WEBVTT - How The Transition Away From LIBOR Is Actually Going 0:00:10.880 --> 0:00:14.600 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.680 --> 0:00:19.680 I'm Tracy Alloway and I'm Joe Wisenthal. So, Joe, uh, 0:00:20.000 --> 0:00:23.239 I think on our last recording of our library series, 0:00:23.400 --> 0:00:26.840 I think I said that that was actually the last episode. 0:00:26.960 --> 0:00:31.560 But you know what, that was false advertising you could do. 0:00:31.760 --> 0:00:35.760 There's never enough libraries there, no, And also it's kind 0:00:35.760 --> 0:00:38.720 of amazing, but as we continue to record these episodes, 0:00:39.120 --> 0:00:44.000 more and more people want to actually talk about libor um, 0:00:44.040 --> 0:00:45.959 and I guess it kind of makes sense. After all, 0:00:46.000 --> 0:00:48.920 this is the reference rate that affects you know, I 0:00:48.960 --> 0:00:50.479 can never keep track, but I think it's something like, 0:00:50.520 --> 0:00:55.040 you're into fifty trillion dollars worth of assets, so obviously 0:00:55.320 --> 0:00:59.560 it's absolutely crucial for the financial system, right, I mean, yeah, 0:00:59.560 --> 0:01:02.920 as you say, it makes sense that people have so 0:01:03.000 --> 0:01:05.240 much to say about it, given that it's been so 0:01:05.360 --> 0:01:08.679 crucial to the pricing of trillions, hundreds of trillions of 0:01:08.720 --> 0:01:12.840 dollars worth of assets, and it's this sort of herculean 0:01:13.000 --> 0:01:16.920 task to sunset it in some way and transition to 0:01:17.640 --> 0:01:19.640 something else. So I don't know, maybe we should do 0:01:19.760 --> 0:01:23.880 like a month long live ar series. Oh god, Okay, look, 0:01:24.000 --> 0:01:27.640 we have two more episodes scheduled, including this one, so 0:01:27.760 --> 0:01:29.800 let's do those first and then we can talk about 0:01:29.800 --> 0:01:34.399 maybe doing a month long live BRLK, we'll revisit. Okay, um, 0:01:34.440 --> 0:01:38.080 but I'm really happy to say that today for our guest, 0:01:38.160 --> 0:01:42.320 we have someone who's actually, you know, personally involved in 0:01:42.600 --> 0:01:48.080 the transition process from library to sof sofar of course, 0:01:48.160 --> 0:01:51.360 is the secured overnight financing rate. If you don't know 0:01:51.400 --> 0:01:53.240 what that is by now, then you should go back 0:01:53.280 --> 0:01:55.960 and listen to some of our previous episodes. But it's 0:01:56.000 --> 0:01:59.480 basically the thing that's supposed to replace librards, so it's 0:01:59.520 --> 0:02:02.840 going to be really interesting to talk about the thinking 0:02:02.880 --> 0:02:07.080 behind that transition process but also how it's actually going. Great. 0:02:07.120 --> 0:02:09.480 I'm really excited about this because again, I do like 0:02:09.560 --> 0:02:11.560 a lot of our top I, like when we have 0:02:11.680 --> 0:02:15.840 discussions on anything that are actually now that are not 0:02:15.960 --> 0:02:18.040 just sort of theoretical, but deal with the sort of 0:02:18.320 --> 0:02:21.680 nuts and bolts with how you actually do something. Yeah, 0:02:21.840 --> 0:02:25.600 this is definitely uh practice. So okay, let's bring on 0:02:25.680 --> 0:02:28.960 our guest for the episode. It is Tom Whipp, who 0:02:29.040 --> 0:02:32.160 is chair of the Alternative Reference Rates Committee and also 0:02:32.280 --> 0:02:37.040 Vice Chairman of Institutional Securities at Morgan Stanley, Tom, thanks 0:02:37.040 --> 0:02:40.400 so much for coming on, Thanks for having me so Tom, 0:02:40.480 --> 0:02:42.720 maybe just to begin with, you can give us a 0:02:42.800 --> 0:02:47.519 sort of brief description of what the Alternative Reference Rates 0:02:47.560 --> 0:02:51.800 Committee or the a r r C actually does, When 0:02:51.880 --> 0:02:56.520 was it started, and what's the goal. So really, the 0:02:56.520 --> 0:02:59.880 the the ARC was put together in two thousand fourteen, 0:03:00.040 --> 0:03:05.680 originally UH to begin to select an appropriate, durable alternative 0:03:05.680 --> 0:03:08.960 to librar and and then to put forward a plan 0:03:09.160 --> 0:03:11.720 to actually get off live ar and onto that new rate. 0:03:12.160 --> 0:03:14.960 That work continued UH for several years, and at that 0:03:15.000 --> 0:03:18.280 point that group selected SOFA, which is you noticed a 0:03:18.320 --> 0:03:22.400 secured overnight financing rate, which is basically the US Treasury 0:03:22.440 --> 0:03:26.600 repo market reported over a trillion dollars a day in 0:03:26.800 --> 0:03:30.440 UH in daily activity and transactions. And that really solved 0:03:30.480 --> 0:03:32.440 for the first problem because if you go back to 0:03:32.520 --> 0:03:36.040 the history of library that the issues developed because the 0:03:36.040 --> 0:03:40.720 inner bank market itself had shrunk tremendously over over some 0:03:40.840 --> 0:03:44.680 period of time. Additionally, the use of librar had gone 0:03:44.720 --> 0:03:47.000 up exponentially, and you think you sort of can take 0:03:47.040 --> 0:03:49.120 that from sort of you know, the mid nineteen eighties 0:03:49.240 --> 0:03:52.000 all the way up until two thousand twelve, and the 0:03:52.040 --> 0:03:54.680 scandals that emerged from that, but so much of that 0:03:54.800 --> 0:03:57.520 was based on the fact that the underlying transactions and 0:03:57.560 --> 0:04:01.560 the inner dealing market had reduced cansiderably used had gone up, 0:04:01.800 --> 0:04:04.360 and you get this uh, this uh, this concept of 0:04:04.400 --> 0:04:08.920 the inverted pyramid, which is too few transactions supporting too 0:04:08.960 --> 0:04:13.280 many financial contracts and without transactions to create those rates, 0:04:13.840 --> 0:04:16.920 submitting paddle banks who create live or were forced to 0:04:17.000 --> 0:04:19.919 use what they call expert judgment. So when we decided 0:04:19.960 --> 0:04:22.240 on so for the first thing we tried to solve 0:04:22.320 --> 0:04:26.440 to was can we find something that has sufficient underlying 0:04:26.480 --> 0:04:29.760 transactions that would mean that these that that there would 0:04:29.800 --> 0:04:32.720 be really no need for expert judgment. But in fact 0:04:32.760 --> 0:04:35.680 we could just rely on actual trades to create the rate. 0:04:36.880 --> 0:04:39.600 From your perspective, as you say, one of the nice 0:04:39.600 --> 0:04:42.599 things about so far is there's actual trades. There's no ambiguity, 0:04:42.800 --> 0:04:47.160 no less opportunity to manipulate the number. What in your 0:04:47.240 --> 0:04:50.240 view is the primary challenge and what is the work 0:04:50.320 --> 0:04:56.280 that you do to enable this transition from one index 0:04:56.320 --> 0:04:59.400 to another. So, so when the art was then reconstituted 0:04:59.440 --> 0:05:01.800 after making those two in the important decision, first the 0:05:01.920 --> 0:05:04.920 selection of SOFA and second to do what we called 0:05:04.960 --> 0:05:07.839 the pace transition plan. You'll hear you know, you've probably 0:05:07.839 --> 0:05:09.240 heard a lot about that, and you continue to hear 0:05:09.240 --> 0:05:11.560 a lot about that, which was not to have really 0:05:11.640 --> 0:05:14.720 a cliff effect, but too over the period of time 0:05:14.800 --> 0:05:17.000 that we had between I would say, two thousand and 0:05:17.040 --> 0:05:20.120 seventeen and two thousand twenty one to be in a 0:05:20.120 --> 0:05:24.200 position to have people use UH, use live or less 0:05:24.320 --> 0:05:27.400 UH and to address some of the legacy UH contracts 0:05:27.400 --> 0:05:30.039 that go beyond the end of live or one, but 0:05:30.120 --> 0:05:33.479 also you know, reduce that exposure through new issue and 0:05:33.640 --> 0:05:37.120 usage of SOFUR. So what we've really tried to do 0:05:37.560 --> 0:05:40.680 over that period of time UH and most recently with 0:05:40.520 --> 0:05:43.320 the with the release of our of our best practices 0:05:43.640 --> 0:05:46.200 for the remainder of the transition is to really give 0:05:46.279 --> 0:05:50.000 market participants to tools that they need to actually enable 0:05:50.040 --> 0:05:54.479 that pace transition, whether that be for legacy UH legacy 0:05:54.560 --> 0:05:58.239 challenges where they have contracts or securities that go beyond 0:05:58.320 --> 0:06:01.960 ende that we can we can have better fallbacks and 0:06:02.000 --> 0:06:04.000 when live world ends, how do you get from live 0:06:04.000 --> 0:06:06.680 board to sofa? So you know, we put we put 0:06:06.680 --> 0:06:09.440 our fallbacks, we put out we've consulted with the market, 0:06:09.520 --> 0:06:12.960 we have provided over the course of just I would say, 0:06:12.960 --> 0:06:16.000 just even the last the last several months, you know, 0:06:16.120 --> 0:06:19.600 recommendations for things like swaptions. Uh we how do you 0:06:19.640 --> 0:06:23.560 how do you how do you price new floating rate mortgages. 0:06:23.600 --> 0:06:27.160 So the art really over the last several years has 0:06:27.200 --> 0:06:31.359 been developing and providing to the market tools to actually 0:06:31.400 --> 0:06:36.279 make this transition as smooth as possible. So, Tom, you're 0:06:36.320 --> 0:06:40.919 a long time repo man, uh rebot man, repo guy 0:06:40.960 --> 0:06:45.839 at Morganstown. UM, could you maybe like explain the rebo 0:06:45.920 --> 0:06:49.440 connection for sofa and I guess I'd be curious to 0:06:49.520 --> 0:06:52.479 just get your take on the transition of the repo 0:06:52.600 --> 0:06:57.279 market from pre financial crisis to now as well. Certainly, 0:06:57.400 --> 0:06:59.640 so if we think about what SOFA is, it really 0:06:59.760 --> 0:07:03.120 is US Treasury Bank three pos so the tread you know, 0:07:03.200 --> 0:07:07.800 Treasury securities on repo, which which represent obviously h the 0:07:07.920 --> 0:07:11.320 risk free rate. Uh. And even if you go prior 0:07:11.360 --> 0:07:15.360 to the financial crisis and beyond and through that particular 0:07:15.440 --> 0:07:17.640 market has always held up very well because of the 0:07:17.720 --> 0:07:20.280 risk free nature of the collateral. So when we think 0:07:20.320 --> 0:07:23.440 about issues in the repo market broadly during the crisis, 0:07:23.760 --> 0:07:25.680 that was really you know, things that were backed by 0:07:25.760 --> 0:07:27.880 you know, less liquid assets and things like that, but 0:07:27.920 --> 0:07:32.040 the treasury repo market for many decades has been really 0:07:32.120 --> 0:07:35.080 been the underpinning and in terms of volume, uh, you know, 0:07:35.200 --> 0:07:37.160 we can look and see it again over a trillion 0:07:37.200 --> 0:07:41.360 dollars a day and traded activity from both the clearing 0:07:41.400 --> 0:07:44.960 banks and from from the Central Clearing House DCCC. So 0:07:45.280 --> 0:07:47.880 when we really looked at that over the period, uh, 0:07:47.880 --> 0:07:50.640 it really stood out as as the best selection because 0:07:50.640 --> 0:07:53.200 our other choices, if you think about what the mandate was, 0:07:53.200 --> 0:07:55.760 would have been things like the overnight bank funding rate 0:07:56.160 --> 0:07:59.240 UH FED funds rate, And if you compare that trillion 0:07:59.320 --> 0:08:01.680 to the FED ones market or it's the overnight thing 0:08:02.000 --> 0:08:05.120 UH funding rate, or to h or two things like 0:08:05.160 --> 0:08:08.960 commercial paper bills, the numbers really really go down. You know, 0:08:09.320 --> 0:08:11.040 you go from sort of a trillion to a hundred 0:08:11.040 --> 0:08:13.840 and fifty to below a hundred. So the choice really 0:08:13.960 --> 0:08:17.360 was to have that strong foundation which we could look 0:08:17.400 --> 0:08:19.360 back and you can you can really model us all 0:08:19.400 --> 0:08:21.880 the way back. It seemed like that was the obvious choice, 0:08:21.920 --> 0:08:23.760 and that and that experience in the report market, I 0:08:23.800 --> 0:08:26.640 think led us to believe that over time. One of 0:08:26.680 --> 0:08:28.360 the key things we looked at way back in two 0:08:28.400 --> 0:08:30.680 thousand and fourteen was we certainly don't want to do 0:08:30.760 --> 0:08:32.160 this work again. We want to do it once, and 0:08:32.160 --> 0:08:50.040 we want to do it right. You mentioned tools, and 0:08:50.040 --> 0:08:53.040 you said giving tools to market participants so that they 0:08:53.040 --> 0:08:55.960 can deal with some of the issues that might arise, 0:08:56.200 --> 0:09:00.240 such as contracts that are pegged to liebor that are 0:09:00.240 --> 0:09:03.959 going to extend beyond. What does that mean specifically, what 0:09:03.960 --> 0:09:07.360 what kind of tools do people have to ameliorate some 0:09:07.440 --> 0:09:12.520 of the issues that will arise from the transition. Just 0:09:12.679 --> 0:09:14.719 a simple, a simple example I would I would say 0:09:14.720 --> 0:09:18.080 as the easiest one is UH floating rate notes. Uh. 0:09:18.160 --> 0:09:21.160 If you think about existing floating rate notes pre all 0:09:21.200 --> 0:09:25.240 these work, UH floating rate notes typically if live boar 0:09:25.240 --> 0:09:27.959 would have cease, had a fall back, had a fallback 0:09:28.000 --> 0:09:29.800 in there, you know, in the in the bond documents, 0:09:29.800 --> 0:09:32.440 that would basically say you would take the last printed 0:09:32.520 --> 0:09:35.880 lie bar and that would be your rate until final maturity. 0:09:36.440 --> 0:09:38.439 So if you think about an investor, what a floating 0:09:38.520 --> 0:09:40.000 rate note is going to float to a three month 0:09:40.040 --> 0:09:43.880 live war and it went well beyond one at some 0:09:44.000 --> 0:09:47.439 point they would take that last fixing of libar, the 0:09:47.480 --> 0:09:49.400 last one at the end and they would live with 0:09:49.520 --> 0:09:53.760 that rate until final maturity. What the ART did because 0:09:53.920 --> 0:09:56.520 and to change those rates in most cases in the 0:09:56.640 --> 0:10:00.560 US you need a d percent consent from bondholders obviously, 0:10:00.679 --> 0:10:03.160 as in your impossibility. So what the ART did way 0:10:03.160 --> 0:10:06.360 back was we put out better fall back language for 0:10:06.480 --> 0:10:08.440 new issue floating right notes. And you can see in 0:10:08.440 --> 0:10:10.360 the floating rate note market we've got well over six 0:10:10.440 --> 0:10:14.640 hundred six hundred billion of new issue using SOFA directly, 0:10:14.679 --> 0:10:17.199 which is obviously the best answer. But even those that 0:10:17.280 --> 0:10:20.440 continue to use live war now have fallbacks that create 0:10:20.480 --> 0:10:24.400 a series of waterfalls that go from go from libor 0:10:25.040 --> 0:10:27.400 with a credit spread and the term spread to replicate 0:10:27.400 --> 0:10:30.080 on a look back what the differences between SOFA and 0:10:30.120 --> 0:10:33.199 librlar over reasonable period of time, and at some point 0:10:33.240 --> 0:10:37.040 now those new issues, even using Librlar will have much 0:10:37.080 --> 0:10:39.640 clearer outcomes at the end of live War, But obviously 0:10:39.679 --> 0:10:42.360 the best case is to use SOFA. So we think 0:10:42.360 --> 0:10:44.920 about the floating rate note market and presented a real 0:10:45.040 --> 0:10:47.440 big challenge, And what the ART did was provide that 0:10:47.480 --> 0:10:50.240 fallback language so people could put their new issue out 0:10:50.240 --> 0:10:52.240 in a much safer way than they could have prior 0:10:52.320 --> 0:10:55.880 to that right, So you have to fall back language 0:10:56.080 --> 0:10:59.360 in order to enable people to get contracts done for 0:10:59.480 --> 0:11:04.559 financial securities, UM, even if libral is no longer available 0:11:04.679 --> 0:11:07.160 and you know, sort of before the new reference rate 0:11:07.520 --> 0:11:10.880 is widely available. I'm curious, what's the I don't know, 0:11:11.040 --> 0:11:13.280 is take up the right word? What's the like adoption 0:11:13.400 --> 0:11:16.320 rate on that kind of fallback provision? Is everyone using 0:11:16.320 --> 0:11:19.360 it nowadays for the most part? Yeah, And and certainly 0:11:19.400 --> 0:11:21.400 in the floating rate note market, we would see people 0:11:21.440 --> 0:11:24.480 either either going directly to sofa, as you know, with 0:11:24.800 --> 0:11:26.880 I said over six d billions of new issue using 0:11:26.920 --> 0:11:29.720 Sofa directly. And I would say that for the for 0:11:29.960 --> 0:11:32.320 a vast majority of that market, because there's an obvious 0:11:32.400 --> 0:11:34.720 risk that you can't undo what you've done post issue 0:11:34.760 --> 0:11:38.600 because of that consent challenge. So I think that, you know, 0:11:38.679 --> 0:11:42.560 for places where there's true economics, uh, not a lot 0:11:42.600 --> 0:11:45.520 of that, not a lot of flexibility that that market 0:11:45.559 --> 0:11:48.480 really was, you know, certainly an early adopter to these 0:11:48.480 --> 0:11:52.360 fallbacks and to sofa itself. Are there instruments, just to 0:11:52.400 --> 0:11:57.360 be clear, other instruments out there that face a cliff nonetheless, 0:11:57.400 --> 0:12:01.800 that were issued before the fall back language uh was 0:12:02.360 --> 0:12:05.040 was offered before their ideas before people were really thinking 0:12:05.040 --> 0:12:07.439 about this, that a is going to create a real 0:12:07.480 --> 0:12:12.240 problem for um either holders or issuers of the notes. Yeah, 0:12:12.280 --> 0:12:14.200 and I think I think that the way I think, 0:12:14.200 --> 0:12:16.320 the way we think about oh this is really in 0:12:16.400 --> 0:12:19.120 terms of you know, legacy, you know, or or stock 0:12:19.320 --> 0:12:22.200 and then flow. Right. So obviously when we look back 0:12:22.200 --> 0:12:24.319 on this, you know, the roll downs of of live 0:12:24.480 --> 0:12:27.160 or exposures when we began this work, you know, by 0:12:27.240 --> 0:12:29.439 the time we had arrived at two thousands twenty one, 0:12:29.480 --> 0:12:32.360 had everyone stopped using live or, we would have been 0:12:32.360 --> 0:12:35.240 in a much smaller exposure number. Uh. But obviously since 0:12:35.280 --> 0:12:38.120 this has taken some time, Uh, we we really think 0:12:38.120 --> 0:12:40.200 about that. But the real term we use, whether it 0:12:40.200 --> 0:12:43.040 be whether it be stock or legacy or flow and 0:12:43.120 --> 0:12:45.800 new issue is what we call the tough legacy. And 0:12:45.800 --> 0:12:49.199 and the tough legacy are things like floating rate notes 0:12:49.280 --> 0:12:56.400 issued without good fallbacks that mature after with certain hybrids, perpetuals, 0:12:56.600 --> 0:12:58.360 and a lot of things that for the most part 0:12:58.440 --> 0:13:03.480 either have fallbacks no fallbacks whatsoever, uh they never contemplated 0:13:03.520 --> 0:13:06.359 the end of live ar or or they have fallbacks 0:13:06.400 --> 0:13:10.079 that revert to last libar or the third one where 0:13:10.120 --> 0:13:14.640 there is uh pretty pretty I would say extreme discretion 0:13:15.200 --> 0:13:17.520 by an agent or a trustee to pick the new 0:13:17.640 --> 0:13:20.119 rate at the end of library. So those three categories 0:13:20.120 --> 0:13:22.600 are what we call the tough legacy UH. And on 0:13:22.679 --> 0:13:26.120 the tough legacy in the US, we've been pursuing, UH, 0:13:26.160 --> 0:13:30.200 we've been pursuing a legislative path which would allow for 0:13:30.720 --> 0:13:35.920 through legislation for those tough legacy UH, securities and other 0:13:35.960 --> 0:13:41.360 contracts to embed ARC fallback language UH in place of 0:13:41.440 --> 0:13:45.120 no no fallback, in place of fallbacks that reference live 0:13:45.240 --> 0:13:48.120 ar which wouldn't exist and gives people also some ability 0:13:48.160 --> 0:13:50.400 on a on a voluntary basis if they have a 0:13:50.440 --> 0:13:53.640 lot of discretion to embed ARC fallbacks to create uh, 0:13:53.679 --> 0:13:56.120 you know, some degree of safe harbor. So the tough 0:13:56.240 --> 0:13:58.240 legacy is the piece that we've really spent a lot 0:13:58.280 --> 0:14:00.400 of time on and again we are pursued doing a 0:14:00.600 --> 0:14:05.160 legislative path on that. But when we speak to market participants, UH, 0:14:05.280 --> 0:14:08.079 we were very very we really think people need to 0:14:08.120 --> 0:14:11.880 focus on that because whether or not that legislative path uh, 0:14:12.200 --> 0:14:14.360 you know, works out or not, people need to think 0:14:14.400 --> 0:14:17.160 about that. It's probably when they risk prioritize that those 0:14:17.200 --> 0:14:19.880 are their single biggest risks is do you have a 0:14:20.040 --> 0:14:24.480 number for how big the tough legacy world is, like 0:14:24.680 --> 0:14:27.280 the size of this issue I don't have in front 0:14:27.320 --> 0:14:29.240 of me. Job. We could definitely get back, but it really, 0:14:29.440 --> 0:14:31.240 it really, it really deals with if you think about, 0:14:31.720 --> 0:14:34.720 you know, parts of the fixed income market again floating 0:14:34.760 --> 0:14:38.120 rate notes that go beyond hybrids. Uh, you know that 0:14:38.240 --> 0:14:39.800 you think about the back end of a lot of 0:14:39.840 --> 0:14:42.480 a lot of trust preferreds that reference library that are 0:14:42.480 --> 0:14:45.320 well beyond one. Those are the kinds of things that 0:14:45.360 --> 0:14:47.480 you have out there. They really can't be. Uh, they 0:14:47.480 --> 0:14:49.600 can't be. And you go much deeper into you know, 0:14:49.640 --> 0:14:53.000 into into just traditional uh you know, contracts that referenced 0:14:53.040 --> 0:14:55.120 live war for penalty rates or other things where if 0:14:55.120 --> 0:14:57.960 there's no lib ar and there's no fallback, you're gonna 0:14:58.000 --> 0:15:00.440 find yourself in, you know, in a lot of disputes 0:15:00.920 --> 0:15:04.440 slash potential litigation. So if we just go back to 0:15:04.760 --> 0:15:07.640 um to sofa for a second and the link with 0:15:07.680 --> 0:15:12.240 the repo market, one of the criticisms of sofa as 0:15:12.240 --> 0:15:15.600 a replacement rate for a lib or has to do 0:15:15.720 --> 0:15:18.720 with this sort of dramatic rebo madness that we saw 0:15:18.720 --> 0:15:20.880 on the market back in September when we saw the 0:15:20.880 --> 0:15:25.720 repo rate spike very quickly and very dramatically. And the 0:15:25.760 --> 0:15:29.640 criticism was that if you have a reference rate tied 0:15:29.760 --> 0:15:33.520 to a repo rate, that is that volatile something that 0:15:33.560 --> 0:15:36.360 can you know, change that quickly in a single day. 0:15:36.600 --> 0:15:39.560 But that probably wasn't a good thing for financial assets 0:15:39.640 --> 0:15:43.760 or for the financial system. How do you respond to that, Tom, Yeah, thanks, 0:15:43.960 --> 0:15:45.880 you know, we looked at that and certainly, you know, 0:15:46.480 --> 0:15:50.480 the dynamics of the repo market we're certainly identified early 0:15:50.560 --> 0:15:53.520 days and we and we took that into consideration even 0:15:53.560 --> 0:15:55.920 even when we chose SOFA. I mean, obviously we know 0:15:55.920 --> 0:15:58.160 about war ends and near ends and you know, and 0:15:58.200 --> 0:16:00.840 how those things can you know, can create that type 0:16:00.840 --> 0:16:04.400 of volatility. Uh. But again, when we thought about, you know, 0:16:04.440 --> 0:16:07.120 our our main goal was having enough underlying volume to 0:16:07.160 --> 0:16:08.960 make sure that we do this once and do it right. 0:16:09.320 --> 0:16:11.960 The second goal was to ensure that this was robust 0:16:12.040 --> 0:16:15.200 and available, which it was. And I think the second 0:16:15.320 --> 0:16:17.440 piece of this is, you know, as much as we've 0:16:17.440 --> 0:16:20.200 seen these sort of uh, you know, a couple of 0:16:20.280 --> 0:16:24.080 days spikes in repo, the assumption would be that most 0:16:24.160 --> 0:16:28.440 market participants using SOFA would be using it in an 0:16:28.440 --> 0:16:31.640 average basis anyway, So when we talked about September, one 0:16:31.680 --> 0:16:33.920 of the things we put out and obviously we you know, 0:16:33.920 --> 0:16:36.320 we took a lot of incoming on that appropriately, was 0:16:36.360 --> 0:16:38.920 that the we found that the uh you know that 0:16:39.120 --> 0:16:42.840 three month live or had moved had had actually moved 0:16:42.880 --> 0:16:45.520 more than three months sofa during that period on an 0:16:45.560 --> 0:16:48.120 average ninety day basis. So when we think about the 0:16:48.240 --> 0:16:50.880 uses of sofa, if you know, if if you're gonna 0:16:50.920 --> 0:16:53.120 use sofa and use you know, either three months three 0:16:53.160 --> 0:16:56.400 month average or you know, or a or a six 0:16:56.440 --> 0:16:59.800 month average or whatever, that these small spikes shouldn't actually 0:16:59.800 --> 0:17:03.960 be uh that impactful. Uh. Nonetheless, I do think that 0:17:04.000 --> 0:17:06.160 you know, certainly, what we've seen in the markets recently 0:17:06.720 --> 0:17:08.880 gives us, I think and everyone a chance to really 0:17:08.920 --> 0:17:10.720 look at the data. Because if you go back to 0:17:10.800 --> 0:17:13.760 when we did this work, we all speculated on how 0:17:13.800 --> 0:17:17.200 sofa were con performed during the stress period. We speculated 0:17:17.200 --> 0:17:19.919 on how library were performed during a stress period, uh, 0:17:19.960 --> 0:17:22.320 and we and we speculate on how and how sort 0:17:22.320 --> 0:17:24.679 of other credit rates would perform during the stress period. 0:17:24.760 --> 0:17:27.600 So with with with real data now, I think it's 0:17:27.920 --> 0:17:29.720 we're looking at it certainly at the ARC, and I think, 0:17:29.720 --> 0:17:31.920 you know, we would encourage others to take a look 0:17:31.960 --> 0:17:34.320 at how all these rates performed. Right, So so so for 0:17:35.119 --> 0:17:38.720 probably I think performed along what people would have expected 0:17:38.720 --> 0:17:40.840 as a flight to quality rate. It went down to 0:17:41.080 --> 0:17:45.520 attracted the monetary policy rate. Uh so pretty much wonderful. One. 0:17:46.200 --> 0:17:47.960 We looked at live war, which you know, was a 0:17:48.000 --> 0:17:50.480 little bit harder to explain. So I think when we 0:17:50.560 --> 0:17:52.080 kind of put it all together and we look at 0:17:52.080 --> 0:17:54.800 the commercial paper markets, we look at live war, was 0:17:54.880 --> 0:17:58.000 live board tracking commercial paper, was commercial paper tracking live bar? 0:17:58.440 --> 0:18:01.159 What happened to money markets over that period? Uh? You know, 0:18:01.320 --> 0:18:04.080 one thing we will draw off from this obviously these 0:18:04.160 --> 0:18:06.399 challenging times, is that we do have real data to 0:18:06.440 --> 0:18:08.439 look at. So I do think that people in the 0:18:08.480 --> 0:18:11.040 market can model so for better and look at sort 0:18:11.040 --> 0:18:14.479 of how it's performed under real life stresses. And I think, frankly, 0:18:14.520 --> 0:18:16.720 I think it does open up you know, still more 0:18:16.800 --> 0:18:19.959 questions about live or and where it comes from and 0:18:19.960 --> 0:18:23.639 where these submissions you know, what they reflect in the markets, uh, 0:18:23.680 --> 0:18:25.560 you know overall, so I think we're gonna try to 0:18:25.600 --> 0:18:29.600 do some real, real hard comparisons of this data. But 0:18:29.600 --> 0:18:32.159 but the but again that's your point the quarter end 0:18:32.200 --> 0:18:34.640 and you're in spikes. I think are you know, get 0:18:34.640 --> 0:18:36.800 a little bit overblown in terms of their importance on 0:18:36.840 --> 0:18:39.240 an average basis, But they're important and they're real true 0:18:39.240 --> 0:18:54.080 factors in the report markets. So going forward in terms 0:18:54.119 --> 0:18:56.639 of your day to day work on this issue, what 0:18:56.760 --> 0:19:00.399 are the biggest um challenges that you still see ahead 0:19:00.480 --> 0:19:05.280 that need the most attention. So we recently released our 0:19:05.119 --> 0:19:08.280 our our sort of date specific best practices from the 0:19:08.400 --> 0:19:11.000 ARC that will take us from here, you know, through 0:19:11.040 --> 0:19:13.719 the end of the transition. And uh, really what we 0:19:13.760 --> 0:19:16.240 did uh at sort of at the last several meets 0:19:16.320 --> 0:19:18.720 the ARC just during this even during this period, we've 0:19:18.720 --> 0:19:21.199 sort of doubled our meetings and you know, certainly we 0:19:21.240 --> 0:19:25.000 continue to see uh you know, the restatement of the deadline, 0:19:25.080 --> 0:19:28.880 so you know, uh, even in light of uh COVID nineteen, 0:19:29.160 --> 0:19:32.560 the work continues, and I think the what we've seen 0:19:32.680 --> 0:19:35.959 is that certainly the message we've gotten from the official 0:19:36.040 --> 0:19:39.600 sector even last week when Edwin's schooling water from the 0:19:39.720 --> 0:19:42.480 st A, so there's no change in the position on 0:19:42.640 --> 0:19:44.800 compelling panel banks. We struck the deal that they would 0:19:44.800 --> 0:19:47.800 stay only end of one, and that's kind of the deal. 0:19:47.880 --> 0:19:50.679 So I think what we've what we've gotten here is 0:19:50.960 --> 0:19:54.760 a restatement of the twelve twenty one deadline, which means 0:19:54.800 --> 0:19:56.720 that it was important for the ARC, I think to 0:19:56.800 --> 0:19:59.720 lay out, you know, some some things ahead. So in 0:19:59.800 --> 0:20:02.160 our best practices, we sort of we work our way 0:20:02.240 --> 0:20:05.520 from say June thirty when we when we we recommend 0:20:05.600 --> 0:20:08.760 these are obviously recommend the best practices that floating rate notes, 0:20:08.840 --> 0:20:11.959 residential arm securitizations should just at a minimum use ARC 0:20:12.040 --> 0:20:15.800 fallback language. We work our way to September through December, 0:20:15.840 --> 0:20:18.000 and obviously the key dates in the future. I think 0:20:18.000 --> 0:20:20.040 one I really want to call out is when the 0:20:20.080 --> 0:20:23.960 central clearinghouses are going to switch their discounting on clear 0:20:24.119 --> 0:20:27.360 derivatives from UH from FED funds to SOFA and that's 0:20:27.400 --> 0:20:30.000 going to happen in October sixte and I think it'll 0:20:30.000 --> 0:20:31.880 answer probably some of the questions you may have had 0:20:31.880 --> 0:20:36.480 in previous UH in previous podcasts about UH the liquidity 0:20:36.480 --> 0:20:39.760 and sulfur. So when that happens, that will actually you know, 0:20:39.840 --> 0:20:42.160 should serve to put a pump a lot of liquidity 0:20:42.160 --> 0:20:45.760 into sofur as people begin to uh, you know, swap 0:20:45.800 --> 0:20:50.119 out their discounting methodologies on clear transactions. Is the plays 0:20:50.119 --> 0:20:52.480 a huge role here. They've got their protocol which will 0:20:52.520 --> 0:20:56.040 help deal with the legacy swaps that comes out, and 0:20:56.320 --> 0:20:59.560 the ARC is recommending that people sign that as quickly 0:20:59.600 --> 0:21:01.560 as a pot sibly can, but you know, certainly within 0:21:01.600 --> 0:21:04.200 four months of publication, and then we work our way 0:21:04.200 --> 0:21:08.400 through to things like streaming prices from dealers, and at 0:21:08.440 --> 0:21:10.359 some point when we get sort of out, you know, 0:21:10.400 --> 0:21:12.600 sort of with six months to go, really you know, 0:21:12.720 --> 0:21:17.080 we recommend no new librar for business loans, floating rate securitizations, 0:21:17.160 --> 0:21:20.080 we clos go a little further out based on some feedback, 0:21:20.359 --> 0:21:23.719 and then stopping new derivative traits that increase risks. So 0:21:24.000 --> 0:21:26.840 we've really tried to address this by getting the legacy 0:21:27.240 --> 0:21:30.960 UH in the best possible shape through fallbacks and protocols 0:21:30.960 --> 0:21:33.560 and other things, and then really you know, stopping new 0:21:33.600 --> 0:21:37.320 issue to some degree, we're slowing down new production, right, 0:21:37.400 --> 0:21:39.480 and really the whole idea of you know, the best 0:21:39.480 --> 0:21:41.159 way out of the holes to stop digging, which I 0:21:41.160 --> 0:21:43.480 think we can we can do today, and I think 0:21:43.520 --> 0:21:45.040 we're just really trying to lay that out. So the 0:21:45.119 --> 0:21:48.320