1 00:00:10,880 --> 00:00:14,600 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:14,680 --> 00:00:19,680 Speaker 1: I'm Tracy Alloway and I'm Joe Wisenthal. So, Joe, uh, 3 00:00:20,000 --> 00:00:23,239 Speaker 1: I think on our last recording of our library series, 4 00:00:23,400 --> 00:00:26,840 Speaker 1: I think I said that that was actually the last episode. 5 00:00:26,960 --> 00:00:31,560 Speaker 1: But you know what, that was false advertising you could do. 6 00:00:31,760 --> 00:00:35,760 Speaker 1: There's never enough libraries there, no, And also it's kind 7 00:00:35,760 --> 00:00:38,720 Speaker 1: of amazing, but as we continue to record these episodes, 8 00:00:39,120 --> 00:00:44,000 Speaker 1: more and more people want to actually talk about libor um, 9 00:00:44,040 --> 00:00:45,959 Speaker 1: and I guess it kind of makes sense. After all, 10 00:00:46,000 --> 00:00:48,920 Speaker 1: this is the reference rate that affects you know, I 11 00:00:48,960 --> 00:00:50,479 Speaker 1: can never keep track, but I think it's something like, 12 00:00:50,520 --> 00:00:55,040 Speaker 1: you're into fifty trillion dollars worth of assets, so obviously 13 00:00:55,320 --> 00:00:59,560 Speaker 1: it's absolutely crucial for the financial system, right, I mean, yeah, 14 00:00:59,560 --> 00:01:02,920 Speaker 1: as you say, it makes sense that people have so 15 00:01:03,000 --> 00:01:05,240 Speaker 1: much to say about it, given that it's been so 16 00:01:05,360 --> 00:01:08,679 Speaker 1: crucial to the pricing of trillions, hundreds of trillions of 17 00:01:08,720 --> 00:01:12,840 Speaker 1: dollars worth of assets, and it's this sort of herculean 18 00:01:13,000 --> 00:01:16,920 Speaker 1: task to sunset it in some way and transition to 19 00:01:17,640 --> 00:01:19,640 Speaker 1: something else. So I don't know, maybe we should do 20 00:01:19,760 --> 00:01:23,880 Speaker 1: like a month long live ar series. Oh god, Okay, look, 21 00:01:24,000 --> 00:01:27,640 Speaker 1: we have two more episodes scheduled, including this one, so 22 00:01:27,760 --> 00:01:29,800 Speaker 1: let's do those first and then we can talk about 23 00:01:29,800 --> 00:01:34,399 Speaker 1: maybe doing a month long live BRLK, we'll revisit. Okay, um, 24 00:01:34,440 --> 00:01:38,080 Speaker 1: but I'm really happy to say that today for our guest, 25 00:01:38,160 --> 00:01:42,320 Speaker 1: we have someone who's actually, you know, personally involved in 26 00:01:42,600 --> 00:01:48,080 Speaker 1: the transition process from library to sof sofar of course, 27 00:01:48,160 --> 00:01:51,360 Speaker 1: is the secured overnight financing rate. If you don't know 28 00:01:51,400 --> 00:01:53,240 Speaker 1: what that is by now, then you should go back 29 00:01:53,280 --> 00:01:55,960 Speaker 1: and listen to some of our previous episodes. But it's 30 00:01:56,000 --> 00:01:59,480 Speaker 1: basically the thing that's supposed to replace librards, so it's 31 00:01:59,520 --> 00:02:02,840 Speaker 1: going to be really interesting to talk about the thinking 32 00:02:02,880 --> 00:02:07,080 Speaker 1: behind that transition process but also how it's actually going. Great. 33 00:02:07,120 --> 00:02:09,480 Speaker 1: I'm really excited about this because again, I do like 34 00:02:09,560 --> 00:02:11,560 Speaker 1: a lot of our top I, like when we have 35 00:02:11,680 --> 00:02:15,840 Speaker 1: discussions on anything that are actually now that are not 36 00:02:15,960 --> 00:02:18,040 Speaker 1: just sort of theoretical, but deal with the sort of 37 00:02:18,320 --> 00:02:21,680 Speaker 1: nuts and bolts with how you actually do something. Yeah, 38 00:02:21,840 --> 00:02:25,600 Speaker 1: this is definitely uh practice. So okay, let's bring on 39 00:02:25,680 --> 00:02:28,960 Speaker 1: our guest for the episode. It is Tom Whipp, who 40 00:02:29,040 --> 00:02:32,160 Speaker 1: is chair of the Alternative Reference Rates Committee and also 41 00:02:32,280 --> 00:02:37,040 Speaker 1: Vice Chairman of Institutional Securities at Morgan Stanley, Tom, thanks 42 00:02:37,040 --> 00:02:40,400 Speaker 1: so much for coming on, Thanks for having me so Tom, 43 00:02:40,480 --> 00:02:42,720 Speaker 1: maybe just to begin with, you can give us a 44 00:02:42,800 --> 00:02:47,519 Speaker 1: sort of brief description of what the Alternative Reference Rates 45 00:02:47,560 --> 00:02:51,800 Speaker 1: Committee or the a r r C actually does, When 46 00:02:51,880 --> 00:02:56,520 Speaker 1: was it started, and what's the goal. So really, the 47 00:02:56,520 --> 00:02:59,880 Speaker 1: the the ARC was put together in two thousand fourteen, 48 00:03:00,040 --> 00:03:05,680 Speaker 1: originally UH to begin to select an appropriate, durable alternative 49 00:03:05,680 --> 00:03:08,960 Speaker 1: to librar and and then to put forward a plan 50 00:03:09,160 --> 00:03:11,720 Speaker 1: to actually get off live ar and onto that new rate. 51 00:03:12,160 --> 00:03:14,960 Speaker 1: That work continued UH for several years, and at that 52 00:03:15,000 --> 00:03:18,280 Speaker 1: point that group selected SOFA, which is you noticed a 53 00:03:18,320 --> 00:03:22,400 Speaker 1: secured overnight financing rate, which is basically the US Treasury 54 00:03:22,440 --> 00:03:26,600 Speaker 1: repo market reported over a trillion dollars a day in 55 00:03:26,800 --> 00:03:30,440 Speaker 1: UH in daily activity and transactions. And that really solved 56 00:03:30,480 --> 00:03:32,440 Speaker 1: for the first problem because if you go back to 57 00:03:32,520 --> 00:03:36,040 Speaker 1: the history of library that the issues developed because the 58 00:03:36,040 --> 00:03:40,720 Speaker 1: inner bank market itself had shrunk tremendously over over some 59 00:03:40,840 --> 00:03:44,680 Speaker 1: period of time. Additionally, the use of librar had gone 60 00:03:44,720 --> 00:03:47,000 Speaker 1: up exponentially, and you think you sort of can take 61 00:03:47,040 --> 00:03:49,120 Speaker 1: that from sort of you know, the mid nineteen eighties 62 00:03:49,240 --> 00:03:52,000 Speaker 1: all the way up until two thousand twelve, and the 63 00:03:52,040 --> 00:03:54,680 Speaker 1: scandals that emerged from that, but so much of that 64 00:03:54,800 --> 00:03:57,520 Speaker 1: was based on the fact that the underlying transactions and 65 00:03:57,560 --> 00:04:01,560 Speaker 1: the inner dealing market had reduced cansiderably used had gone up, 66 00:04:01,800 --> 00:04:04,360 Speaker 1: and you get this uh, this uh, this concept of 67 00:04:04,400 --> 00:04:08,920 Speaker 1: the inverted pyramid, which is too few transactions supporting too 68 00:04:08,960 --> 00:04:13,280 Speaker 1: many financial contracts and without transactions to create those rates, 69 00:04:13,840 --> 00:04:16,920 Speaker 1: submitting paddle banks who create live or were forced to 70 00:04:17,000 --> 00:04:19,919 Speaker 1: use what they call expert judgment. So when we decided 71 00:04:19,960 --> 00:04:22,240 Speaker 1: on so for the first thing we tried to solve 72 00:04:22,320 --> 00:04:26,440 Speaker 1: to was can we find something that has sufficient underlying 73 00:04:26,480 --> 00:04:29,760 Speaker 1: transactions that would mean that these that that there would 74 00:04:29,800 --> 00:04:32,720 Speaker 1: be really no need for expert judgment. But in fact 75 00:04:32,760 --> 00:04:35,680 Speaker 1: we could just rely on actual trades to create the rate. 76 00:04:36,880 --> 00:04:39,600 Speaker 1: From your perspective, as you say, one of the nice 77 00:04:39,600 --> 00:04:42,599 Speaker 1: things about so far is there's actual trades. There's no ambiguity, 78 00:04:42,800 --> 00:04:47,160 Speaker 1: no less opportunity to manipulate the number. What in your 79 00:04:47,240 --> 00:04:50,240 Speaker 1: view is the primary challenge and what is the work 80 00:04:50,320 --> 00:04:56,280 Speaker 1: that you do to enable this transition from one index 81 00:04:56,320 --> 00:04:59,400 Speaker 1: to another. So, so when the art was then reconstituted 82 00:04:59,440 --> 00:05:01,800 Speaker 1: after making those two in the important decision, first the 83 00:05:01,920 --> 00:05:04,920 Speaker 1: selection of SOFA and second to do what we called 84 00:05:04,960 --> 00:05:07,839 Speaker 1: the pace transition plan. You'll hear you know, you've probably 85 00:05:07,839 --> 00:05:09,240 Speaker 1: heard a lot about that, and you continue to hear 86 00:05:09,240 --> 00:05:11,560 Speaker 1: a lot about that, which was not to have really 87 00:05:11,640 --> 00:05:14,720 Speaker 1: a cliff effect, but too over the period of time 88 00:05:14,800 --> 00:05:17,000 Speaker 1: that we had between I would say, two thousand and 89 00:05:17,040 --> 00:05:20,120 Speaker 1: seventeen and two thousand twenty one to be in a 90 00:05:20,120 --> 00:05:24,200 Speaker 1: position to have people use UH, use live or less 91 00:05:24,320 --> 00:05:27,400 Speaker 1: UH and to address some of the legacy UH contracts 92 00:05:27,400 --> 00:05:30,039 Speaker 1: that go beyond the end of live or one, but 93 00:05:30,120 --> 00:05:33,479 Speaker 1: also you know, reduce that exposure through new issue and 94 00:05:33,640 --> 00:05:37,120 Speaker 1: usage of SOFUR. So what we've really tried to do 95 00:05:37,560 --> 00:05:40,680 Speaker 1: over that period of time UH and most recently with 96 00:05:40,520 --> 00:05:43,320 Speaker 1: the with the release of our of our best practices 97 00:05:43,640 --> 00:05:46,200 Speaker 1: for the remainder of the transition is to really give 98 00:05:46,279 --> 00:05:50,000 Speaker 1: market participants to tools that they need to actually enable 99 00:05:50,040 --> 00:05:54,479 Speaker 1: that pace transition, whether that be for legacy UH legacy 100 00:05:54,560 --> 00:05:58,239 Speaker 1: challenges where they have contracts or securities that go beyond 101 00:05:58,320 --> 00:06:01,960 Speaker 1: ende that we can we can have better fallbacks and 102 00:06:02,000 --> 00:06:04,000 Speaker 1: when live world ends, how do you get from live 103 00:06:04,000 --> 00:06:06,680 Speaker 1: board to sofa? So you know, we put we put 104 00:06:06,680 --> 00:06:09,440 Speaker 1: our fallbacks, we put out we've consulted with the market, 105 00:06:09,520 --> 00:06:12,960 Speaker 1: we have provided over the course of just I would say, 106 00:06:12,960 --> 00:06:16,000 Speaker 1: just even the last the last several months, you know, 107 00:06:16,120 --> 00:06:19,600 Speaker 1: recommendations for things like swaptions. Uh we how do you 108 00:06:19,640 --> 00:06:23,560 Speaker 1: how do you how do you price new floating rate mortgages. 109 00:06:23,600 --> 00:06:27,160 Speaker 1: So the art really over the last several years has 110 00:06:27,200 --> 00:06:31,359 Speaker 1: been developing and providing to the market tools to actually 111 00:06:31,400 --> 00:06:36,279 Speaker 1: make this transition as smooth as possible. So, Tom, you're 112 00:06:36,320 --> 00:06:40,919 Speaker 1: a long time repo man, uh rebot man, repo guy 113 00:06:40,960 --> 00:06:45,839 Speaker 1: at Morganstown. UM, could you maybe like explain the rebo 114 00:06:45,920 --> 00:06:49,440 Speaker 1: connection for sofa and I guess I'd be curious to 115 00:06:49,520 --> 00:06:52,479 Speaker 1: just get your take on the transition of the repo 116 00:06:52,600 --> 00:06:57,279 Speaker 1: market from pre financial crisis to now as well. Certainly, 117 00:06:57,400 --> 00:06:59,640 Speaker 1: so if we think about what SOFA is, it really 118 00:06:59,760 --> 00:07:03,120 Speaker 1: is US Treasury Bank three pos so the tread you know, 119 00:07:03,200 --> 00:07:07,800 Speaker 1: Treasury securities on repo, which which represent obviously h the 120 00:07:07,920 --> 00:07:11,320 Speaker 1: risk free rate. Uh. And even if you go prior 121 00:07:11,360 --> 00:07:15,360 Speaker 1: to the financial crisis and beyond and through that particular 122 00:07:15,440 --> 00:07:17,640 Speaker 1: market has always held up very well because of the 123 00:07:17,720 --> 00:07:20,280 Speaker 1: risk free nature of the collateral. So when we think 124 00:07:20,320 --> 00:07:23,440 Speaker 1: about issues in the repo market broadly during the crisis, 125 00:07:23,760 --> 00:07:25,680 Speaker 1: that was really you know, things that were backed by 126 00:07:25,760 --> 00:07:27,880 Speaker 1: you know, less liquid assets and things like that, but 127 00:07:27,920 --> 00:07:32,040 Speaker 1: the treasury repo market for many decades has been really 128 00:07:32,120 --> 00:07:35,080 Speaker 1: been the underpinning and in terms of volume, uh, you know, 129 00:07:35,200 --> 00:07:37,160 Speaker 1: we can look and see it again over a trillion 130 00:07:37,200 --> 00:07:41,360 Speaker 1: dollars a day and traded activity from both the clearing 131 00:07:41,400 --> 00:07:44,960 Speaker 1: banks and from from the Central Clearing House DCCC. So 132 00:07:45,280 --> 00:07:47,880 Speaker 1: when we really looked at that over the period, uh, 133 00:07:47,880 --> 00:07:50,640 Speaker 1: it really stood out as as the best selection because 134 00:07:50,640 --> 00:07:53,200 Speaker 1: our other choices, if you think about what the mandate was, 135 00:07:53,200 --> 00:07:55,760 Speaker 1: would have been things like the overnight bank funding rate 136 00:07:56,160 --> 00:07:59,240 Speaker 1: UH FED funds rate, And if you compare that trillion 137 00:07:59,320 --> 00:08:01,680 Speaker 1: to the FED ones market or it's the overnight thing 138 00:08:02,000 --> 00:08:05,120 Speaker 1: UH funding rate, or to h or two things like 139 00:08:05,160 --> 00:08:08,960 Speaker 1: commercial paper bills, the numbers really really go down. You know, 140 00:08:09,320 --> 00:08:11,040 Speaker 1: you go from sort of a trillion to a hundred 141 00:08:11,040 --> 00:08:13,840 Speaker 1: and fifty to below a hundred. So the choice really 142 00:08:13,960 --> 00:08:17,360 Speaker 1: was to have that strong foundation which we could look 143 00:08:17,400 --> 00:08:19,360 Speaker 1: back and you can you can really model us all 144 00:08:19,400 --> 00:08:21,880 Speaker 1: the way back. It seemed like that was the obvious choice, 145 00:08:21,920 --> 00:08:23,760 Speaker 1: and that and that experience in the report market, I 146 00:08:23,800 --> 00:08:26,640 Speaker 1: think led us to believe that over time. One of 147 00:08:26,680 --> 00:08:28,360 Speaker 1: the key things we looked at way back in two 148 00:08:28,400 --> 00:08:30,680 Speaker 1: thousand and fourteen was we certainly don't want to do 149 00:08:30,760 --> 00:08:32,160 Speaker 1: this work again. We want to do it once, and 150 00:08:32,160 --> 00:08:50,040 Speaker 1: we want to do it right. You mentioned tools, and 151 00:08:50,040 --> 00:08:53,040 Speaker 1: you said giving tools to market participants so that they 152 00:08:53,040 --> 00:08:55,960 Speaker 1: can deal with some of the issues that might arise, 153 00:08:56,200 --> 00:09:00,240 Speaker 1: such as contracts that are pegged to liebor that are 154 00:09:00,240 --> 00:09:03,959 Speaker 1: going to extend beyond. What does that mean specifically, what 155 00:09:03,960 --> 00:09:07,360 Speaker 1: what kind of tools do people have to ameliorate some 156 00:09:07,440 --> 00:09:12,520 Speaker 1: of the issues that will arise from the transition. Just 157 00:09:12,679 --> 00:09:14,719 Speaker 1: a simple, a simple example I would I would say 158 00:09:14,720 --> 00:09:18,080 Speaker 1: as the easiest one is UH floating rate notes. Uh. 159 00:09:18,160 --> 00:09:21,160 Speaker 1: If you think about existing floating rate notes pre all 160 00:09:21,200 --> 00:09:25,240 Speaker 1: these work, UH floating rate notes typically if live boar 161 00:09:25,240 --> 00:09:27,959 Speaker 1: would have cease, had a fall back, had a fallback 162 00:09:28,000 --> 00:09:29,800 Speaker 1: in there, you know, in the in the bond documents, 163 00:09:29,800 --> 00:09:32,440 Speaker 1: that would basically say you would take the last printed 164 00:09:32,520 --> 00:09:35,880 Speaker 1: lie bar and that would be your rate until final maturity. 165 00:09:36,440 --> 00:09:38,439 Speaker 1: So if you think about an investor, what a floating 166 00:09:38,520 --> 00:09:40,000 Speaker 1: rate note is going to float to a three month 167 00:09:40,040 --> 00:09:43,880 Speaker 1: live war and it went well beyond one at some 168 00:09:44,000 --> 00:09:47,439 Speaker 1: point they would take that last fixing of libar, the 169 00:09:47,480 --> 00:09:49,400 Speaker 1: last one at the end and they would live with 170 00:09:49,520 --> 00:09:53,760 Speaker 1: that rate until final maturity. What the ART did because 171 00:09:53,920 --> 00:09:56,520 Speaker 1: and to change those rates in most cases in the 172 00:09:56,640 --> 00:10:00,560 Speaker 1: US you need a d percent consent from bondholders obviously, 173 00:10:00,679 --> 00:10:03,160 Speaker 1: as in your impossibility. So what the ART did way 174 00:10:03,160 --> 00:10:06,360 Speaker 1: back was we put out better fall back language for 175 00:10:06,480 --> 00:10:08,440 Speaker 1: new issue floating right notes. And you can see in 176 00:10:08,440 --> 00:10:10,360 Speaker 1: the floating rate note market we've got well over six 177 00:10:10,440 --> 00:10:14,640 Speaker 1: hundred six hundred billion of new issue using SOFA directly, 178 00:10:14,679 --> 00:10:17,199 Speaker 1: which is obviously the best answer. But even those that 179 00:10:17,280 --> 00:10:20,440 Speaker 1: continue to use live war now have fallbacks that create 180 00:10:20,480 --> 00:10:24,400 Speaker 1: a series of waterfalls that go from go from libor 181 00:10:25,040 --> 00:10:27,400 Speaker 1: with a credit spread and the term spread to replicate 182 00:10:27,400 --> 00:10:30,080 Speaker 1: on a look back what the differences between SOFA and 183 00:10:30,120 --> 00:10:33,199 Speaker 1: librlar over reasonable period of time, and at some point 184 00:10:33,240 --> 00:10:37,040 Speaker 1: now those new issues, even using Librlar will have much 185 00:10:37,080 --> 00:10:39,640 Speaker 1: clearer outcomes at the end of live War, But obviously 186 00:10:39,679 --> 00:10:42,360 Speaker 1: the best case is to use SOFA. So we think 187 00:10:42,360 --> 00:10:44,920 Speaker 1: about the floating rate note market and presented a real 188 00:10:45,040 --> 00:10:47,440 Speaker 1: big challenge, And what the ART did was provide that 189 00:10:47,480 --> 00:10:50,240 Speaker 1: fallback language so people could put their new issue out 190 00:10:50,240 --> 00:10:52,240 Speaker 1: in a much safer way than they could have prior 191 00:10:52,320 --> 00:10:55,880 Speaker 1: to that right, So you have to fall back language 192 00:10:56,080 --> 00:10:59,360 Speaker 1: in order to enable people to get contracts done for 193 00:10:59,480 --> 00:11:04,559 Speaker 1: financial securities, UM, even if libral is no longer available 194 00:11:04,679 --> 00:11:07,160 Speaker 1: and you know, sort of before the new reference rate 195 00:11:07,520 --> 00:11:10,880 Speaker 1: is widely available. I'm curious, what's the I don't know, 196 00:11:11,040 --> 00:11:13,280 Speaker 1: is take up the right word? What's the like adoption 197 00:11:13,400 --> 00:11:16,320 Speaker 1: rate on that kind of fallback provision? Is everyone using 198 00:11:16,320 --> 00:11:19,360 Speaker 1: it nowadays for the most part? Yeah, And and certainly 199 00:11:19,400 --> 00:11:21,400 Speaker 1: in the floating rate note market, we would see people 200 00:11:21,440 --> 00:11:24,480 Speaker 1: either either going directly to sofa, as you know, with 201 00:11:24,800 --> 00:11:26,880 Speaker 1: I said over six d billions of new issue using 202 00:11:26,920 --> 00:11:29,720 Speaker 1: Sofa directly. And I would say that for the for 203 00:11:29,960 --> 00:11:32,320 Speaker 1: a vast majority of that market, because there's an obvious 204 00:11:32,400 --> 00:11:34,720 Speaker 1: risk that you can't undo what you've done post issue 205 00:11:34,760 --> 00:11:38,600 Speaker 1: because of that consent challenge. So I think that, you know, 206 00:11:38,679 --> 00:11:42,560 Speaker 1: for places where there's true economics, uh, not a lot 207 00:11:42,600 --> 00:11:45,520 Speaker 1: of that, not a lot of flexibility that that market 208 00:11:45,559 --> 00:11:48,480 Speaker 1: really was, you know, certainly an early adopter to these 209 00:11:48,480 --> 00:11:52,360 Speaker 1: fallbacks and to sofa itself. Are there instruments, just to 210 00:11:52,400 --> 00:11:57,360 Speaker 1: be clear, other instruments out there that face a cliff nonetheless, 211 00:11:57,400 --> 00:12:01,800 Speaker 1: that were issued before the fall back language uh was 212 00:12:02,360 --> 00:12:05,040 Speaker 1: was offered before their ideas before people were really thinking 213 00:12:05,040 --> 00:12:07,439 Speaker 1: about this, that a is going to create a real 214 00:12:07,480 --> 00:12:12,240 Speaker 1: problem for um either holders or issuers of the notes. Yeah, 215 00:12:12,280 --> 00:12:14,200 Speaker 1: and I think I think that the way I think, 216 00:12:14,200 --> 00:12:16,320 Speaker 1: the way we think about oh this is really in 217 00:12:16,400 --> 00:12:19,120 Speaker 1: terms of you know, legacy, you know, or or stock 218 00:12:19,320 --> 00:12:22,200 Speaker 1: and then flow. Right. So obviously when we look back 219 00:12:22,200 --> 00:12:24,319 Speaker 1: on this, you know, the roll downs of of live 220 00:12:24,480 --> 00:12:27,160 Speaker 1: or exposures when we began this work, you know, by 221 00:12:27,240 --> 00:12:29,439 Speaker 1: the time we had arrived at two thousands twenty one, 222 00:12:29,480 --> 00:12:32,360 Speaker 1: had everyone stopped using live or, we would have been 223 00:12:32,360 --> 00:12:35,240 Speaker 1: in a much smaller exposure number. Uh. But obviously since 224 00:12:35,280 --> 00:12:38,120 Speaker 1: this has taken some time, Uh, we we really think 225 00:12:38,120 --> 00:12:40,200 Speaker 1: about that. But the real term we use, whether it 226 00:12:40,200 --> 00:12:43,040 Speaker 1: be whether it be stock or legacy or flow and 227 00:12:43,120 --> 00:12:45,800 Speaker 1: new issue is what we call the tough legacy. And 228 00:12:45,800 --> 00:12:49,199 Speaker 1: and the tough legacy are things like floating rate notes 229 00:12:49,280 --> 00:12:56,400 Speaker 1: issued without good fallbacks that mature after with certain hybrids, perpetuals, 230 00:12:56,600 --> 00:12:58,360 Speaker 1: and a lot of things that for the most part 231 00:12:58,440 --> 00:13:03,480 Speaker 1: either have fallbacks no fallbacks whatsoever, uh they never contemplated 232 00:13:03,520 --> 00:13:06,359 Speaker 1: the end of live ar or or they have fallbacks 233 00:13:06,400 --> 00:13:10,079 Speaker 1: that revert to last libar or the third one where 234 00:13:10,120 --> 00:13:14,640 Speaker 1: there is uh pretty pretty I would say extreme discretion 235 00:13:15,200 --> 00:13:17,520 Speaker 1: by an agent or a trustee to pick the new 236 00:13:17,640 --> 00:13:20,119 Speaker 1: rate at the end of library. So those three categories 237 00:13:20,120 --> 00:13:22,600 Speaker 1: are what we call the tough legacy UH. And on 238 00:13:22,679 --> 00:13:26,120 Speaker 1: the tough legacy in the US, we've been pursuing, UH, 239 00:13:26,160 --> 00:13:30,200 Speaker 1: we've been pursuing a legislative path which would allow for 240 00:13:30,720 --> 00:13:35,920 Speaker 1: through legislation for those tough legacy UH, securities and other 241 00:13:35,960 --> 00:13:41,360 Speaker 1: contracts to embed ARC fallback language UH in place of 242 00:13:41,440 --> 00:13:45,120 Speaker 1: no no fallback, in place of fallbacks that reference live 243 00:13:45,240 --> 00:13:48,120 Speaker 1: ar which wouldn't exist and gives people also some ability 244 00:13:48,160 --> 00:13:50,400 Speaker 1: on a on a voluntary basis if they have a 245 00:13:50,440 --> 00:13:53,640 Speaker 1: lot of discretion to embed ARC fallbacks to create uh, 246 00:13:53,679 --> 00:13:56,120 Speaker 1: you know, some degree of safe harbor. So the tough 247 00:13:56,240 --> 00:13:58,240 Speaker 1: legacy is the piece that we've really spent a lot 248 00:13:58,280 --> 00:14:00,400 Speaker 1: of time on and again we are pursued doing a 249 00:14:00,600 --> 00:14:05,160 Speaker 1: legislative path on that. But when we speak to market participants, UH, 250 00:14:05,280 --> 00:14:08,079 Speaker 1: we were very very we really think people need to 251 00:14:08,120 --> 00:14:11,880 Speaker 1: focus on that because whether or not that legislative path uh, 252 00:14:12,200 --> 00:14:14,360 Speaker 1: you know, works out or not, people need to think 253 00:14:14,400 --> 00:14:17,160 Speaker 1: about that. It's probably when they risk prioritize that those 254 00:14:17,200 --> 00:14:19,880 Speaker 1: are their single biggest risks is do you have a 255 00:14:20,040 --> 00:14:24,480 Speaker 1: number for how big the tough legacy world is, like 256 00:14:24,680 --> 00:14:27,280 Speaker 1: the size of this issue I don't have in front 257 00:14:27,320 --> 00:14:29,240 Speaker 1: of me. Job. We could definitely get back, but it really, 258 00:14:29,440 --> 00:14:31,240 Speaker 1: it really, it really deals with if you think about, 259 00:14:31,720 --> 00:14:34,720 Speaker 1: you know, parts of the fixed income market again floating 260 00:14:34,760 --> 00:14:38,120 Speaker 1: rate notes that go beyond hybrids. Uh, you know that 261 00:14:38,240 --> 00:14:39,800 Speaker 1: you think about the back end of a lot of 262 00:14:39,840 --> 00:14:42,480 Speaker 1: a lot of trust preferreds that reference library that are 263 00:14:42,480 --> 00:14:45,320 Speaker 1: well beyond one. Those are the kinds of things that 264 00:14:45,360 --> 00:14:47,480 Speaker 1: you have out there. They really can't be. Uh, they 265 00:14:47,480 --> 00:14:49,600 Speaker 1: can't be. And you go much deeper into you know, 266 00:14:49,640 --> 00:14:53,000 Speaker 1: into into just traditional uh you know, contracts that referenced 267 00:14:53,040 --> 00:14:55,120 Speaker 1: live war for penalty rates or other things where if 268 00:14:55,120 --> 00:14:57,960 Speaker 1: there's no lib ar and there's no fallback, you're gonna 269 00:14:58,000 --> 00:15:00,440 Speaker 1: find yourself in, you know, in a lot of disputes 270 00:15:00,920 --> 00:15:04,440 Speaker 1: slash potential litigation. So if we just go back to 271 00:15:04,760 --> 00:15:07,640 Speaker 1: um to sofa for a second and the link with 272 00:15:07,680 --> 00:15:12,240 Speaker 1: the repo market, one of the criticisms of sofa as 273 00:15:12,240 --> 00:15:15,600 Speaker 1: a replacement rate for a lib or has to do 274 00:15:15,720 --> 00:15:18,720 Speaker 1: with this sort of dramatic rebo madness that we saw 275 00:15:18,720 --> 00:15:20,880 Speaker 1: on the market back in September when we saw the 276 00:15:20,880 --> 00:15:25,720 Speaker 1: repo rate spike very quickly and very dramatically. And the 277 00:15:25,760 --> 00:15:29,640 Speaker 1: criticism was that if you have a reference rate tied 278 00:15:29,760 --> 00:15:33,520 Speaker 1: to a repo rate, that is that volatile something that 279 00:15:33,560 --> 00:15:36,360 Speaker 1: can you know, change that quickly in a single day. 280 00:15:36,600 --> 00:15:39,560 Speaker 1: But that probably wasn't a good thing for financial assets 281 00:15:39,640 --> 00:15:43,760 Speaker 1: or for the financial system. How do you respond to that, Tom, Yeah, thanks, 282 00:15:43,960 --> 00:15:45,880 Speaker 1: you know, we looked at that and certainly, you know, 283 00:15:46,480 --> 00:15:50,480 Speaker 1: the dynamics of the repo market we're certainly identified early 284 00:15:50,560 --> 00:15:53,520 Speaker 1: days and we and we took that into consideration even 285 00:15:53,560 --> 00:15:55,920 Speaker 1: even when we chose SOFA. I mean, obviously we know 286 00:15:55,920 --> 00:15:58,160 Speaker 1: about war ends and near ends and you know, and 287 00:15:58,200 --> 00:16:00,840 Speaker 1: how those things can you know, can create that type 288 00:16:00,840 --> 00:16:04,400 Speaker 1: of volatility. Uh. But again, when we thought about, you know, 289 00:16:04,440 --> 00:16:07,120 Speaker 1: our our main goal was having enough underlying volume to 290 00:16:07,160 --> 00:16:08,960 Speaker 1: make sure that we do this once and do it right. 291 00:16:09,320 --> 00:16:11,960 Speaker 1: The second goal was to ensure that this was robust 292 00:16:12,040 --> 00:16:15,200 Speaker 1: and available, which it was. And I think the second 293 00:16:15,320 --> 00:16:17,440 Speaker 1: piece of this is, you know, as much as we've 294 00:16:17,440 --> 00:16:20,200 Speaker 1: seen these sort of uh, you know, a couple of 295 00:16:20,280 --> 00:16:24,080 Speaker 1: days spikes in repo, the assumption would be that most 296 00:16:24,160 --> 00:16:28,440 Speaker 1: market participants using SOFA would be using it in an 297 00:16:28,440 --> 00:16:31,640 Speaker 1: average basis anyway, So when we talked about September, one 298 00:16:31,680 --> 00:16:33,920 Speaker 1: of the things we put out and obviously we you know, 299 00:16:33,920 --> 00:16:36,320 Speaker 1: we took a lot of incoming on that appropriately, was 300 00:16:36,360 --> 00:16:38,920 Speaker 1: that the we found that the uh you know that 301 00:16:39,120 --> 00:16:42,840 Speaker 1: three month live or had moved had had actually moved 302 00:16:42,880 --> 00:16:45,520 Speaker 1: more than three months sofa during that period on an 303 00:16:45,560 --> 00:16:48,120 Speaker 1: average ninety day basis. So when we think about the 304 00:16:48,240 --> 00:16:50,880 Speaker 1: uses of sofa, if you know, if if you're gonna 305 00:16:50,920 --> 00:16:53,120 Speaker 1: use sofa and use you know, either three months three 306 00:16:53,160 --> 00:16:56,400 Speaker 1: month average or you know, or a or a six 307 00:16:56,440 --> 00:16:59,800 Speaker 1: month average or whatever, that these small spikes shouldn't actually 308 00:16:59,800 --> 00:17:03,960 Speaker 1: be uh that impactful. Uh. Nonetheless, I do think that 309 00:17:04,000 --> 00:17:06,160 Speaker 1: you know, certainly, what we've seen in the markets recently 310 00:17:06,720 --> 00:17:08,880 Speaker 1: gives us, I think and everyone a chance to really 311 00:17:08,920 --> 00:17:10,720 Speaker 1: look at the data. Because if you go back to 312 00:17:10,800 --> 00:17:13,760 Speaker 1: when we did this work, we all speculated on how 313 00:17:13,800 --> 00:17:17,200 Speaker 1: sofa were con performed during the stress period. We speculated 314 00:17:17,200 --> 00:17:19,919 Speaker 1: on how library were performed during a stress period, uh, 315 00:17:19,960 --> 00:17:22,320 Speaker 1: and we and we speculate on how and how sort 316 00:17:22,320 --> 00:17:24,679 Speaker 1: of other credit rates would perform during the stress period. 317 00:17:24,760 --> 00:17:27,600 Speaker 1: So with with with real data now, I think it's 318 00:17:27,920 --> 00:17:29,720 Speaker 1: we're looking at it certainly at the ARC, and I think, 319 00:17:29,720 --> 00:17:31,920 Speaker 1: you know, we would encourage others to take a look 320 00:17:31,960 --> 00:17:34,320 Speaker 1: at how all these rates performed. Right, So so so for 321 00:17:35,119 --> 00:17:38,720 Speaker 1: probably I think performed along what people would have expected 322 00:17:38,720 --> 00:17:40,840 Speaker 1: as a flight to quality rate. It went down to 323 00:17:41,080 --> 00:17:45,520 Speaker 1: attracted the monetary policy rate. Uh so pretty much wonderful. One. 324 00:17:46,200 --> 00:17:47,960 Speaker 1: We looked at live war, which you know, was a 325 00:17:48,000 --> 00:17:50,480 Speaker 1: little bit harder to explain. So I think when we 326 00:17:50,560 --> 00:17:52,080 Speaker 1: kind of put it all together and we look at 327 00:17:52,080 --> 00:17:54,800 Speaker 1: the commercial paper markets, we look at live war, was 328 00:17:54,880 --> 00:17:58,000 Speaker 1: live board tracking commercial paper, was commercial paper tracking live bar? 329 00:17:58,440 --> 00:18:01,159 Speaker 1: What happened to money markets over that period? Uh? You know, 330 00:18:01,320 --> 00:18:04,080 Speaker 1: one thing we will draw off from this obviously these 331 00:18:04,160 --> 00:18:06,399 Speaker 1: challenging times, is that we do have real data to 332 00:18:06,440 --> 00:18:08,439 Speaker 1: look at. So I do think that people in the 333 00:18:08,480 --> 00:18:11,040 Speaker 1: market can model so for better and look at sort 334 00:18:11,040 --> 00:18:14,479 Speaker 1: of how it's performed under real life stresses. And I think, frankly, 335 00:18:14,520 --> 00:18:16,720 Speaker 1: I think it does open up you know, still more 336 00:18:16,800 --> 00:18:19,959 Speaker 1: questions about live or and where it comes from and 337 00:18:19,960 --> 00:18:23,639 Speaker 1: where these submissions you know, what they reflect in the markets, uh, 338 00:18:23,680 --> 00:18:25,560 Speaker 1: you know overall, so I think we're gonna try to 339 00:18:25,600 --> 00:18:29,600 Speaker 1: do some real, real hard comparisons of this data. But 340 00:18:29,600 --> 00:18:32,159 Speaker 1: but the but again that's your point the quarter end 341 00:18:32,200 --> 00:18:34,640 Speaker 1: and you're in spikes. I think are you know, get 342 00:18:34,640 --> 00:18:36,800 Speaker 1: a little bit overblown in terms of their importance on 343 00:18:36,840 --> 00:18:39,240 Speaker 1: an average basis, But they're important and they're real true 344 00:18:39,240 --> 00:18:54,080 Speaker 1: factors in the report markets. So going forward in terms 345 00:18:54,119 --> 00:18:56,639 Speaker 1: of your day to day work on this issue, what 346 00:18:56,760 --> 00:19:00,399 Speaker 1: are the biggest um challenges that you still see ahead 347 00:19:00,480 --> 00:19:05,280 Speaker 1: that need the most attention. So we recently released our 348 00:19:05,119 --> 00:19:08,280 Speaker 1: our our sort of date specific best practices from the 349 00:19:08,400 --> 00:19:11,000 Speaker 1: ARC that will take us from here, you know, through 350 00:19:11,040 --> 00:19:13,719 Speaker 1: the end of the transition. And uh, really what we 351 00:19:13,760 --> 00:19:16,240 Speaker 1: did uh at sort of at the last several meets 352 00:19:16,320 --> 00:19:18,720 Speaker 1: the ARC just during this even during this period, we've 353 00:19:18,720 --> 00:19:21,199 Speaker 1: sort of doubled our meetings and you know, certainly we 354 00:19:21,240 --> 00:19:25,000 Speaker 1: continue to see uh you know, the restatement of the deadline, 355 00:19:25,080 --> 00:19:28,880 Speaker 1: so you know, uh, even in light of uh COVID nineteen, 356 00:19:29,160 --> 00:19:32,560 Speaker 1: the work continues, and I think the what we've seen 357 00:19:32,680 --> 00:19:35,959 Speaker 1: is that certainly the message we've gotten from the official 358 00:19:36,040 --> 00:19:39,600 Speaker 1: sector even last week when Edwin's schooling water from the 359 00:19:39,720 --> 00:19:42,480 Speaker 1: st A, so there's no change in the position on 360 00:19:42,640 --> 00:19:44,800 Speaker 1: compelling panel banks. We struck the deal that they would 361 00:19:44,800 --> 00:19:47,800 Speaker 1: stay only end of one, and that's kind of the deal. 362 00:19:47,880 --> 00:19:50,679 Speaker 1: So I think what we've what we've gotten here is 363 00:19:50,960 --> 00:19:54,760 Speaker 1: a restatement of the twelve twenty one deadline, which means 364 00:19:54,800 --> 00:19:56,720 Speaker 1: that it was important for the ARC, I think to 365 00:19:56,800 --> 00:19:59,720 Speaker 1: lay out, you know, some some things ahead. So in 366 00:19:59,800 --> 00:20:02,160 Speaker 1: our best practices, we sort of we work our way 367 00:20:02,240 --> 00:20:05,520 Speaker 1: from say June thirty when we when we we recommend 368 00:20:05,600 --> 00:20:08,760 Speaker 1: these are obviously recommend the best practices that floating rate notes, 369 00:20:08,840 --> 00:20:11,959 Speaker 1: residential arm securitizations should just at a minimum use ARC 370 00:20:12,040 --> 00:20:15,800 Speaker 1: fallback language. We work our way to September through December, 371 00:20:15,840 --> 00:20:18,000 Speaker 1: and obviously the key dates in the future. I think 372 00:20:18,000 --> 00:20:20,040 Speaker 1: one I really want to call out is when the 373 00:20:20,080 --> 00:20:23,960 Speaker 1: central clearinghouses are going to switch their discounting on clear 374 00:20:24,119 --> 00:20:27,360 Speaker 1: derivatives from UH from FED funds to SOFA and that's 375 00:20:27,400 --> 00:20:30,000 Speaker 1: going to happen in October sixte and I think it'll 376 00:20:30,000 --> 00:20:31,880 Speaker 1: answer probably some of the questions you may have had 377 00:20:31,880 --> 00:20:36,480 Speaker 1: in previous UH in previous podcasts about UH the liquidity 378 00:20:36,480 --> 00:20:39,760 Speaker 1: and sulfur. So when that happens, that will actually you know, 379 00:20:39,840 --> 00:20:42,160 Speaker 1: should serve to put a pump a lot of liquidity 380 00:20:42,160 --> 00:20:45,760 Speaker 1: into sofur as people begin to uh, you know, swap 381 00:20:45,800 --> 00:20:50,119 Speaker 1: out their discounting methodologies on clear transactions. Is the plays 382 00:20:50,119 --> 00:20:52,480 Speaker 1: a huge role here. They've got their protocol which will 383 00:20:52,520 --> 00:20:56,040 Speaker 1: help deal with the legacy swaps that comes out, and 384 00:20:56,320 --> 00:20:59,560 Speaker 1: the ARC is recommending that people sign that as quickly 385 00:20:59,600 --> 00:21:01,560 Speaker 1: as a pot sibly can, but you know, certainly within 386 00:21:01,600 --> 00:21:04,200 Speaker 1: four months of publication, and then we work our way 387 00:21:04,200 --> 00:21:08,400 Speaker 1: through to things like streaming prices from dealers, and at 388 00:21:08,440 --> 00:21:10,359 Speaker 1: some point when we get sort of out, you know, 389 00:21:10,400 --> 00:21:12,600 Speaker 1: sort of with six months to go, really you know, 390 00:21:12,720 --> 00:21:17,080 Speaker 1: we recommend no new librar for business loans, floating rate securitizations, 391 00:21:17,160 --> 00:21:20,080 Speaker 1: we clos go a little further out based on some feedback, 392 00:21:20,359 --> 00:21:23,719 Speaker 1: and then stopping new derivative traits that increase risks. So 393 00:21:24,000 --> 00:21:26,840 Speaker 1: we've really tried to address this by getting the legacy 394 00:21:27,240 --> 00:21:30,960 Speaker 1: UH in the best possible shape through fallbacks and protocols 395 00:21:30,960 --> 00:21:33,560 Speaker 1: and other things, and then really you know, stopping new 396 00:21:33,600 --> 00:21:37,320 Speaker 1: issue to some degree, we're slowing down new production, right, 397 00:21:37,400 --> 00:21:39,480 Speaker 1: and really the whole idea of you know, the best 398 00:21:39,480 --> 00:21:41,159 Speaker 1: way out of the holes to stop digging, which I 399 00:21:41,160 --> 00:21:43,480 Speaker 1: think we can we can do today, and I think 400 00:21:43,520 --> 00:21:45,040 Speaker 1: we're just really trying to lay that out. So the 401 00:21:45,119 --> 00:21:48,320 Speaker 1: ARC has really I think taken a position now to 402 00:21:48,359 --> 00:21:51,560 Speaker 1: hopefully inform participants in the market on steps that they 403 00:21:51,560 --> 00:21:53,760 Speaker 1: can take between now and the end of live War. 404 00:21:54,000 --> 00:21:55,919 Speaker 1: In addition to all the things that we put out 405 00:21:56,000 --> 00:21:58,919 Speaker 1: in terms of tools, and we've also held ourselves were 406 00:21:58,920 --> 00:22:01,679 Speaker 1: pretty high standards and meetings and uh and I have 407 00:22:01,760 --> 00:22:04,399 Speaker 1: to say that even during this period, although we've been 408 00:22:04,720 --> 00:22:07,880 Speaker 1: meeting virtually like everyone else we've been, we've been doubling 409 00:22:07,880 --> 00:22:10,920 Speaker 1: our meetings and we continue to get product out there 410 00:22:10,920 --> 00:22:14,840 Speaker 1: because we're continuing to address a deadline at twelve m. 411 00:22:15,800 --> 00:22:18,280 Speaker 1: So I think it's kind of funny that you refer 412 00:22:18,400 --> 00:22:23,920 Speaker 1: to the committee as the arc, which obviously has biblical connotations. 413 00:22:23,960 --> 00:22:25,240 Speaker 1: I don't know if that was sort of what you 414 00:22:25,320 --> 00:22:28,199 Speaker 1: were thinking about, but do you feel a sense of 415 00:22:28,960 --> 00:22:33,120 Speaker 1: responsibility when it comes to making the transition from live Board? 416 00:22:33,160 --> 00:22:36,720 Speaker 1: This is clearly a new beginning in some sense um 417 00:22:36,920 --> 00:22:40,920 Speaker 1: for the financial system. Tracy really comes down to that 418 00:22:40,920 --> 00:22:44,280 Speaker 1: that this, this work is an opportunity for the industry 419 00:22:44,320 --> 00:22:47,840 Speaker 1: to solve a problem that was that was quite obvious, 420 00:22:47,960 --> 00:22:50,600 Speaker 1: you know in two thousand and eleven and twelve. And 421 00:22:50,640 --> 00:22:53,080 Speaker 1: I think the way we've tried to look at this is, 422 00:22:53,440 --> 00:22:57,879 Speaker 1: you know, in acknowledging the challenges we have. We also 423 00:22:58,040 --> 00:23:00,359 Speaker 1: know that we can that the market can act truly 424 00:23:00,400 --> 00:23:03,439 Speaker 1: do this right with without you know, the market has 425 00:23:03,480 --> 00:23:06,920 Speaker 1: an ability to correct this problem and and to put 426 00:23:07,040 --> 00:23:09,679 Speaker 1: put the market on firmer on a on a firmer 427 00:23:09,720 --> 00:23:12,040 Speaker 1: bit of footing. Uh. It turns out, you know, obviously 428 00:23:12,119 --> 00:23:16,879 Speaker 1: the live woar is is a critical component of the infrastructure. 429 00:23:17,440 --> 00:23:20,480 Speaker 1: Uh it has it has you know, we've we've identified 430 00:23:20,880 --> 00:23:24,119 Speaker 1: you know, the weaknesses of live war. We've identified what 431 00:23:24,160 --> 00:23:26,920 Speaker 1: we think is a workable replacement. And certainly people in 432 00:23:26,960 --> 00:23:29,480 Speaker 1: the market you know, can figure out ways to use sofa. 433 00:23:29,640 --> 00:23:31,359 Speaker 1: And one of the tools we put out a while 434 00:23:31,440 --> 00:23:33,199 Speaker 1: back was just how do you use sofa? How do 435 00:23:33,200 --> 00:23:35,440 Speaker 1: you use to compounding? How do you do different things 436 00:23:35,440 --> 00:23:37,680 Speaker 1: to FED? Recently, now you can look go on the 437 00:23:37,760 --> 00:23:41,840 Speaker 1: FED every day publishes averages of sofa that look back 438 00:23:41,920 --> 00:23:44,440 Speaker 1: over periods of time, which will be a key component 439 00:23:44,480 --> 00:23:46,440 Speaker 1: to the mortgage with the floody right, no mortgage market. 440 00:23:46,800 --> 00:23:48,359 Speaker 1: So if you really just need to take it. In 441 00:23:48,400 --> 00:23:52,080 Speaker 1: many cases we found and talking to you know, market participants, 442 00:23:52,119 --> 00:23:53,520 Speaker 1: is that they just need a rate. They wanted to 443 00:23:53,600 --> 00:23:54,720 Speaker 1: rate from screen and they used to be able to 444 00:23:54,720 --> 00:23:56,600 Speaker 1: look up and see three month live war. Well now 445 00:23:56,640 --> 00:23:59,119 Speaker 1: you can see three month average SOFA and it's and 446 00:23:59,160 --> 00:24:02,560 Speaker 1: it's on an it's you know, obviously it's administered by 447 00:24:02,600 --> 00:24:05,440 Speaker 1: the New York Fed, so we have an unassailable administrator. 448 00:24:05,480 --> 00:24:08,080 Speaker 1: We have a rate that's based on transaction. So you know, 449 00:24:08,160 --> 00:24:10,400 Speaker 1: when we kind of get there, uh, you know from 450 00:24:10,600 --> 00:24:12,880 Speaker 1: the people I've been on the Arctians the beginning and 451 00:24:13,000 --> 00:24:15,679 Speaker 1: took over his chair last year. But you know, between 452 00:24:15,720 --> 00:24:18,040 Speaker 1: the people who've done it before, Brian Leach, Sandy O'Connor, 453 00:24:18,080 --> 00:24:21,000 Speaker 1: who have chaired this, you know, there's been a degree 454 00:24:21,040 --> 00:24:24,480 Speaker 1: of the people around this work, Uh can really see 455 00:24:24,520 --> 00:24:27,160 Speaker 1: the challenges and also know that we have to get 456 00:24:27,280 --> 00:24:29,400 Speaker 1: to the next place. And I think that people who 457 00:24:29,400 --> 00:24:32,760 Speaker 1: are around this topic are are there's a lot of 458 00:24:32,840 --> 00:24:34,800 Speaker 1: zeal around that, I would say, because it's an obvious 459 00:24:34,840 --> 00:24:38,240 Speaker 1: problem and the solutions, although challenging, are there and we 460 00:24:38,280 --> 00:24:42,480 Speaker 1: can get this work done. Let's question for me, I 461 00:24:42,480 --> 00:24:45,399 Speaker 1: mean one of the sort of like overriding themes of 462 00:24:45,440 --> 00:24:48,560 Speaker 1: this and honestly other discussions at least that strikes out 463 00:24:48,560 --> 00:24:51,120 Speaker 1: to me is just this whole idea of like inertia 464 00:24:51,240 --> 00:24:54,040 Speaker 1: and network effects and how hard that is to break 465 00:24:54,040 --> 00:24:55,920 Speaker 1: and how much work it is to go from one 466 00:24:55,960 --> 00:24:59,400 Speaker 1: sort of de facto platform to another. And you mentioned, 467 00:24:59,720 --> 00:25:02,520 Speaker 1: you know, aiming for a sort of real drop dead 468 00:25:02,600 --> 00:25:06,320 Speaker 1: day and saying, uh, no more a goal of no 469 00:25:06,480 --> 00:25:10,880 Speaker 1: more library based contracts. Why is it that even at 470 00:25:10,920 --> 00:25:15,159 Speaker 1: this late point, it's difficult for people to not just 471 00:25:15,400 --> 00:25:18,320 Speaker 1: reach for lib or first, when you know the the 472 00:25:18,359 --> 00:25:22,840 Speaker 1: alternative is now clearly available. It's it's a great point 473 00:25:22,880 --> 00:25:25,320 Speaker 1: that the inertiats of the status quo around this has been, 474 00:25:25,680 --> 00:25:27,600 Speaker 1: you know, one of our biggest challenges. And if you 475 00:25:27,680 --> 00:25:30,160 Speaker 1: go back and you know think, uh, you know, anyone 476 00:25:30,200 --> 00:25:34,160 Speaker 1: who's been in the market, you know since has seen 477 00:25:34,240 --> 00:25:37,280 Speaker 1: library as a key component of of of the markets 478 00:25:37,560 --> 00:25:39,840 Speaker 1: and removing that. We talked about this, you know, years back. 479 00:25:39,880 --> 00:25:42,040 Speaker 1: It's sort of the five stages of grief and how 480 00:25:42,119 --> 00:25:44,400 Speaker 1: people have to go through it. But more and more 481 00:25:44,560 --> 00:25:47,000 Speaker 1: we do face that and we will reach critical mass 482 00:25:47,000 --> 00:25:49,159 Speaker 1: at some point. The key things I think on the 483 00:25:49,240 --> 00:25:52,040 Speaker 1: question is the derivative markets. There has been an enormous 484 00:25:52,119 --> 00:25:55,480 Speaker 1: amount of reliance on the is the protocol because the 485 00:25:55,560 --> 00:25:58,560 Speaker 1: IS the protocol allows people and there's been a lot 486 00:25:58,560 --> 00:26:00,480 Speaker 1: of confidence that is that we'll get this work done, 487 00:26:00,840 --> 00:26:04,240 Speaker 1: will deal with your legacy book in a fairly straightforward manner. 488 00:26:04,440 --> 00:26:06,920 Speaker 1: So the comfort people having a derivatives market is that 489 00:26:07,000 --> 00:26:09,320 Speaker 1: the protocol will solve a lot of their problems, even 490 00:26:09,320 --> 00:26:12,439 Speaker 1: if they're trading beyond the end of Really, if you 491 00:26:12,480 --> 00:26:14,480 Speaker 1: think about it, at the beginning of this year, if 492 00:26:14,520 --> 00:26:16,480 Speaker 1: you did a ten year swap, you were really doing 493 00:26:16,520 --> 00:26:18,399 Speaker 1: two years of live or and eight years of so 494 00:26:18,520 --> 00:26:21,080 Speaker 1: for so more and more, I think as people begin 495 00:26:21,119 --> 00:26:23,520 Speaker 1: to understand this, But to me, one of the biggest 496 00:26:23,560 --> 00:26:26,720 Speaker 1: incentives I think that will begin to get people moving 497 00:26:26,880 --> 00:26:30,720 Speaker 1: even a little bit more quickly is the capacity to 498 00:26:30,880 --> 00:26:33,800 Speaker 1: operationalize all the things that we're doing, whether that be 499 00:26:33,920 --> 00:26:37,280 Speaker 1: fallbacks or protocols. Just imagine we're here, you know, at 500 00:26:37,280 --> 00:26:42,400 Speaker 1: the New Year's Eve in one and you've got thousands 501 00:26:42,440 --> 00:26:45,919 Speaker 1: of protocols that you have to actually connect with counterparties on, 502 00:26:45,960 --> 00:26:47,919 Speaker 1: and you have thousands of fallbacks that you have to 503 00:26:47,960 --> 00:26:51,480 Speaker 1: recalculate and do these things. That capacity, I think will 504 00:26:51,520 --> 00:26:54,879 Speaker 1: begin to be the incentive again to get people just 505 00:26:54,880 --> 00:26:57,560 Speaker 1: stop digging the whole. So more and more we're you know, 506 00:26:57,600 --> 00:27:01,360 Speaker 1: we're anticipating that there will be a greater awareness as 507 00:27:01,359 --> 00:27:04,040 Speaker 1: we move forward, and I think the tipping points could 508 00:27:04,080 --> 00:27:07,320 Speaker 1: be the is the protocol, the CCP conversion. As I 509 00:27:07,359 --> 00:27:11,360 Speaker 1: talked about the central clearing houses switching their discounting methodology 510 00:27:11,480 --> 00:27:13,840 Speaker 1: to SO for so, there's a few things coming down 511 00:27:13,920 --> 00:27:16,399 Speaker 1: the pike where we think that, uh that more and 512 00:27:16,480 --> 00:27:18,919 Speaker 1: more if you think about so for being, you know 513 00:27:19,080 --> 00:27:23,119 Speaker 1: the way all clear product is discounted, Well, that's gonna 514 00:27:23,200 --> 00:27:25,879 Speaker 1: create new hedging demand, that's going to create new activity 515 00:27:26,359 --> 00:27:28,240 Speaker 1: and more and more. We think that we'll get there. 516 00:27:28,280 --> 00:27:31,639 Speaker 1: But I would say that we certainly would have hoped 517 00:27:32,040 --> 00:27:34,080 Speaker 1: to have been a little further down the road here, 518 00:27:34,520 --> 00:27:36,679 Speaker 1: but with the deadline in place, I think that I 519 00:27:36,680 --> 00:27:41,520 Speaker 1: think our industry response to deadlines pretty well. Tom. That 520 00:27:41,600 --> 00:27:45,600 Speaker 1: was a great sort of run through the work of 521 00:27:45,640 --> 00:27:48,520 Speaker 1: the committee, and you really appreciate you coming on and 522 00:27:48,680 --> 00:27:51,600 Speaker 1: explaining what's going on with us. Thank you so much. Yes, 523 00:27:51,680 --> 00:28:01,359 Speaker 1: thank you great to Thank you so Joe. Just listening 524 00:28:01,359 --> 00:28:04,479 Speaker 1: to that conversation, I mean, I don't really envy the 525 00:28:04,560 --> 00:28:08,200 Speaker 1: work that Tom is doing on that committee. It sounds 526 00:28:08,240 --> 00:28:11,639 Speaker 1: like a pretty gargantuan task, to be honest, But I 527 00:28:11,680 --> 00:28:14,680 Speaker 1: think your point about the network effect is really interesting 528 00:28:14,720 --> 00:28:18,040 Speaker 1: and that's something that we've talked about well, in relation 529 00:28:18,080 --> 00:28:20,600 Speaker 1: to a few different things now, but bitcoin being one 530 00:28:20,600 --> 00:28:22,840 Speaker 1: of them. But it is. It is really interesting to 531 00:28:23,000 --> 00:28:27,280 Speaker 1: see when a large group of people start to change 532 00:28:27,600 --> 00:28:32,240 Speaker 1: behavior for something that's related to you know, this enormous 533 00:28:32,320 --> 00:28:36,159 Speaker 1: dollar amount of financial assets. Yeah. I thought that was 534 00:28:36,160 --> 00:28:40,480 Speaker 1: really interesting, and especially like the specific deadline team mentioned 535 00:28:40,480 --> 00:28:43,520 Speaker 1: and I like when he got into the details about Okay, 536 00:28:43,560 --> 00:28:46,920 Speaker 1: on this day clearing houses are going to do, ex etcetera. 537 00:28:46,960 --> 00:28:51,480 Speaker 1: Because it's one thing to have another sort of platform 538 00:28:51,560 --> 00:28:54,280 Speaker 1: so to speak, or index that you sort of hope 539 00:28:54,280 --> 00:28:58,360 Speaker 1: will become the default standard, but then actually talk about 540 00:28:58,680 --> 00:29:01,400 Speaker 1: what it takes to do the transition rather than just 541 00:29:01,440 --> 00:29:04,600 Speaker 1: sort of having it out there because obviously, even if 542 00:29:04,640 --> 00:29:08,720 Speaker 1: it's everyone can agree that so far or whatever, but 543 00:29:08,800 --> 00:29:12,920 Speaker 1: in this case, so far is the better measure. Uh, 544 00:29:12,960 --> 00:29:15,600 Speaker 1: that's not enough to get the transition over. You actually 545 00:29:15,640 --> 00:29:17,040 Speaker 1: have to like put in the work and put on 546 00:29:17,040 --> 00:29:19,440 Speaker 1: all these deadlines. And I like what to talk about 547 00:29:19,600 --> 00:29:23,680 Speaker 1: the language tools that use to use the transition. It's 548 00:29:23,680 --> 00:29:26,040 Speaker 1: good to just hear about someone who's like very much 549 00:29:26,120 --> 00:29:28,440 Speaker 1: like sort of sleeves rolled up in the work of 550 00:29:28,480 --> 00:29:31,920 Speaker 1: doing this. Yeah. Absolutely, I also like the description of 551 00:29:31,960 --> 00:29:35,240 Speaker 1: having like long term market participants move away from library 552 00:29:35,240 --> 00:29:38,760 Speaker 1: as the sort of five stages of grief. Um, yeah, 553 00:29:38,920 --> 00:29:43,120 Speaker 1: like who knew that people could be so personally tied 554 00:29:43,240 --> 00:29:47,200 Speaker 1: to an interest rate? But there we are. Well, you know, 555 00:29:47,400 --> 00:29:51,000 Speaker 1: it's it's like we've all been in offices and workplaces 556 00:29:51,000 --> 00:29:54,520 Speaker 1: long enough that we know that people get irrationally attached 557 00:29:54,520 --> 00:29:58,760 Speaker 1: to bizarre things, certain workflows that people have dealt with 558 00:29:58,800 --> 00:30:02,040 Speaker 1: their entire careers. If he was saying, even if logically 559 00:30:02,200 --> 00:30:04,040 Speaker 1: there's no good reason for it, it's like that's what 560 00:30:04,040 --> 00:30:07,040 Speaker 1: they're familiar with, that's where they're the experts, and so 561 00:30:07,400 --> 00:30:09,760 Speaker 1: you just have to uh, you see it all the time, 562 00:30:09,800 --> 00:30:13,760 Speaker 1: and I guess I'm not surprised that uh an index 563 00:30:13,840 --> 00:30:15,640 Speaker 1: or an interest rate could be one of them. Right, 564 00:30:15,840 --> 00:30:19,440 Speaker 1: No one likes change. Okay, Well, I mentioned in the 565 00:30:19,480 --> 00:30:23,880 Speaker 1: intro that we have two more episodes. This has been 566 00:30:24,080 --> 00:30:26,720 Speaker 1: one of them. We've got one more coming up, which 567 00:30:26,760 --> 00:30:30,000 Speaker 1: will make our Librard series a total of five episodes 568 00:30:30,160 --> 00:30:33,560 Speaker 1: in all, so something to look forward to. And I 569 00:30:33,600 --> 00:30:35,880 Speaker 1: think I think by the time we finished this, I 570 00:30:35,920 --> 00:30:38,560 Speaker 1: know you want to do that month long library series 571 00:30:38,600 --> 00:30:41,160 Speaker 1: and keep it going. I'm good. I think a week 572 00:30:41,280 --> 00:30:43,640 Speaker 1: is a good start. Yeah, I really think with five 573 00:30:43,880 --> 00:30:47,719 Speaker 1: episodes will have covered. Um. I want to say all 574 00:30:47,800 --> 00:30:49,720 Speaker 1: the bases, but I'm sure something will crop up that 575 00:30:49,760 --> 00:30:54,240 Speaker 1: we haven't covered, but the vast majority of bases. Okay, 576 00:30:54,280 --> 00:30:56,680 Speaker 1: all right, Well this has been another episode of the 577 00:30:56,720 --> 00:31:00,520 Speaker 1: All Thoughts podcast and another episode in our library series. 578 00:31:00,680 --> 00:31:03,520 Speaker 1: I'm ms Alloway. You can follow me on Twitter at 579 00:31:03,720 --> 00:31:07,320 Speaker 1: mssy Alloway and you can follow me on Twitter at 580 00:31:07,320 --> 00:31:11,080 Speaker 1: the Stalwart. Follow our producer on Twitter, Laura Carlson at 581 00:31:11,160 --> 00:31:14,840 Speaker 1: Laura M Carlson. Follow the Bloomberg head of podcast, Francesca 582 00:31:14,920 --> 00:31:18,720 Speaker 1: Levi at Francesca Today, and check out all of our 583 00:31:18,760 --> 00:31:23,320 Speaker 1: podcast at Bloomberg under the handle at podcasts. Thanks for listening.