,640 --> 00:26:43,240 Speaker 1: have adoption of floating rate, they're using a thirty day 327 00:26:43,560 --> 00:26:47,719 Speaker 1: average because they can go onto Bloomberg, they can go 328 00:26:47,800 --> 00:26:52,000 Speaker 1: on to you know, any vand or or marrabor dot 329 00:26:52,080 --> 00:26:57,120 Speaker 1: net see the price of this perfect transparency, and they're 330 00:26:57,240 --> 00:27:02,160 Speaker 1: using a thirty day average. On June eight, we will 331 00:27:02,240 --> 00:27:09,560 Speaker 1: launch a monthly futures contract on the thirty day average 332 00:27:09,560 --> 00:27:15,240 Speaker 1: AMORBOR to reflect what banks are pricing loans to auto 333 00:27:15,359 --> 00:27:21,639 Speaker 1: dealers in Memphis and small milk farmers in Wisconsin, me 334 00:27:21,960 --> 00:27:29,399 Speaker 1: you know, hundred million dollar manufacturing companies in Arkansas. That's 335 00:27:29,400 --> 00:27:32,520 Speaker 1: how the loans are going to get priced. And then 336 00:27:32,720 --> 00:27:38,240 Speaker 1: once that happens, we will UH and we are educating 337 00:27:38,359 --> 00:27:42,680 Speaker 1: swap dealers now who already deal with these banks to 338 00:27:42,920 --> 00:27:50,960 Speaker 1: swap floating to fix um and the swap dealers will 339 00:27:51,040 --> 00:27:54,720 Speaker 1: be matched with a bank whose issue they floating rate 340 00:27:54,840 --> 00:27:59,000 Speaker 1: loan to a corporate, they will develop a swap. The 341 00:27:59,080 --> 00:28:02,560 Speaker 1: swap will be hedged in the futures, and that is 342 00:28:02,760 --> 00:28:07,280 Speaker 1: the final link in the maturity of the market. So 343 00:28:07,320 --> 00:28:11,560 Speaker 1: as we see banks adopt marra bor is a benchmark, 344 00:28:12,080 --> 00:28:17,200 Speaker 1: give it to corporates and small businesses on loans, then 345 00:28:17,280 --> 00:28:20,439 Speaker 1: the banks go to either money center bank or a 346 00:28:20,520 --> 00:28:23,920 Speaker 1: large bank to do a swap, and then that feeds 347 00:28:23,960 --> 00:28:29,080 Speaker 1: the future, and then it's just a matter of replication, 348 00:28:29,359 --> 00:28:34,679 Speaker 1: and we figure that's probably to to to five years 349 00:28:35,200 --> 00:28:40,320 Speaker 1: we will see the ultimate broader adoption of a merabor 350 00:28:40,760 --> 00:28:46,959 Speaker 1: as a benchmark um. And and again we see a 351 00:28:47,000 --> 00:28:51,360 Speaker 1: world in which Sonja so for a merabor. You know, 352 00:28:51,480 --> 00:28:54,920 Speaker 1: there'll be a rate in Europe, We've already educated some 353 00:28:55,040 --> 00:28:59,720 Speaker 1: central bankers there, uh, and there'll be a rate in 354 00:29:00,120 --> 00:29:05,200 Speaker 1: China that that the whole benchmark will be disrupted and 355 00:29:05,240 --> 00:29:14,520 Speaker 1: we'll see a whole family of different rates. Alright, Richard, Well, 356 00:29:14,560 --> 00:29:17,080 Speaker 1: we'll have to have you back on in a few 357 00:29:17,160 --> 00:29:19,720 Speaker 1: years to talk about what's going on with the marabor 358 00:29:20,040 --> 00:29:23,760 Speaker 1: um in the US and also potentially some reference rates 359 00:29:23,880 --> 00:29:26,120 Speaker 1: outside of the US as well. Thank you so much 360 00:29:26,120 --> 00:29:29,240 Speaker 1: for coming on off. This is my pleasure. Thank you. 361 00:29:29,240 --> 00:29:34,720 Speaker 1: Your questions were intelligent, well thought out. Thank you very much. 362 00:29:34,800 --> 00:29:44,240 Speaker 1: Thank you. That was great. His point about how there's 363 00:29:44,280 --> 00:29:47,160 Speaker 1: no reason why you have to have a single benchmark, 364 00:29:47,360 --> 00:29:51,000 Speaker 1: and it's kind of weird that for something as important 365 00:29:51,200 --> 00:29:54,440 Speaker 1: as this sort of blending or interbank benchmark, that you 366 00:29:54,520 --> 00:29:56,880 Speaker 1: only have a single one. I think that's really interesting. 367 00:29:57,440 --> 00:30:00,000 Speaker 1: I did too. I also think it's interesting this idea 368 00:30:00,360 --> 00:30:05,120 Speaker 1: of wanting a credit component in the benchmark itself, because 369 00:30:05,160 --> 00:30:08,040 Speaker 1: of course so FUR it's like, the idea is that 370 00:30:08,080 --> 00:30:11,240 Speaker 1: really shouldn't be much of a credit component. It's secured 371 00:30:11,800 --> 00:30:14,480 Speaker 1: and so on. But then of course, if you're going 372 00:30:14,560 --> 00:30:16,800 Speaker 1: to build a loan on top of SOFA that you 373 00:30:16,800 --> 00:30:20,920 Speaker 1: have to calculate a credit spread or some sort of market, 374 00:30:21,320 --> 00:30:23,400 Speaker 1: the market will determined to spread on top of that. 375 00:30:23,800 --> 00:30:27,080 Speaker 1: So it'll be interesting to see if it makes more 376 00:30:27,280 --> 00:30:30,400 Speaker 1: sense and to his point sort of a local regional 377 00:30:30,480 --> 00:30:34,200 Speaker 1: company capital efficiency, if it makes more sense to have 378 00:30:34,400 --> 00:30:39,400 Speaker 1: a benchmark that includes the sort of the credit conditions 379 00:30:39,480 --> 00:30:44,040 Speaker 1: of the American economy overall. Yeah, and that risk free 380 00:30:44,320 --> 00:30:47,800 Speaker 1: rate idea that's embedded in SOFUR, I mean that's very 381 00:30:47,880 --> 00:30:51,239 Speaker 1: different to the original concept of live or and so 382 00:30:51,360 --> 00:30:54,720 Speaker 1: from that perspective, you could see something like a Maribor 383 00:30:54,800 --> 00:30:57,240 Speaker 1: that does include that credit risk component. You could see 384 00:30:57,280 --> 00:31:02,720 Speaker 1: that trading much more close lead to Libor then, so 385 00:31:02,840 --> 00:31:06,160 Speaker 1: for I think, yeah, exactly right. Of course, even if 386 00:31:06,160 --> 00:31:09,080 Speaker 1: you look at on our terminal right now, you see 387 00:31:09,080 --> 00:31:14,320 Speaker 1: there's a pretty big noticeable spread between Maraboror and so 388 00:31:14,520 --> 00:31:17,800 Speaker 1: for as it is right now. So, uh, it will 389 00:31:17,840 --> 00:31:20,120 Speaker 1: be interesting. Again. It sort of goes back to this 390 00:31:20,440 --> 00:31:23,360 Speaker 1: idea of all of these things, whether we're talking about 391 00:31:23,400 --> 00:31:26,120 Speaker 1: the reference rate, whether we're talking about a currency as 392 00:31:26,200 --> 00:31:30,840 Speaker 1: sort of de facto social networks and or at least 393 00:31:30,920 --> 00:31:34,800 Speaker 1: having big network effects. So obviously live Or had the 394 00:31:34,880 --> 00:31:38,080 Speaker 1: ultimate network effect, but then it's sort of faded. But 395 00:31:38,200 --> 00:31:40,760 Speaker 1: we'll see. It'll be interesting to see if Ameribor can 396 00:31:40,800 --> 00:31:44,520 Speaker 1: get enough traction so that people feel value and continuing 397 00:31:44,560 --> 00:31:46,360 Speaker 1: to use it, which is a good reason to have 398 00:31:47,160 --> 00:31:50,040 Speaker 1: Richard back any I don't know, six months or a 399 00:31:50,120 --> 00:31:54,800 Speaker 1: year or something like that. Yeah, for sure. I'm Tracy Alloway. 400 00:31:54,960 --> 00:31:58,920 Speaker 1: You can follow me on Twitter at Tracy Alloway, and 401 00:31:58,960 --> 00:32:01,600 Speaker 1: I'm Joe wasn't All. You can follow me on Twitter 402 00:32:01,720 --> 00:32:05,160 Speaker 1: at the Stalwart. You should follow our producer on Twitter. 403 00:32:05,480 --> 00:32:09,400 Speaker 1: Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg 404 00:32:09,480 --> 00:32:12,960 Speaker 1: head of podcast, Francesca Leavie at Francesca Today, as well 405 00:32:13,000 --> 00:32:15,719 Speaker 1: as all of the Bloomberg podcast that can be found 406 00:32:16,200 --> 00:32:19,160 Speaker 1: under the handle at podcasts. Thanks for listening.