WEBVTT - The Case for AMERIBOR As The Replacement for LIBOR 0:00:11.240 --> 0:00:14.640 Hello, and welcome to another episode of the Odd Thoughts podcast. 0:00:14.720 --> 0:00:18.680 I'm Tracy Alloway and I'm Joe. Wasn't all so Joe. 0:00:18.800 --> 0:00:22.599 This is the third episode of our Live Bard series. 0:00:23.120 --> 0:00:24.520 You know, I said it in the beginning, and it 0:00:24.600 --> 0:00:27.240 was a big, facetious This is one of those things 0:00:27.320 --> 0:00:30.600 that I felt was extremely important to understand that I 0:00:30.640 --> 0:00:33.880 didn't have much knowledge on, and so I'm very happy 0:00:33.920 --> 0:00:36.760 that we finally working through all that. You know, our 0:00:36.800 --> 0:00:40.839 first episode we sort of talked about the problems with 0:00:40.960 --> 0:00:45.160 librar pre financial crisis and post financial crisis, and then 0:00:45.159 --> 0:00:47.320 in the second episode we talked a lot about the 0:00:47.360 --> 0:00:52.200 transition away from library and how that's going. In this episode, 0:00:52.400 --> 0:00:55.720 we are going to talk to someone who's actually actively 0:00:55.840 --> 0:01:00.520 trying to come up with an alternative reference rate. Yeah. 0:01:00.560 --> 0:01:03.760 It's interesting because I know that there is a very 0:01:03.800 --> 0:01:06.640 big push a foot to move you know, as we've 0:01:06.640 --> 0:01:10.960 talked about from libor over to so FUR, and they're 0:01:11.000 --> 0:01:15.120 all kinds of efforts going on for that front. But 0:01:15.240 --> 0:01:20.400 I guess that is not the only theoretical alternative approach. Yeah, exactly. So, 0:01:20.440 --> 0:01:23.960 even though there's this regulatory push towards the security overnight 0:01:24.000 --> 0:01:28.080 financing rate or so fur there are well, there is 0:01:28.120 --> 0:01:31.760 the potential for alternative rates to enter the market, and 0:01:32.040 --> 0:01:35.000 we have the perfect person to talk about this. We're 0:01:35.000 --> 0:01:38.319 gonna be speaking with Richard Sandor. He's the chairman and 0:01:38.440 --> 0:01:42.679 CEO of the American Financial Exchange, also someone who occasionally 0:01:42.720 --> 0:01:46.400 is referred to as the father of financial futures, has 0:01:46.440 --> 0:01:49.840 a lot of experience in the derivatives market and has 0:01:50.240 --> 0:01:54.520 well invented quite a few contracts over the years. So again, 0:01:54.560 --> 0:01:58.200 the perfect person. I'm really looking forward to this. Okay, 0:01:58.280 --> 0:02:00.920 let's bring him on. Richard, thank you so much for 0:02:01.160 --> 0:02:05.400 coming on offts. Oh, it's my pleasure. Thank you for 0:02:05.440 --> 0:02:09.760 the invitation, and I'm happy to be here with both 0:02:09.800 --> 0:02:14.560 of you. Thank you, thank you. So I gave a 0:02:14.560 --> 0:02:17.040 little bit of an intro just then. Um, but it's 0:02:17.080 --> 0:02:20.560 kind of hard to summarize your career because it's quite 0:02:20.600 --> 0:02:24.440 expensive and you've done quite a few things. Can can 0:02:24.480 --> 0:02:27.080 you try to summarize it in a in a nutshell 0:02:27.160 --> 0:02:30.079 for our viewers, viewers, for our listeners. I should say, 0:02:30.440 --> 0:02:33.840 it's really hard to talk about yourself. I leave that 0:02:34.040 --> 0:02:37.760 to others generally, But let's say I'm a serial and 0:02:38.080 --> 0:02:43.079 the inventor and the financial innovator. I get it wrong 0:02:43.120 --> 0:02:46.760 a bunch of times and then get it right too. 0:02:46.919 --> 0:02:54.360 So I've spent forty five years trying to observe capital 0:02:54.440 --> 0:03:02.600 markets and see what instruments can be developed to minimize 0:03:02.720 --> 0:03:11.160 transaction costs and achieve social objectives. And Library and its 0:03:11.240 --> 0:03:18.560 successors fit into that. And like most inventive activity, there's 0:03:18.600 --> 0:03:23.280 a spark. And we had sold our last exchange, which 0:03:23.520 --> 0:03:27.760 was a series of market based solutions to global warming, 0:03:28.320 --> 0:03:34.079 two ice in twenty ten. UM. It was very successful. 0:03:34.160 --> 0:03:37.720 Our investors made seven and a half to fifteen times 0:03:37.800 --> 0:03:41.760 their money between oh three and ten. A sale price 0:03:41.920 --> 0:03:46.080 was six hundred million. And we had developed exchanges in 0:03:46.240 --> 0:03:54.040 North America, the UK and China, and we reformed the incubator, 0:03:54.680 --> 0:03:59.040 which is something called the FP because we were looking 0:03:59.200 --> 0:04:04.840 for new markets and we started to look at water. UM. 0:04:04.960 --> 0:04:07.520 We had a contract with the state of New Mexico, 0:04:07.840 --> 0:04:12.360 California looking at China because we thought that water would 0:04:12.360 --> 0:04:15.840 be and still do think the commodity of the twenty 0:04:16.000 --> 0:04:20.760 first century. I picked up a newspaper in twenty eleven 0:04:21.160 --> 0:04:25.280 UH and read that the Royal Bank of Scotland fired 0:04:25.600 --> 0:04:31.160 four people for manipulating library. Uh called the team in 0:04:31.640 --> 0:04:37.480 and even I know it takes two to manipulate. So 0:04:37.640 --> 0:04:40.440 if there was one, then there was going to be 0:04:40.480 --> 0:04:45.400 a second, and we by no really expanded too. Would 0:04:45.480 --> 0:04:50.159 go to four, four, would go to eight, etcetera. And 0:04:50.240 --> 0:04:54.880 that ultimately we thought that there would be a demise 0:04:55.160 --> 0:04:58.480 in library, it would end, and that we would set 0:04:58.520 --> 0:05:06.000 off on a ten year odyssey to develop a replacement 0:05:06.279 --> 0:05:14.240 to librar. Library was unusual and in that it was 0:05:14.320 --> 0:05:18.960 the only asset class that I knew about that had 0:05:19.000 --> 0:05:24.080 a single benchmark, all because of alone in the sixties 0:05:24.160 --> 0:05:26.880 to the shah Iran. If you take a look at 0:05:26.960 --> 0:05:30.400 crude oil, it's got w t I, it's got brand, 0:05:31.240 --> 0:05:34.920 it's got Dubai, it's now gonna Shanghai. If we look 0:05:34.960 --> 0:05:41.680 at the equity markets, they have Nastack SMP, Dow Russell 0:05:42.000 --> 0:05:48.760 Value Line, more stock indexes than there are stocks, and 0:05:48.920 --> 0:05:53.400 the same with fixed income. So what is this anomaly 0:05:53.800 --> 0:05:59.760 called library? And how could we have hundreds of trillions 0:06:00.160 --> 0:06:05.800 dollars tied to a pole that would be like electing 0:06:06.560 --> 0:06:09.799 the president of the United States based on the Wall 0:06:09.839 --> 0:06:14.640 Street Journal poll. It made no sense whatsoever that it 0:06:14.760 --> 0:06:19.400 was the only benchmark, and it wasn't even market determined. 0:06:20.000 --> 0:06:24.039 So we set out and said, let's develop something that 0:06:24.560 --> 0:06:32.279 is everything that Libor isn't. Let's make it transparent, let's 0:06:32.320 --> 0:06:37.520 make it regulated, let's make it based on transactions only, 0:06:38.480 --> 0:06:43.080 and let's make it American. London has lib Or, Europe 0:06:43.080 --> 0:06:48.919 as Europe, or even Hong Kong as UH high bor. 0:06:48.960 --> 0:06:53.000 How could it be that the world's largest economy didn't 0:06:53.000 --> 0:06:58.800 have its own benchmark. So UM I got on a 0:06:58.880 --> 0:07:04.160 plane and instead of going to London, Parish, Shanghai, Hong Kong, 0:07:05.000 --> 0:07:14.040 uh and Vienna, etcetera, I ended up in Bentonville, Arkansas, Tupelo, Mississippi, 0:07:14.440 --> 0:07:20.600 San Antonio, Texas, Green Bay, Wisconsin and visited a hundred 0:07:20.600 --> 0:07:26.560 and twenty five small banks with my colleague. So if 0:07:26.600 --> 0:07:29.240 it was going to be a benchmark, it would be 0:07:29.720 --> 0:07:38.840 one that was based on American banks overnight, unsecured lending 0:07:38.920 --> 0:07:44.680 to each other. We were naturally viewed with some skepticism. 0:07:44.840 --> 0:07:50.360 Interest rates for zero. People said library is never gonna 0:07:50.400 --> 0:07:55.800 go away. You don't understand, Dr Sandor, this is the 0:07:55.920 --> 0:08:01.360 bedrock of all finance, and your climbing up a mountain 0:08:01.720 --> 0:08:04.960 and you need to go back to Chicago, because not, 0:08:05.680 --> 0:08:12.240 that's not the way it works. We felt quite opposite, 0:08:12.280 --> 0:08:17.280 and actually as a contrariant and as an inventor, that 0:08:17.400 --> 0:08:23.360 was really bullish because everybody thought that there was no 0:08:23.480 --> 0:08:27.720 need for it. And oftentimes in my experience, whether it's 0:08:27.800 --> 0:08:33.080 financial futures, the derivatives, everybody said no need for it. 0:08:33.160 --> 0:08:36.000 Whether it was acid rain and the mark and no 0:08:36.120 --> 0:08:40.760 need for it, catastrophe bonds, no need for it, climate 0:08:40.840 --> 0:08:44.720 change no not happening, no need for it. So whatever 0:08:44.880 --> 0:08:51.679 small success I've had, it's been where the lights and 0:08:51.880 --> 0:08:55.960 beacon of the industry has told me that there's no 0:08:56.080 --> 0:09:11.880 need for it. So talk to us about your approach. 0:09:12.000 --> 0:09:15.520 You mentioned the sort of absurdity that the world operated 0:09:15.800 --> 0:09:18.400 on a single benchmark, even though most things, whether it's 0:09:18.440 --> 0:09:23.200 doctor or multiple benchmarks all around the world. What is 0:09:23.240 --> 0:09:28.720 it about the way that UM your index would be 0:09:28.800 --> 0:09:33.760 constructed that's a better for use. Why regionalization is good 0:09:34.080 --> 0:09:37.760 but also less prone to some of the manipulation issues 0:09:37.840 --> 0:09:41.760 that of course accelerated or caused live worth of mine 0:09:42.480 --> 0:09:47.800 great questions. So we again we thought that we would 0:09:47.840 --> 0:09:54.520 stay away from siffy UM the systemically important financial institutions, 0:09:54.600 --> 0:09:59.920 and we would go to recruit the five thousand by 0:10:00.000 --> 0:10:06.800 inks Um that were non citfies and not go after 0:10:06.960 --> 0:10:10.240 the fifteen Ciffy. So our market was going to be 0:10:10.320 --> 0:10:15.719 five thousand banks that have approximately nine tribuon and assets 0:10:15.760 --> 0:10:19.640 about half of that and floating rate, and that would 0:10:19.640 --> 0:10:24.839 be Regional's mid sized community banks. And if we had 0:10:25.040 --> 0:10:31.400 breath as well as depth that the competitive markets like 0:10:31.600 --> 0:10:37.480 wheat and soybeans and gold, et cetera, that were regulated 0:10:37.600 --> 0:10:43.840 and we're transaction based, manipulation could not occur. And if 0:10:43.840 --> 0:10:47.719 it occur, if it was regulated, we had policing and 0:10:47.880 --> 0:10:52.120 enforcement powers. So we hooked up with sea Boat. We said, 0:10:52.280 --> 0:10:56.560 here's our algorithm, here's our benchmarks. You have a big 0:10:56.600 --> 0:11:01.840 compliance department, you're an s R. Oh want to securities exchange, 0:11:01.880 --> 0:11:07.000 you own a commodities exchange. Why don't you be our 0:11:07.160 --> 0:11:11.880 compliance folks and take a look at every single transaction, 0:11:12.080 --> 0:11:16.000 have the complete tape, have a complete compliance thing, and 0:11:16.080 --> 0:11:21.840 we will make sure that that we are not manipulable 0:11:22.120 --> 0:11:27.200 and we will have to anti spoofing rules. Concentrations will 0:11:27.280 --> 0:11:32.239 be limited, we will be able to speak to anybody. 0:11:32.280 --> 0:11:35.200 We have a business conduct committee, we have a hundred 0:11:35.280 --> 0:11:38.959 and twenty five page rule book of students, and don't 0:11:39.000 --> 0:11:42.000 we have the ability to bring up a bank that 0:11:42.880 --> 0:11:48.080 misbehaves and before a business conduct committee. We know how 0:11:48.120 --> 0:11:51.200 to do this. So we set in place all of 0:11:51.320 --> 0:11:58.240 the things that traditionally regulated and transportent markets perform. So 0:11:58.320 --> 0:12:02.920 we started with four banks, we traded thirteen million a day. 0:12:03.080 --> 0:12:06.559 We're up to a hundred and forty three banks, another 0:12:06.679 --> 0:12:11.400 twelve hundred correspondents, so we have about thirty percent of 0:12:11.440 --> 0:12:15.400 America's banks. We trade two and a half billion dollars 0:12:15.520 --> 0:12:20.760 a day after four years, and we have eighty participants 0:12:20.880 --> 0:12:25.920 in any given quarter a month, so we are deep 0:12:26.440 --> 0:12:31.199 and we are broad. We also brought in iasco because 0:12:31.240 --> 0:12:35.320 we thought it was important that we get independently audited 0:12:35.400 --> 0:12:42.040 with regard to liquidity, concentration, etcetera. So an independent audit 0:12:42.280 --> 0:12:46.640 was accurred by a major accounting firm that said we 0:12:46.640 --> 0:12:51.520 were AYASCO compliant. When we hit a billion dollars a day, 0:12:51.679 --> 0:12:54.640 we went and got to see FDC approval. They have 0:12:54.760 --> 0:12:58.240 to make sure the index is viable before they allow 0:12:58.320 --> 0:13:02.800 you to trade a future. And we have broadened the 0:13:03.040 --> 0:13:07.000 market from not only hundred forty three banks, they include 0:13:07.240 --> 0:13:12.240 all of the big regionals Regions, Northern Trust, the fifth Third, 0:13:12.320 --> 0:13:16.680 et cetera, fifty percent of the banks just under between 0:13:16.760 --> 0:13:21.400 five and sixty billion, and the twelve hundred community banks. 0:13:21.440 --> 0:13:26.600 We also have Jefferies, the Progra dealers, insurance companies like 0:13:26.720 --> 0:13:31.960 Northwestern Money Managers, Goggenheim just joined, and now we have 0:13:32.080 --> 0:13:37.600 companies like John Deere. We feel that a transparent, regulated 0:13:37.880 --> 0:13:43.319 market that has eighty participants, that does billions a day 0:13:44.160 --> 0:13:49.439 is an adequate benchmark, and how you can see the tape. 0:13:50.240 --> 0:13:54.880 Every trade is transparent, it can be monitored, it can 0:13:54.920 --> 0:13:59.920 be audited, and so we feel we've just taken an 0:13:59.840 --> 0:14:05.679 age old tradition that exists in Chicago, provide many buyers 0:14:05.760 --> 0:14:14.840 and sellers of a broad commodity financial instrument, and the 0:14:15.080 --> 0:14:20.240 rest will take care of itself. Richard, I want him 0:14:20.240 --> 0:14:23.720 to go back to UM. I guess this's the notion 0:14:23.800 --> 0:14:25.600 that you had that you you didn't have to have 0:14:25.680 --> 0:14:28.640 a reference rate, a sort of one size fits all 0:14:28.800 --> 0:14:31.720 reference rate. You could have shades of it. I have 0:14:31.840 --> 0:14:35.040 maybe a stupid question, but some people would perhaps argue 0:14:35.320 --> 0:14:38.120 that one of the good things about having a benchmark, 0:14:38.160 --> 0:14:43.160 a single benchmark, is the simplicity how would you respond 0:14:43.280 --> 0:14:47.640 to that idea? That's great. Simplicity is fine. If you're 0:14:47.640 --> 0:14:51.880 willing to roll the entire world economy on simpleness, then 0:14:51.960 --> 0:14:56.760 you get what you would get a total breakdown. You 0:14:56.840 --> 0:15:03.240 get simplicity, you just get a financial crisis. Why would 0:15:03.280 --> 0:15:07.320 you want Look, well, I'm a professional economist. I teach 0:15:07.360 --> 0:15:10.600 at the University of Chicago. I've been doing it for 0:15:10.600 --> 0:15:16.680 forty five years. The economists don't know anything. Okay, we 0:15:16.880 --> 0:15:22.240 can't forecast, we haven't foreseen two major crisis is meltdowns 0:15:22.720 --> 0:15:25.880 things of this thing, there's only one thing you could 0:15:25.880 --> 0:15:29.680 probably get every economist. So if you go to China, 0:15:29.840 --> 0:15:32.920 you go to London, Roxford, you go to the University 0:15:32.920 --> 0:15:37.000 of Chicago, one and only one thing will everybody agree on, 0:15:37.880 --> 0:15:43.960 and that is diversification. Right, that's you probably will get. 0:15:44.120 --> 0:15:49.800 Nobody will argue against diversification. R Right. It's the one 0:15:49.840 --> 0:15:52.200 thing we know. I don't know whether the market is 0:15:52.240 --> 0:15:55.400 going to go up or down, whether it's gonna crash, 0:15:55.600 --> 0:15:59.520 fall apart. We don't know anything in finance. And he 0:15:59.640 --> 0:16:05.600 can which other than choice and diversification is good. So obviously, um, 0:16:05.640 --> 0:16:09.800 you know, as you say, diversification of things are good. 0:16:10.400 --> 0:16:14.960 The dependent on a single librlar proved to be problematic. 0:16:16.040 --> 0:16:19.880 As we set up in the intro, regulators are pushing 0:16:20.040 --> 0:16:23.560 for this Libel replacement SOFA which we've discussed based on 0:16:23.920 --> 0:16:29.280 overnight secured financing. Your you take a different approach. Can 0:16:29.320 --> 0:16:34.120 your vision, your index thrive in a world in which 0:16:34.160 --> 0:16:37.280 regulators are pushing for everything out or pushing for another 0:16:37.400 --> 0:16:41.920 sort of universal Libel replacement? And can we have this 0:16:42.000 --> 0:16:45.040 sort of diversification even if regulators sort of have the 0:16:45.080 --> 0:16:52.240 specification we I don't think regulators are as singular in 0:16:52.360 --> 0:17:00.800 their attitudes and thought processes as the popular press with indicate. 0:17:01.160 --> 0:17:07.760 For the financial press, we have spoken to them and uh, 0:17:08.240 --> 0:17:12.119 that is that we've brief because this is how we operate. 0:17:12.280 --> 0:17:15.439 We for the last five years, we go down in Washington, 0:17:15.560 --> 0:17:17.879 we brief the FED, the O C C B F 0:17:18.040 --> 0:17:23.240 D I C B SEC, that's the FDC. And when 0:17:23.800 --> 0:17:27.680 I say to them what I am sharing with you, 0:17:28.520 --> 0:17:32.600 that there should be a free market for ideas and 0:17:32.760 --> 0:17:38.760 competition for ideas, not one, not a singular one, said 0:17:38.880 --> 0:17:44.640 that's a bad idea. Okay, they have not said they 0:17:44.680 --> 0:17:50.040 are officially neutral. Um, we already have our premise from 0:17:50.080 --> 0:17:54.359 twenty eleven being validated. We got so Fur, we got Sonia, 0:17:54.520 --> 0:17:58.520 and we got Tona. We did Esther. We're already breaking 0:17:58.600 --> 0:18:02.920 down the idea. It a simple idea. Now, why would 0:18:03.000 --> 0:18:06.240 you have only a risk re rate. You need a 0:18:06.400 --> 0:18:09.959 risk rate because in fact, what we've learned in the 0:18:10.080 --> 0:18:15.080 last two crisises, there's a flight to quality and interest 0:18:15.200 --> 0:18:21.359 rates between government guaranteed paper and private uh borrowing non 0:18:21.520 --> 0:18:29.000 public diverge on crisis is and secularly when there's a recession. 0:18:29.160 --> 0:18:33.679 So you need a credit component in an index. We 0:18:33.800 --> 0:18:38.000 are the only index that has a credit component. Five 0:18:38.080 --> 0:18:46.360 thousand American banks want to develop assets which reflect their 0:18:46.440 --> 0:18:50.360 borrowing costs so they can match the two in an 0:18:50.400 --> 0:18:55.080 asset liability management process. So if you want to make 0:18:55.119 --> 0:19:00.840 the banking system stable, you should develop floating rate assets 0:19:00.920 --> 0:19:07.720 that reflect the floating rate costs. And for five thousand 0:19:07.840 --> 0:19:14.440 American banks, the risk free rate is fabulous. We believe 0:19:14.520 --> 0:19:17.800 in So for we think it's a great thing, it's terrific. 0:19:17.960 --> 0:19:21.840 For the money center banks it doesn't fit and the 0:19:22.040 --> 0:19:27.000 five thousand small banks. Getting back to my opening comment 0:19:27.119 --> 0:19:31.800 about social purpose, we had Jeremy Stein with who is 0:19:31.840 --> 0:19:35.200 the chair of the Harvard Economics Department. We funded a 0:19:35.320 --> 0:19:40.800 lecture at Northwestern two years ago, and it's unambiguous that 0:19:40.800 --> 0:19:47.400 that these midsize, regional, and small banks disproportionately create jobs 0:19:47.440 --> 0:19:51.640 in America. This is a critical time in our economy 0:19:51.880 --> 0:19:58.240 in the world. Why would one be against the institutions 0:19:58.280 --> 0:20:06.840 that function and provide financing to America's businesses, small businesses 0:20:06.880 --> 0:20:13.240 which disproportionally create jobs. I don't get that opposition. It's 0:20:13.320 --> 0:20:18.560 like being in a Madrid painting. It's surreal. Richard, you're 0:20:18.600 --> 0:20:22.040 talking about the importance of having a credit component in 0:20:22.520 --> 0:20:25.840 uh this benchmark reference rate. I wanted to ask you, 0:20:27.119 --> 0:20:31.320 I think the loans that you're looking at include not 0:20:31.440 --> 0:20:36.239 just loans between banks, but also between broker dealers and 0:20:36.680 --> 0:20:40.359 private equity as well. UM. I think that's right. Could 0:20:40.359 --> 0:20:43.080 you maybe talk a little bit about why you thought 0:20:43.119 --> 0:20:47.480 it was important to include those entities as well. Yeah, 0:20:47.640 --> 0:20:50.679 I I think the job is not only to create 0:20:50.840 --> 0:20:55.600 liquidity in the banking system, but it is the bridge 0:20:55.760 --> 0:20:59.840 the market between the banking system and the capital market. 0:21:00.080 --> 0:21:04.120 And if you have Serberis or Jefferies or John Deere 0:21:04.320 --> 0:21:10.879 or Northwestern Mutual that also resources of liquidity, then you 0:21:11.080 --> 0:21:15.720 bring to bear the power of more and more players 0:21:15.840 --> 0:21:21.159 and greater breath to the market. So that's why we 0:21:21.880 --> 0:21:25.919 and all of those folks either have floating rate assets, 0:21:26.119 --> 0:21:30.399 they have asset liability management, they have capital market debt. 0:21:31.000 --> 0:21:38.000 So there's a natural nexus. And why libar was confined 0:21:38.119 --> 0:21:44.200 only to banks again is a historical accident. And if 0:21:44.200 --> 0:21:47.800 you wanted to design it was like saying, Okay, I'm 0:21:47.800 --> 0:21:50.320 gonna design a car, and it's going to be a 0:21:50.359 --> 0:21:54.720 two wheeler like a bicycle, because everything before has two wheels, 0:21:54.760 --> 0:21:57.480 and therefore I don't care if it's a car and 0:21:57.560 --> 0:22:00.680 needs four wheels. It's like a bicycle, So let's make 0:22:00.720 --> 0:22:04.960 it a two wheeling. If you broke down almost anything 0:22:05.080 --> 0:22:09.440 you do, and if you look at inventive activity, you 0:22:09.600 --> 0:22:12.880 tailor it to what the more it needs and wants. 0:22:13.400 --> 0:22:17.600 And again we're struck by well, that's the way. You know, 0:22:17.840 --> 0:22:20.960 my grandfather used to do it, so I'm gonna do 0:22:21.040 --> 0:22:35.359 it the same way. Richard. Here's what I'm trying to 0:22:35.720 --> 0:22:38.600 still wrap my head around, because what you're saying makes 0:22:38.640 --> 0:22:42.159 a lot of sense that it doesn't necessarily benefit the 0:22:42.359 --> 0:22:46.640 country as a whole to have a lending index. That's 0:22:46.640 --> 0:22:50.840 heavily skewed towards built around the big banks, that smaller companies, 0:22:50.920 --> 0:22:55.600 real economy companies like dear local banks key for job creation. 0:22:56.640 --> 0:23:02.040 All that big said, how does it in practice? How 0:23:02.160 --> 0:23:07.600 does the use of a mirrabor your index improve actual 0:23:07.680 --> 0:23:11.840 business functioning versus some of these other benchmarks when it 0:23:11.880 --> 0:23:16.120 comes to the actual writing of loans and other deals 0:23:16.160 --> 0:23:20.240 that need some index to be built up. Two ways. 0:23:20.440 --> 0:23:25.040 I remember that the banks lend not based on a 0:23:25.160 --> 0:23:31.640 risk free rate, right, so if you if they are 0:23:31.760 --> 0:23:38.359 forced to create assets that are are risk free, then 0:23:39.280 --> 0:23:43.600 there will be volatility in their assets and liability. It 0:23:43.760 --> 0:23:49.560 will create uncertainty, it will reduce profitability, and therefore it 0:23:49.640 --> 0:23:55.639 will cause interest rates and profitability of banks to be 0:23:55.800 --> 0:23:58.760 lowered or account for the risks they take, and interest 0:23:58.840 --> 0:24:03.240 rates to be high for borrowers to reflect the increase 0:24:03.920 --> 0:24:15.880 volatility associated with running the business. It's just like competition narrows. 0:24:16.040 --> 0:24:22.840 They spread between wholesale and retail prices. And it's true 0:24:22.920 --> 0:24:27.760 for supermarkets, car dealers, and it's true for interest rates. 0:24:27.880 --> 0:24:32.920 The more you get and the more the commodity becomes homogenious, 0:24:33.600 --> 0:24:38.840 the greater the benefits to the institutions. Through higher probability 0:24:39.040 --> 0:24:42.959 and to the consumers through lower costs. It's no different 0:24:43.040 --> 0:24:47.680 than any other commodity. Richard, you spoke a little bit 0:24:47.720 --> 0:24:51.840 about adoption of a marabor. I guess I'm curious, what's 0:24:51.920 --> 0:24:55.320 the what's the next step for the reference rate to 0:24:55.440 --> 0:25:00.800 Joyce to Joe's point, when does like what would it 0:25:00.840 --> 0:25:03.720 take for adoption to really sort of take offer? What 0:25:03.800 --> 0:25:08.880 are you aiming for? Great question, You guys are super 0:25:09.160 --> 0:25:13.200 gonna smile on my day. So so in twenty eleven 0:25:13.200 --> 0:25:17.280 when we did this why experience, whether it was bond 0:25:17.400 --> 0:25:21.080 futures or as IT rate or anything, it takes a 0:25:21.160 --> 0:25:24.480 decade to develop a market. So in twenty eleven we 0:25:24.600 --> 0:25:28.920 said this is going to take ten to fifteen years. 0:25:29.320 --> 0:25:33.320 Zero to two is toddler, two to five is kind 0:25:33.320 --> 0:25:39.680 of teenager and young adult, and five to fifteen is adulthood. 0:25:39.800 --> 0:25:44.400 We're eight years into the process. We got lucky when 0:25:44.440 --> 0:25:48.200 we said ten years that the and it was no judgment. 0:25:48.240 --> 0:25:50.560 It was a stroke of luck that we called for 0:25:50.600 --> 0:25:56.040 a ten year arise and just when live or ended one. 0:25:56.960 --> 0:26:01.080 So we now have an it. This is true whether 0:26:01.119 --> 0:26:06.199 it's the personal computer you know, or or the iPhone 0:26:07.119 --> 0:26:10.400 these things take a generation to go. So we are 0:26:10.440 --> 0:26:16.760 now getting banks that are starting to price the loans 0:26:16.960 --> 0:26:20.560 that they make based on a Merra board fifty million, 0:26:21.000 --> 0:26:27.160 twenty million hred midion. They show on their graphs that 0:26:27.280 --> 0:26:31.480 they have a high correlation to the old librar, so 0:26:31.520 --> 0:26:38.520 it's very easy days to educate customers. Equally, as we 0:26:38.640 --> 0:26:43.240 have adoption of floating rate, they're using a thirty day 0:26:43.560 --> 0:26:47.719 average because they can go onto Bloomberg, they can go 0:26:47.800 --> 0:26:52.000 on to you know, any vand or or marrabor dot 0:26:52.080 --> 0:26:57.120 net see the price of this perfect transparency, and they're 0:26:57.240 --> 0:27:02.160 using a thirty day average. On June eight, we will 0:27:02.240 --> 0:27:09.560 launch a monthly futures contract on the thirty day average 0:27:09.560 --> 0:27:15.240 AMORBOR to reflect what banks are pricing loans to auto 0:27:15.359 --> 0:27:21.639 dealers in Memphis and small milk farmers in Wisconsin, me 0:27:21.960 --> 0:27:29.399 you know, hundred million dollar manufacturing companies in Arkansas. That's 0:27:29.400 --> 0:27:32.520 how the loans are going to get priced. And then 0:27:32.720 --> 0:27:38.240 once that happens, we will UH and we are educating 0:27:38.359 --> 0:27:42.680 swap dealers now who already deal with these banks to 0:27:42.920 --> 0:27:50.960 swap floating to fix um and the swap dealers will 0:27:51.040 --> 0:27:54.720 be matched with a bank whose issue they floating rate 0:27:54.840 --> 0:27:59.000 loan to a corporate, they will develop a swap. The 0:27:59.080 --> 0:28:02.560 swap will be hedged in the futures, and that is 0:28:02.760 --> 0:28:07.280 the final link in the maturity of the market. So 0:28:07.320 --> 0:28:11.560 as we see banks adopt marra bor is a benchmark, 0:28:12.080 --> 0:28:17.200 give it to corporates and small businesses on loans, then 0:28:17.280 --> 0:28:20.439 the banks go to either money center bank or a 0:28:20.520 --> 0:28:23.920 large bank to do a swap, and then that feeds 0:28:23.960 --> 0:28:29.080 the future, and then it's just a matter of replication, 0:28:29.359 --> 0:28:34.679 and we figure that's probably to to to five years 0:28:35.200 --> 0:28:40.320 we will see the ultimate broader adoption of a merabor 0:28:40.760 --> 0:28:46.959 as a benchmark um. And and again we see a 0:28:47.000 --> 0:28:51.360 world in which Sonja so for a merabor. You know, 0:28:51.480 --> 0:28:54.920 there'll be a rate in Europe, We've already educated some 0:28:55.040 --> 0:28:59.720 central bankers there, uh, and there'll be a rate in 0:29:00.120 --> 0:29:05.200 China that that the whole benchmark will be disrupted and 0:29:05.240 --> 0:29:14.520 we'll see a whole family of different rates. Alright, Richard, Well, 0:29:14.560 --> 0:29:17.080 we'll have to have you back on in a few 0:29:17.160 --> 0:29:19.720 years to talk about what's going on with the marabor 0:29:20.040 --> 0:29:23.760 um in the US and also potentially some reference rates 0:29:23.880 --> 0:29:26.120 outside of the US as well. Thank you so much 0:29:26.120 --> 0:29:29.240 for coming on off. This is my pleasure. Thank you. 0:29:29.240 --> 0:29:34.720 Your questions were intelligent, well thought out. Thank you very much. 0:29:34.800 --> 0:29:44.240 Thank you. That was great. His point about how there's 0:29:44.280 --> 0:29:47.160 no reason why you have to have a single benchmark, 0:29:47.360 --> 0:29:51.000 and it's kind of weird that for something as important 0:29:51.200 --> 0:29:54.440 as this sort of blending or interbank benchmark, that you 0:29:54.520 --> 0:29:56.880 only have a single one. I think that's really interesting. 0:29:57.440 --> 0:30:00.000 I did too. I also think it's interesting this idea 0:30:00.360 --> 0:30:05.120 of wanting a credit component in the benchmark itself, because 0:30:05.160 --> 0:30:08.040 of course so FUR it's like, the idea is that 0:30:08.080 --> 0:30:11.240 really shouldn't be much of a credit component. It's secured 0:30:11.800 --> 0:30:14.480 and so on. But then of course, if you're going 0:30:14.560 --> 0:30:16.800 to build a loan on top of SOFA that you 0:30:16.800 --> 0:30:20.920 have to calculate a credit spread or some sort of market, 0:30:21.320 --> 0:30:23.400 the market will determined to spread on top of that. 0:30:23.800 --> 0:30:27.080 So it'll be interesting to see if it makes more 0:30:27.280 --> 0:30:30.400 sense and to his point sort of a local regional 0:30:30.480 --> 0:30:34.200 company capital efficiency, if it makes more sense to have 0:30:34.400 --> 0:30:39.400 a benchmark that includes the sort of the credit conditions 0:30:39.480 --> 0:30:44.040 of the American economy overall. Yeah, and that risk free 0:30:44.320 --> 0:30:47.800 rate idea that's embedded in SOFUR, I mean that's very 0:30:47.880 --> 0:30:51.239 different to the original concept of live or and so 0:30:51.360 --> 0:30:54.720 from that perspective, you could see something like a Maribor 0:30:54.800 --> 0:30:57.240 that does include that credit risk component. You could see 0:30:57.280 --> 0:31:02.720 that trading much more close lead to Libor then, so 0:31:02.840 --> 0:31:06.160 for I think, yeah, exactly right. Of course, even if 0:31:06.160 --> 0:31:09.080 you look at on our terminal right now, you see 0:31:09.080 --> 0:31:14.320 there's a pretty big noticeable spread between Maraboror and so 0:31:14.520 --> 0:31:17.800 for as it is right now. So, uh, it will 0:31:17.840 --> 0:31:20.120 be interesting. Again. It sort of goes back to this 0:31:20.440 --> 0:31:23.360 idea of all of these things, whether we're talking about 0:31:23.400 --> 0:31:26.120 the reference rate, whether we're talking about a currency as 0:31:26.200 --> 0:31:30.840 sort of de facto social networks and or at least 0:31:30.920 --> 0:31:34.800 having big network effects. So obviously live Or had the 0:31:34.880 --> 0:31:38.080 ultimate network effect, but then it's sort of faded. But 0:31:38.200 --> 0:31:40.760 we'll see. It'll be interesting to see if Ameribor can 0:31:40.800 --> 0:31:44.520 get enough traction so that people feel value and continuing 0:31:44.560 --> 0:31:46.360 to use it, which is a good reason to have 0:31:47.160 --> 0:31:50.040 Richard back any I don't know, six months or a 0:31:50.120 --> 0:31:54.800 year or something like that. Yeah, for sure. I'm Tracy Alloway. 0:31:54.960 --> 0:31:58.920 You can follow me on Twitter at Tracy Alloway, and 0:31:58.960 --> 0:32:01.600