Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe Wisenthal. So, Joe, uh,
Speaker 1: I think on our last recording of our library series,
Speaker 1: I think I said that that was actually the last episode.
Speaker 1: But you know what, that was false advertising you could do.
Speaker 1: There's never enough libraries there, no, And also it's kind
Speaker 1: of amazing, but as we continue to record these episodes,
Speaker 1: more and more people want to actually talk about libor um,
Speaker 1: and I guess it kind of makes sense. After all,
Speaker 1: this is the reference rate that affects you know, I
Speaker 1: can never keep track, but I think it's something like,
Speaker 1: you're into fifty trillion dollars worth of assets, so obviously
Speaker 1: it's absolutely crucial for the financial system, right, I mean, yeah,
Speaker 1: as you say, it makes sense that people have so
Speaker 1: much to say about it, given that it's been so
Speaker 1: crucial to the pricing of trillions, hundreds of trillions of
Speaker 1: dollars worth of assets, and it's this sort of herculean
Speaker 1: task to sunset it in some way and transition to
Speaker 1: something else. So I don't know, maybe we should do
Speaker 1: like a month long live ar series. Oh god, Okay, look,
Speaker 1: we have two more episodes scheduled, including this one, so
Speaker 1: let's do those first and then we can talk about
Speaker 1: maybe doing a month long live BRLK, we'll revisit. Okay, um,
Speaker 1: but I'm really happy to say that today for our guest,
Speaker 1: we have someone who's actually, you know, personally involved in
Speaker 1: the transition process from library to sof sofar of course,
Speaker 1: is the secured overnight financing rate. If you don't know
Speaker 1: what that is by now, then you should go back
Speaker 1: and listen to some of our previous episodes. But it's
Speaker 1: basically the thing that's supposed to replace librards, so it's
Speaker 1: going to be really interesting to talk about the thinking
Speaker 1: behind that transition process but also how it's actually going. Great.
Speaker 1: I'm really excited about this because again, I do like
Speaker 1: a lot of our top I, like when we have
Speaker 1: discussions on anything that are actually now that are not
Speaker 1: just sort of theoretical, but deal with the sort of
Speaker 1: nuts and bolts with how you actually do something. Yeah,
Speaker 1: this is definitely uh practice. So okay, let's bring on
Speaker 1: our guest for the episode. It is Tom Whipp, who
Speaker 1: is chair of the Alternative Reference Rates Committee and also
Speaker 1: Vice Chairman of Institutional Securities at Morgan Stanley, Tom, thanks
Speaker 1: so much for coming on, Thanks for having me so Tom,
Speaker 1: maybe just to begin with, you can give us a
Speaker 1: sort of brief description of what the Alternative Reference Rates
Speaker 1: Committee or the a r r C actually does, When
Speaker 1: was it started, and what's the goal. So really, the
Speaker 1: the the ARC was put together in two thousand fourteen,
Speaker 1: originally UH to begin to select an appropriate, durable alternative
Speaker 1: to librar and and then to put forward a plan
Speaker 1: to actually get off live ar and onto that new rate.
Speaker 1: That work continued UH for several years, and at that
Speaker 1: point that group selected SOFA, which is you noticed a
Speaker 1: secured overnight financing rate, which is basically the US Treasury
Speaker 1: repo market reported over a trillion dollars a day in
Speaker 1: UH in daily activity and transactions. And that really solved
Speaker 1: for the first problem because if you go back to
Speaker 1: the history of library that the issues developed because the
Speaker 1: inner bank market itself had shrunk tremendously over over some
Speaker 1: period of time. Additionally, the use of librar had gone
Speaker 1: up exponentially, and you think you sort of can take
Speaker 1: that from sort of you know, the mid nineteen eighties
Speaker 1: all the way up until two thousand twelve, and the
Speaker 1: scandals that emerged from that, but so much of that
Speaker 1: was based on the fact that the underlying transactions and
Speaker 1: the inner dealing market had reduced cansiderably used had gone up,
Speaker 1: and you get this uh, this uh, this concept of
Speaker 1: the inverted pyramid, which is too few transactions supporting too
Speaker 1: many financial contracts and without transactions to create those rates,
Speaker 1: submitting paddle banks who create live or were forced to
Speaker 1: use what they call expert judgment. So when we decided
Speaker 1: on so for the first thing we tried to solve
Speaker 1: to was can we find something that has sufficient underlying
Speaker 1: transactions that would mean that these that that there would
Speaker 1: be really no need for expert judgment. But in fact
Speaker 1: we could just rely on actual trades to create the rate.
Speaker 1: From your perspective, as you say, one of the nice
Speaker 1: things about so far is there's actual trades. There's no ambiguity,
Speaker 1: no less opportunity to manipulate the number. What in your
Speaker 1: view is the primary challenge and what is the work
Speaker 1: that you do to enable this transition from one index
Speaker 1: to another. So, so when the art was then reconstituted
Speaker 1: after making those two in the important decision, first the
Speaker 1: selection of SOFA and second to do what we called
Speaker 1: the pace transition plan. You'll hear you know, you've probably
Speaker 1: heard a lot about that, and you continue to hear
Speaker 1: a lot about that, which was not to have really
Speaker 1: a cliff effect, but too over the period of time
Speaker 1: that we had between I would say, two thousand and
Speaker 1: seventeen and two thousand twenty one to be in a
Speaker 1: position to have people use UH, use live or less
Speaker 1: UH and to address some of the legacy UH contracts
Speaker 1: that go beyond the end of live or one, but
Speaker 1: also you know, reduce that exposure through new issue and
Speaker 1: usage of SOFUR. So what we've really tried to do
Speaker 1: over that period of time UH and most recently with
Speaker 1: the with the release of our of our best practices
Speaker 1: for the remainder of the transition is to really give
Speaker 1: market participants to tools that they need to actually enable
Speaker 1: that pace transition, whether that be for legacy UH legacy
Speaker 1: challenges where they have contracts or securities that go beyond
Speaker 1: ende that we can we can have better fallbacks and
Speaker 1: when live world ends, how do you get from live
Speaker 1: board to sofa? So you know, we put we put
Speaker 1: our fallbacks, we put out we've consulted with the market,
Speaker 1: we have provided over the course of just I would say,
Speaker 1: just even the last the last several months, you know,
Speaker 1: recommendations for things like swaptions. Uh we how do you
Speaker 1: how do you how do you price new floating rate mortgages.
Speaker 1: So the art really over the last several years has
Speaker 1: been developing and providing to the market tools to actually
Speaker 1: make this transition as smooth as possible. So, Tom, you're
Speaker 1: a long time repo man, uh rebot man, repo guy
Speaker 1: at Morganstown. UM, could you maybe like explain the rebo
Speaker 1: connection for sofa and I guess I'd be curious to
Speaker 1: just get your take on the transition of the repo
Speaker 1: market from pre financial crisis to now as well. Certainly,
Speaker 1: so if we think about what SOFA is, it really
Speaker 1: is US Treasury Bank three pos so the tread you know,
Speaker 1: Treasury securities on repo, which which represent obviously h the
Speaker 1: risk free rate. Uh. And even if you go prior
Speaker 1: to the financial crisis and beyond and through that particular
Speaker 1: market has always held up very well because of the
Speaker 1: risk free nature of the collateral. So when we think
Speaker 1: about issues in the repo market broadly during the crisis,
Speaker 1: that was really you know, things that were backed by
Speaker 1: you know, less liquid assets and things like that, but
Speaker 1: the treasury repo market for many decades has been really
Speaker 1: been the underpinning and in terms of volume, uh, you know,
Speaker 1: we can look and see it again over a trillion
Speaker 1: dollars a day and traded activity from both the clearing
Speaker 1: banks and from from the Central Clearing House DCCC. So
Speaker 1: when we really looked at that over the period, uh,
Speaker 1: it really stood out as as the best selection because
Speaker 1: our other choices, if you think about what the mandate was,
Speaker 1: would have been things like the overnight bank funding rate
Speaker 1: UH FED funds rate, And if you compare that trillion
Speaker 1: to the FED ones market or it's the overnight thing
Speaker 1: UH funding rate, or to h or two things like
Speaker 1: commercial paper bills, the numbers really really go down. You know,
Speaker 1: you go from sort of a trillion to a hundred
Speaker 1: and fifty to below a hundred. So the choice really
Speaker 1: was to have that strong foundation which we could look
Speaker 1: back and you can you can really model us all
Speaker 1: the way back. It seemed like that was the obvious choice,
Speaker 1: and that and that experience in the report market, I
Speaker 1: think led us to believe that over time. One of
Speaker 1: the key things we looked at way back in two
Speaker 1: thousand and fourteen was we certainly don't want to do
Speaker 1: this work again. We want to do it once, and
Speaker 1: we want to do it right. You mentioned tools, and
Speaker 1: you said giving tools to market participants so that they
Speaker 1: can deal with some of the issues that might arise,
Speaker 1: such as contracts that are pegged to liebor that are
Speaker 1: going to extend beyond. What does that mean specifically, what
Speaker 1: what kind of tools do people have to ameliorate some
Speaker 1: of the issues that will arise from the transition. Just
Speaker 1: a simple, a simple example I would I would say
Speaker 1: as the easiest one is UH floating rate notes. Uh.
Speaker 1: If you think about existing floating rate notes pre all
Speaker 1: these work, UH floating rate notes typically if live boar
Speaker 1: would have cease, had a fall back, had a fallback
Speaker 1: in there, you know, in the in the bond documents,
Speaker 1: that would basically say you would take the last printed
Speaker 1: lie bar and that would be your rate until final maturity.
Speaker 1: So if you think about an investor, what a floating
Speaker 1: rate note is going to float to a three month
Speaker 1: live war and it went well beyond one at some
Speaker 1: point they would take that last fixing of libar, the
Speaker 1: last one at the end and they would live with
Speaker 1: that rate until final maturity. What the ART did because
Speaker 1: and to change those rates in most cases in the
Speaker 1: US you need a d percent consent from bondholders obviously,
Speaker 1: as in your impossibility. So what the ART did way
Speaker 1: back was we put out better fall back language for
Speaker 1: new issue floating right notes. And you can see in
Speaker 1: the floating rate note market we've got well over six
Speaker 1: hundred six hundred billion of new issue using SOFA directly,
Speaker 1: which is obviously the best answer. But even those that
Speaker 1: continue to use live war now have fallbacks that create
Speaker 1: a series of waterfalls that go from go from libor
Speaker 1: with a credit spread and the term spread to replicate
Speaker 1: on a look back what the differences between SOFA and
Speaker 1: librlar over reasonable period of time, and at some point
Speaker 1: now those new issues, even using Librlar will have much
Speaker 1: clearer outcomes at the end of live War, But obviously
Speaker 1: the best case is to use SOFA. So we think
Speaker 1: about the floating rate note market and presented a real
Speaker 1: big challenge, And what the ART did was provide that
Speaker 1: fallback language so people could put their new issue out
Speaker 1: in a much safer way than they could have prior
Speaker 1: to that right, So you have to fall back language
Speaker 1: in order to enable people to get contracts done for
Speaker 1: financial securities, UM, even if libral is no longer available
Speaker 1: and you know, sort of before the new reference rate
Speaker 1: is widely available. I'm curious, what's the I don't know,
Speaker 1: is take up the right word? What's the like adoption
Speaker 1: rate on that kind of fallback provision? Is everyone using
Speaker 1: it nowadays for the most part? Yeah, And and certainly
Speaker 1: in the floating rate note market, we would see people
Speaker 1: either either going directly to sofa, as you know, with
Speaker 1: I said over six d billions of new issue using
Speaker 1: Sofa directly. And I would say that for the for
Speaker 1: a vast majority of that market, because there's an obvious
Speaker 1: risk that you can't undo what you've done post issue
Speaker 1: because of that consent challenge. So I think that, you know,
Speaker 1: for places where there's true economics, uh, not a lot
Speaker 1: of that, not a lot of flexibility that that market
Speaker 1: really was, you know, certainly an early adopter to these
Speaker 1: fallbacks and to sofa itself. Are there instruments, just to
Speaker 1: be clear, other instruments out there that face a cliff nonetheless,
Speaker 1: that were issued before the fall back language uh was
Speaker 1: was offered before their ideas before people were really thinking
Speaker 1: about this, that a is going to create a real
Speaker 1: problem for um either holders or issuers of the notes. Yeah,
Speaker 1: and I think I think that the way I think,
Speaker 1: the way we think about oh this is really in
Speaker 1: terms of you know, legacy, you know, or or stock
Speaker 1: and then flow. Right. So obviously when we look back
Speaker 1: on this, you know, the roll downs of of live
Speaker 1: or exposures when we began this work, you know, by
Speaker 1: the time we had arrived at two thousands twenty one,
Speaker 1: had everyone stopped using live or, we would have been
Speaker 1: in a much smaller exposure number. Uh. But obviously since
Speaker 1: this has taken some time, Uh, we we really think
Speaker 1: about that. But the real term we use, whether it
Speaker 1: be whether it be stock or legacy or flow and
Speaker 1: new issue is what we call the tough legacy. And
Speaker 1: and the tough legacy are things like floating rate notes
Speaker 1: issued without good fallbacks that mature after with certain hybrids, perpetuals,
Speaker 1: and a lot of things that for the most part
Speaker 1: either have fallbacks no fallbacks whatsoever, uh they never contemplated
Speaker 1: the end of live ar or or they have fallbacks
Speaker 1: that revert to last libar or the third one where
Speaker 1: there is uh pretty pretty I would say extreme discretion
Speaker 1: by an agent or a trustee to pick the new
Speaker 1: rate at the end of library. So those three categories
Speaker 1: are what we call the tough legacy UH. And on
Speaker 1: the tough legacy in the US, we've been pursuing, UH,
Speaker 1: we've been pursuing a legislative path which would allow for
Speaker 1: through legislation for those tough legacy UH, securities and other
Speaker 1: contracts to embed ARC fallback language UH in place of
Speaker 1: no no fallback, in place of fallbacks that reference live
Speaker 1: ar which wouldn't exist and gives people also some ability
Speaker 1: on a on a voluntary basis if they have a
Speaker 1: lot of discretion to embed ARC fallbacks to create uh,
Speaker 1: you know, some degree of safe harbor. So the tough
Speaker 1: legacy is the piece that we've really spent a lot
Speaker 1: of time on and again we are pursued doing a
Speaker 1: legislative path on that. But when we speak to market participants, UH,
Speaker 1: we were very very we really think people need to
Speaker 1: focus on that because whether or not that legislative path uh,
Speaker 1: you know, works out or not, people need to think
Speaker 1: about that. It's probably when they risk prioritize that those
Speaker 1: are their single biggest risks is do you have a
Speaker 1: number for how big the tough legacy world is, like
Speaker 1: the size of this issue I don't have in front
Speaker 1: of me. Job. We could definitely get back, but it really,
Speaker 1: it really, it really deals with if you think about,
Speaker 1: you know, parts of the fixed income market again floating
Speaker 1: rate notes that go beyond hybrids. Uh, you know that
Speaker 1: you think about the back end of a lot of
Speaker 1: a lot of trust preferreds that reference library that are
Speaker 1: well beyond one. Those are the kinds of things that
Speaker 1: you have out there. They really can't be. Uh, they
Speaker 1: can't be. And you go much deeper into you know,
Speaker 1: into into just traditional uh you know, contracts that referenced
Speaker 1: live war for penalty rates or other things where if
Speaker 1: there's no lib ar and there's no fallback, you're gonna
Speaker 1: find yourself in, you know, in a lot of disputes
Speaker 1: slash potential litigation. So if we just go back to
Speaker 1: um to sofa for a second and the link with
Speaker 1: the repo market, one of the criticisms of sofa as
Speaker 1: a replacement rate for a lib or has to do
Speaker 1: with this sort of dramatic rebo madness that we saw
Speaker 1: on the market back in September when we saw the
Speaker 1: repo rate spike very quickly and very dramatically. And the
Speaker 1: criticism was that if you have a reference rate tied
Speaker 1: to a repo rate, that is that volatile something that
Speaker 1: can you know, change that quickly in a single day.
Speaker 1: But that probably wasn't a good thing for financial assets
Speaker 1: or for the financial system. How do you respond to that, Tom, Yeah, thanks,
Speaker 1: you know, we looked at that and certainly, you know,
Speaker 1: the dynamics of the repo market we're certainly identified early
Speaker 1: days and we and we took that into consideration even
Speaker 1: even when we chose SOFA. I mean, obviously we know
Speaker 1: about war ends and near ends and you know, and
Speaker 1: how those things can you know, can create that type
Speaker 1: of volatility. Uh. But again, when we thought about, you know,
Speaker 1: our our main goal was having enough underlying volume to
Speaker 1: make sure that we do this once and do it right.
Speaker 1: The second goal was to ensure that this was robust
Speaker 1: and available, which it was. And I think the second
Speaker 1: piece of this is, you know, as much as we've
Speaker 1: seen these sort of uh, you know, a couple of
Speaker 1: days spikes in repo, the assumption would be that most
Speaker 1: market participants using SOFA would be using it in an
Speaker 1: average basis anyway, So when we talked about September, one
Speaker 1: of the things we put out and obviously we you know,
Speaker 1: we took a lot of incoming on that appropriately, was
Speaker 1: that the we found that the uh you know that
Speaker 1: three month live or had moved had had actually moved
Speaker 1: more than three months sofa during that period on an
Speaker 1: average ninety day basis. So when we think about the
Speaker 1: uses of sofa, if you know, if if you're gonna
Speaker 1: use sofa and use you know, either three months three
Speaker 1: month average or you know, or a or a six
Speaker 1: month average or whatever, that these small spikes shouldn't actually
Speaker 1: be uh that impactful. Uh. Nonetheless, I do think that
Speaker 1: you know, certainly, what we've seen in the markets recently
Speaker 1: gives us, I think and everyone a chance to really
Speaker 1: look at the data. Because if you go back to
Speaker 1: when we did this work, we all speculated on how
Speaker 1: sofa were con performed during the stress period. We speculated
Speaker 1: on how library were performed during a stress period, uh,
Speaker 1: and we and we speculate on how and how sort
Speaker 1: of other credit rates would perform during the stress period.
Speaker 1: So with with with real data now, I think it's
Speaker 1: we're looking at it certainly at the ARC, and I think,
Speaker 1: you know, we would encourage others to take a look
Speaker 1: at how all these rates performed. Right, So so so for
Speaker 1: probably I think performed along what people would have expected
Speaker 1: as a flight to quality rate. It went down to
Speaker 1: attracted the monetary policy rate. Uh so pretty much wonderful. One.
Speaker 1: We looked at live war, which you know, was a
Speaker 1: little bit harder to explain. So I think when we
Speaker 1: kind of put it all together and we look at
Speaker 1: the commercial paper markets, we look at live war, was
Speaker 1: live board tracking commercial paper, was commercial paper tracking live bar?
Speaker 1: What happened to money markets over that period? Uh? You know,
Speaker 1: one thing we will draw off from this obviously these
Speaker 1: challenging times, is that we do have real data to
Speaker 1: look at. So I do think that people in the
Speaker 1: market can model so for better and look at sort
Speaker 1: of how it's performed under real life stresses. And I think, frankly,
Speaker 1: I think it does open up you know, still more
Speaker 1: questions about live or and where it comes from and
Speaker 1: where these submissions you know, what they reflect in the markets, uh,
Speaker 1: you know overall, so I think we're gonna try to
Speaker 1: do some real, real hard comparisons of this data. But
Speaker 1: but the but again that's your point the quarter end
Speaker 1: and you're in spikes. I think are you know, get
Speaker 1: a little bit overblown in terms of their importance on
Speaker 1: an average basis, But they're important and they're real true
Speaker 1: factors in the report markets. So going forward in terms
Speaker 1: of your day to day work on this issue, what
Speaker 1: are the biggest um challenges that you still see ahead
Speaker 1: that need the most attention. So we recently released our
Speaker 1: our our sort of date specific best practices from the
Speaker 1: ARC that will take us from here, you know, through
Speaker 1: the end of the transition. And uh, really what we
Speaker 1: did uh at sort of at the last several meets
Speaker 1: the ARC just during this even during this period, we've
Speaker 1: sort of doubled our meetings and you know, certainly we
Speaker 1: continue to see uh you know, the restatement of the deadline,
Speaker 1: so you know, uh, even in light of uh COVID nineteen,
Speaker 1: the work continues, and I think the what we've seen
Speaker 1: is that certainly the message we've gotten from the official
Speaker 1: sector even last week when Edwin's schooling water from the
Speaker 1: st A, so there's no change in the position on
Speaker 1: compelling panel banks. We struck the deal that they would
Speaker 1: stay only end of one, and that's kind of the deal.
Speaker 1: So I think what we've what we've gotten here is
Speaker 1: a restatement of the twelve twenty one deadline, which means
Speaker 1: that it was important for the ARC, I think to
Speaker 1: lay out, you know, some some things ahead. So in
Speaker 1: our best practices, we sort of we work our way
Speaker 1: from say June thirty when we when we we recommend
Speaker 1: these are obviously recommend the best practices that floating rate notes,
Speaker 1: residential arm securitizations should just at a minimum use ARC
Speaker 1: fallback language. We work our way to September through December,
Speaker 1: and obviously the key dates in the future. I think
Speaker 1: one I really want to call out is when the
Speaker 1: central clearinghouses are going to switch their discounting on clear
Speaker 1: derivatives from UH from FED funds to SOFA and that's
Speaker 1: going to happen in October sixte and I think it'll
Speaker 1: answer probably some of the questions you may have had
Speaker 1: in previous UH in previous podcasts about UH the liquidity
Speaker 1: and sulfur. So when that happens, that will actually you know,
Speaker 1: should serve to put a pump a lot of liquidity
Speaker 1: into sofur as people begin to uh, you know, swap
Speaker 1: out their discounting methodologies on clear transactions. Is the plays
Speaker 1: a huge role here. They've got their protocol which will
Speaker 1: help deal with the legacy swaps that comes out, and
Speaker 1: the ARC is recommending that people sign that as quickly
Speaker 1: as a pot sibly can, but you know, certainly within
Speaker 1: four months of publication, and then we work our way
Speaker 1: through to things like streaming prices from dealers, and at
Speaker 1: some point when we get sort of out, you know,
Speaker 1: sort of with six months to go, really you know,
Speaker 1: we recommend no new librar for business loans, floating rate securitizations,
Speaker 1: we clos go a little further out based on some feedback,
Speaker 1: and then stopping new derivative traits that increase risks. So
Speaker 1: we've really tried to address this by getting the legacy
Speaker 1: UH in the best possible shape through fallbacks and protocols
Speaker 1: and other things, and then really you know, stopping new
Speaker 1: issue to some degree, we're slowing down new production, right,
Speaker 1: and really the whole idea of you know, the best
Speaker 1: way out of the holes to stop digging, which I
Speaker 1: think we can we can do today, and I think
Speaker 1: we're just really trying to lay that out. So the
Speaker 1: ARC has really I think taken a position now to
Speaker 1: hopefully inform participants in the market on steps that they
Speaker 1: can take between now and the end of live War.
Speaker 1: In addition to all the things that we put out
Speaker 1: in terms of tools, and we've also held ourselves were
Speaker 1: pretty high standards and meetings and uh and I have
Speaker 1: to say that even during this period, although we've been
Speaker 1: meeting virtually like everyone else we've been, we've been doubling
Speaker 1: our meetings and we continue to get product out there
Speaker 1: because we're continuing to address a deadline at twelve m.
Speaker 1: So I think it's kind of funny that you refer
Speaker 1: to the committee as the arc, which obviously has biblical connotations.
Speaker 1: I don't know if that was sort of what you
Speaker 1: were thinking about, but do you feel a sense of
Speaker 1: responsibility when it comes to making the transition from live Board?
Speaker 1: This is clearly a new beginning in some sense um
Speaker 1: for the financial system. Tracy really comes down to that
Speaker 1: that this, this work is an opportunity for the industry
Speaker 1: to solve a problem that was that was quite obvious,
Speaker 1: you know in two thousand and eleven and twelve. And
Speaker 1: I think the way we've tried to look at this is,
Speaker 1: you know, in acknowledging the challenges we have. We also
Speaker 1: know that we can that the market can act truly
Speaker 1: do this right with without you know, the market has
Speaker 1: an ability to correct this problem and and to put
Speaker 1: put the market on firmer on a on a firmer
Speaker 1: bit of footing. Uh. It turns out, you know, obviously
Speaker 1: the live woar is is a critical component of the infrastructure.
Speaker 1: Uh it has it has you know, we've we've identified
Speaker 1: you know, the weaknesses of live war. We've identified what
Speaker 1: we think is a workable replacement. And certainly people in
Speaker 1: the market you know, can figure out ways to use sofa.
Speaker 1: And one of the tools we put out a while
Speaker 1: back was just how do you use sofa? How do
Speaker 1: you use to compounding? How do you do different things
Speaker 1: to FED? Recently, now you can look go on the
Speaker 1: FED every day publishes averages of sofa that look back
Speaker 1: over periods of time, which will be a key component
Speaker 1: to the mortgage with the floody right, no mortgage market.
Speaker 1: So if you really just need to take it. In
Speaker 1: many cases we found and talking to you know, market participants,
Speaker 1: is that they just need a rate. They wanted to
Speaker 1: rate from screen and they used to be able to
Speaker 1: look up and see three month live war. Well now
Speaker 1: you can see three month average SOFA and it's and
Speaker 1: it's on an it's you know, obviously it's administered by
Speaker 1: the New York Fed, so we have an unassailable administrator.
Speaker 1: We have a rate that's based on transaction. So you know,
Speaker 1: when we kind of get there, uh, you know from
Speaker 1: the people I've been on the Arctians the beginning and
Speaker 1: took over his chair last year. But you know, between
Speaker 1: the people who've done it before, Brian Leach, Sandy O'Connor,
Speaker 1: who have chaired this, you know, there's been a degree
Speaker 1: of the people around this work, Uh can really see
Speaker 1: the challenges and also know that we have to get
Speaker 1: to the next place. And I think that people who
Speaker 1: are around this topic are are there's a lot of
Speaker 1: zeal around that, I would say, because it's an obvious
Speaker 1: problem and the solutions, although challenging, are there and we
Speaker 1: can get this work done. Let's question for me, I
Speaker 1: mean one of the sort of like overriding themes of
Speaker 1: this and honestly other discussions at least that strikes out
Speaker 1: to me is just this whole idea of like inertia
Speaker 1: and network effects and how hard that is to break
Speaker 1: and how much work it is to go from one
Speaker 1: sort of de facto platform to another. And you mentioned,
Speaker 1: you know, aiming for a sort of real drop dead
Speaker 1: day and saying, uh, no more a goal of no
Speaker 1: more library based contracts. Why is it that even at
Speaker 1: this late point, it's difficult for people to not just
Speaker 1: reach for lib or first, when you know the the
Speaker 1: alternative is now clearly available. It's it's a great point
Speaker 1: that the inertiats of the status quo around this has been,
Speaker 1: you know, one of our biggest challenges. And if you
Speaker 1: go back and you know think, uh, you know, anyone
Speaker 1: who's been in the market, you know since has seen
Speaker 1: library as a key component of of of the markets
Speaker 1: and removing that. We talked about this, you know, years back.
Speaker 1: It's sort of the five stages of grief and how
Speaker 1: people have to go through it. But more and more
Speaker 1: we do face that and we will reach critical mass
Speaker 1: at some point. The key things I think on the
Speaker 1: question is the derivative markets. There has been an enormous
Speaker 1: amount of reliance on the is the protocol because the
Speaker 1: IS the protocol allows people and there's been a lot
Speaker 1: of confidence that is that we'll get this work done,
Speaker 1: will deal with your legacy book in a fairly straightforward manner.
Speaker 1: So the comfort people having a derivatives market is that
Speaker 1: the protocol will solve a lot of their problems, even
Speaker 1: if they're trading beyond the end of Really, if you
Speaker 1: think about it, at the beginning of this year, if
Speaker 1: you did a ten year swap, you were really doing
Speaker 1: two years of live or and eight years of so
Speaker 1: for so more and more, I think as people begin
Speaker 1: to understand this, But to me, one of the biggest
Speaker 1: incentives I think that will begin to get people moving
Speaker 1: even a little bit more quickly is the capacity to
Speaker 1: operationalize all the things that we're doing, whether that be
Speaker 1: fallbacks or protocols. Just imagine we're here, you know, at
Speaker 1: the New Year's Eve in one and you've got thousands
Speaker 1: of protocols that you have to actually connect with counterparties on,
Speaker 1: and you have thousands of fallbacks that you have to
Speaker 1: recalculate and do these things. That capacity, I think will
Speaker 1: begin to be the incentive again to get people just
Speaker 1: stop digging the whole. So more and more we're you know,
Speaker 1: we're anticipating that there will be a greater awareness as
Speaker 1: we move forward, and I think the tipping points could
Speaker 1: be the is the protocol, the CCP conversion. As I
Speaker 1: talked about the central clearing houses switching their discounting methodology
Speaker 1: to SO for so, there's a few things coming down
Speaker 1: the pike where we think that, uh that more and
Speaker 1: more if you think about so for being, you know
Speaker 1: the way all clear product is discounted, Well, that's gonna
Speaker 1: create new hedging demand, that's going to create new activity
Speaker 1: and more and more. We think that we'll get there.
Speaker 1: But I would say that we certainly would have hoped
Speaker 1: to have been a little further down the road here,
Speaker 1: but with the deadline in place, I think that I
Speaker 1: think our industry response to deadlines pretty well. Tom. That
Speaker 1: was a great sort of run through the work of
Speaker 1: the committee, and you really appreciate you coming on and
Speaker 1: explaining what's going on with us. Thank you so much. Yes,
Speaker 1: thank you great to Thank you so Joe. Just listening
Speaker 1: to that conversation, I mean, I don't really envy the
Speaker 1: work that Tom is doing on that committee. It sounds
Speaker 1: like a pretty gargantuan task, to be honest, But I
Speaker 1: think your point about the network effect is really interesting
Speaker 1: and that's something that we've talked about well, in relation
Speaker 1: to a few different things now, but bitcoin being one
Speaker 1: of them. But it is. It is really interesting to
Speaker 1: see when a large group of people start to change
Speaker 1: behavior for something that's related to you know, this enormous
Speaker 1: dollar amount of financial assets. Yeah. I thought that was
Speaker 1: really interesting, and especially like the specific deadline team mentioned
Speaker 1: and I like when he got into the details about Okay,
Speaker 1: on this day clearing houses are going to do, ex etcetera.
Speaker 1: Because it's one thing to have another sort of platform
Speaker 1: so to speak, or index that you sort of hope
Speaker 1: will become the default standard, but then actually talk about
Speaker 1: what it takes to do the transition rather than just
Speaker 1: sort of having it out there because obviously, even if
Speaker 1: it's everyone can agree that so far or whatever, but
Speaker 1: in this case, so far is the better measure. Uh,
Speaker 1: that's not enough to get the transition over. You actually
Speaker 1: have to like put in the work and put on
Speaker 1: all these deadlines. And I like what to talk about
Speaker 1: the language tools that use to use the transition. It's
Speaker 1: good to just hear about someone who's like very much
Speaker 1: like sort of sleeves rolled up in the work of
Speaker 1: doing this. Yeah. Absolutely, I also like the description of
Speaker 1: having like long term market participants move away from library
Speaker 1: as the sort of five stages of grief. Um, yeah,
Speaker 1: like who knew that people could be so personally tied
Speaker 1: to an interest rate? But there we are. Well, you know,
Speaker 1: it's it's like we've all been in offices and workplaces
Speaker 1: long enough that we know that people get irrationally attached
Speaker 1: to bizarre things, certain workflows that people have dealt with
Speaker 1: their entire careers. If he was saying, even if logically
Speaker 1: there's no good reason for it, it's like that's what
Speaker 1: they're familiar with, that's where they're the experts, and so
Speaker 1: you just have to uh, you see it all the time,
Speaker 1: and I guess I'm not surprised that uh an index
Speaker 1: or an interest rate could be one of them. Right,
Speaker 1: No one likes change. Okay, Well, I mentioned in the
Speaker 1: intro that we have two more episodes. This has been
Speaker 1: one of them. We've got one more coming up, which
Speaker 1: will make our Librard series a total of five episodes
Speaker 1: in all, so something to look forward to. And I
Speaker 1: think I think by the time we finished this, I
Speaker 1: know you want to do that month long library series
Speaker 1: and keep it going. I'm good. I think a week
Speaker 1: is a good start. Yeah, I really think with five
Speaker 1: episodes will have covered. Um. I want to say all
Speaker 1: the bases, but I'm sure something will crop up that
Speaker 1: we haven't covered, but the vast majority of bases. Okay,
Speaker 1: all right, Well this has been another episode of the
Speaker 1: All Thoughts podcast and another episode in our library series.
Speaker 1: I'm ms Alloway. You can follow me on Twitter at
Speaker 1: mssy Alloway and you can follow me on Twitter at
Speaker 1: the Stalwart. Follow our producer on Twitter, Laura Carlson at
Speaker 1: Laura M Carlson. Follow the Bloomberg head of podcast, Francesca
Speaker 1: Levi at Francesca Today, and check out all of our
Speaker 1: podcast at Bloomberg under the handle at podcasts. Thanks for listening.