Speaker 1:
From the Library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership and vision in global business, the dream drivers that have made the NYSE an indispensable institution for global growth for more than 225 years. Each week, we feature stories of those who hatch plans, create jobs and harness the engine of capitalism right here, right now at the NYSE and at ICE's 12 exchanges and seven clearing houses around the world. Now, here's your host, Josh King, head of communications at Intercontinental Exchange.
Josh King:
It's been over 15 years since Clive Humby said data is the new oil. It's valuable, but if unrefined, it can't really be used. Oil, that raw material, has to be transformed into gas, plastic, chemicals, and the like to create the valuable entity that drives profitable activity. So, too does data have to be refined, analyzed for it to have value.
Josh King:
Here at Intercontinental Exchange, we call our refinery, ICE Data Services, which provides end to end solutions for realtime data analytics, evaluated pricing, reference data, feeds and connectivity. Here's a little background.
Josh King:
ICE Data Services was formed in 2016 by combining Intercontinental Exchange's exchange data business, which combined data from its futures and equities exchanges in clearing houses with two companies that ICE had acquired, Super Derivatives and Interactive Data Services. That combination gave ICE a strong foothold in price evaluations for the fixed income and OTC markets.
Josh King:
Here on the podcast, we often get into the weeds on the issues. Call us the gardeners of the financial services industry. And for this episode, we've called in some experts to help us till the soil on the vast field we call liquidity. Rob Haddad is the head of product strategy and innovation at ICE Data Services, which includes the company's ICE liquidity indicators business, along with the applied research and development market research, and business communications teams within pricing and analytics at ICE. A well regarded expert in this area, Rob has a degree in quantitative finance from Bentley University, and was awarded a patent in April, 2012 in connection with fair value pricing innovations. And he is got another patent on the way, which is pending.
Josh King:
Also, here in the library is Jamila Abston of EY Financial Services, who recently appeared with Rob at ICE Data Services, funds advisory board on a panel about liquidity risk management and SEC report modernization. Jamila will be joining Rob and me in the ICE House to continue the conversation right after this.
Betty Liu:
Hi, everyone. I'm Betty Lou, executive vice chairman of the New York Stock Exchange and founder of Radiate. I started at Radiate with the mission to make leadership learning more accessible to anyone interested in advancing their career and fostering a culture of excellence in their workplace. My team and I have handpicked and interviewed successful CEOs and thought leaders, asking them questions, such as, "What's your biggest time saving trick?" Or, "What's the best and worst advice someone gave you?" You can watch the service from experts such as Jack Welch, Ariana Huffington, Gary Varnerchuk, Steve Case, and many more, by visiting radiateinc.com. That's www.radiateinc.com.
Betty Liu:
I'm excited about expanding Radiate. And I'm working with my team at ICE and NYSE to offer this content and engage with our vibrant community. Keep listening to hear John Chen, chairman and CEO of NYSE listed, Blackberry, answer the question, what is the most important soft skill for a manager?
Josh King:
Our guest today, along with Rob Haddad, is Jamila Abston, a partner in the EY Financial Services office here in New York city. This is her second stint with EY. She first worked for the firm after graduating from Florida, A&M University with a bachelor's in accounting and earning her masters in accounting from the University of Virginia. Jamila, then served as the assistant regional director for the Office of Compliance Inspections and Examinations at the SEC's office in Atlanta, before returning to EY and receiving her MBA from the Yale School of Management in 2017. Welcome to the ICE House, Jamila and Rob.
Jamila Abston:
Thank you.
Rob Haddad:
Pleasure to be here.
Jamila Abston:
So, the big idea guys here is data the new oil?
Rob Haddad:
Absolutely. I love that analogy. Thank you for that, Josh.
Jamila Abston:
I agree. I couldn't agree more. Everyone is focused on data right now. And the regulators are not far behind at all.
Josh King:
Jamila, how does a data expert get their start?
Jamila Abston:
This is a great question. In many ways. It's not a one shop stop where you just go to school for a data degree. I think engineers, accountant, finance people, I think anybody that has an interest and a knack for under standing trends likes to do analysis and likes to work with tools would make a great data expert.
Josh King:
Some of the things that you've looked back on your career and said, "Well, this really helped me." Was your work studying the piano. Does that lead to a profitable career as a data expert?
Jamila Abston:
I agree. I think piano and music, it's just a language of its own, right? Just like accounting, it's a new language. So, those type of things, studying them. They give you trend analysis opportunities. They give you ways to study patterns, to listen for things, to look for things that are nuanced, that makes you a great data expert.
Josh King:
Rob, does this ring a bell? I mean, some people look at a whiteboard and see a lot of equations, and think it's completely Greek. And for others, it is music.
Rob Haddad:
Well, I played saxophone until seventh grade.
Jamila Abston:
Did you?
Rob Haddad:
I would hardly use music as an example for me, but I can totally understand. For me, I think it's a combination. For me, I like the art of it. I do draw. And that is one of my outlets. And I do like looking at a problem as a blank page and thinking about how I would try to solve that problem. And so, thinking about it visually first, and then going into the data and the content, and the analytics to figure it out and see if that all makes sense. But it really starts with thinking through how it is you're going to go through the path and solve a problem.
Josh King:
Jamila, you work at one of the great firms, EY, known and respected around the world. How did you become interested in accounting and what drew you to a focus on regulatory issues?
Jamila Abston:
I wanted to be a lawyer, a corporate lawyer originally like so many of my friends. And I started out just doing pre-law and switched my major to accounting with the good old advice from my dad, saying, "Have something else that you can fall back on if you don't choose law." So, I did the accounting degree. EY recruited me as a junior, right out of college. And they told me, "We'll let you work in our fraud investigations and dispute services practice. You'll get to work with all these cool lawyers. Then make a decision about whether or not you want to go back to law school." Best advice I ever got.
Josh King:
Did they bring you right up to New York City or somewhere else?
Jamila Abston:
They did not. I started in Atlanta, but I traveled tremendously for the first six years of my career, overseas work, but I got to work right side by side with those lawyers as well as the regulators. So, then I chose this path. It made sense. So, accounting was my fallback, but now it's my go-to.
Josh King:
We have this image of the accountant with their huge satchels, getting on a plane on Sunday night or Monday morning, coming home Thursday night. Was that you?
Jamila Abston:
We shipped our boxes by the time I started, but it was a lot of data, a lot of paper when I started still. Thank God, now for computers.
Josh King:
A couple of weeks ago, you spoke at the accounting and finance show on equipping your clients to deal with regulatory changes, big show. What were the takeaways from that?
Jamila Abston:
I think a lot of it has to do with keeping your ear to the ground, staying in the know with regulatory change. There was a lot of releases daily from the Securities and Exchange Commission, FIN or the Fed. So, it really admonished a lot of the clients that I know, and some of the ones that I'm hoping to gain to just keep your ear to the ground. Have a group of people that follow the news.
Josh King:
Where does one keep one's ear to the ground for these changes? Is it Wall Street Journal or is it more esoteric?
Jamila Abston:
It's both. It's the WSJ, but it's also an individual websites. It's setting up like Factiva and Yahoo Finance. It's like making sure you get a feed in the morning when you wake up to see what's happening.
Josh King:
That's how I wake up in the morning, just a feed of accounting news. Increasingly, technology plays a role in making sure companies remain compliant. Rob, you joined Interactive Data Solutions. We'll call it IDS. What were some of the problems that you were brought on to solve at IDS?
Rob Haddad:
Yeah. So, it's been a while being with Interactive Data and ICE Data Services now for 16 and a half years. To me, what I became fascinated with was the predictability of market movements and trying to estimate that. And I became so fascinated because we had just rolled out a product when I started here called fair value pricing. And my mentor at the time, Peter Champi was just this combination, academic quant, really lively individual. And just, ultimately, that was my second year, third year at the firm. And I was inspired to learn more. And that's when I went back to school to study quantitative finance.
Rob Haddad:
And that service in particular, what's so interesting is that it's an innovation that was not only solving an industry problem, but was also a disruptor of sorts because there was no service like that before. And people were skeptical that you can utilize a model and statistical inference to estimate a value when that security is not trading in the market. So, it was this foreign thought, but by showing the evidence and showing the results, you can prove that it works to provide people with a fair price. And that's really the goal.
Rob Haddad:
If you and I are investing in a mutual fund and we want to have liquidity at four o'clock, we want to make sure that we're getting a fair price on that execution. And so, I was inspired with not just the mechanics behind it, and the ability to estimate a value using other factors that are moving throughout the day, but the fact that it was helping to price billions and billions of dollars in funds for my parents, for myself, for my wife, her family. So, that was one of the things that really started me off at this concept of forecasting and predicting.
Josh King:
I'm reminded of the great movie, The Graduate, when Benjamin Braddock is at this pool party after getting out of school, and the friend of the parents comes up to him and says, "Ben, I've got one word for you, plastics." Did Peter come up to you at IDS and put his arm around you and say, "I've got three words for you, fair value pricing."
Rob Haddad:
It was like, "Hey, Rob, I got a lot of work to do. I can't do all this. I need some help." But it's turned into, it's funny, every now and then, he's retired now, every now and then when I see him, we're either grabbing lunch or dinner, and for some reason, I go home with a homework assignment. So, he still gives me work, even though he's retired, running his hedge fund right now.
Rob Haddad:
The ultimate part of that too, with any new innovation where it's a new concept to the market, you're always discovering something new. So, the models are never done. You're always looking to improve upon your estimates. And that is the part that really gravitated towards me as well. When I think of innovation, I think of an existing service or function that can be improved incrementally or an altogether new business that might support that main business, but covers off a different type of use in the market. And then the third, liquidity is a good example of that, is an entirely new market segment that addresses a whole new assortment of needs in the market, where the solution is not evident, and you have to invent it. You have to create a way to help solve that problem.
Josh King:
So, from fair value pricing to liquidity, I mentioned in the introduction that you do have a patent in this area. Talk to me about what finance and data innovation looked like today and how it's evolved throughout your career from that day that Peter first put his arm around your shoulder.
Rob Haddad:
Yeah. So, for one, people in general became much more comfortable with a quantitative process providing a solution. If you think about 15, 20 years ago, the resistance to an estimate of value that was based purely on quantitative methods was that I don't understand it. I don't get it. How do I trust a model providing me with an assumption, a value? And then the test would be, well, if your team or others collectively have a better viewpoint, then that should compare favorably to our viewpoint or this model generator viewpoint. And then over time, as people became more comfortable with it, they recognized the efficiency. They recognized the benefit of having an independent, fair assessment of value. And to me, that has really trickled into all forms of the data refinery as you put it. So, the real time access to data to help make decisions is why people need it. And they need to make those decisions in real time. And they need to trust the input that they're using to support those decisions.
Josh King:
Jamila, you talked about the influence of your dad when he told you that you should have some alternative to being a lawyer. The same track of Rob and Peter, for you at EY or at the SEC, who are the people who steered you on a much more particular path toward where you are now?
Jamila Abston:
I think one of my early partners did that exact same guidance, similar to Peter with Rob, just taking me by the hand and saying, "Hey, there's a lot you can do with the firm. And there's many paths to take." I think investigative accounting is very fascinating and interesting. What sector do you want to specialize in? So, when you start at the firm, they let you try on everything, pharma, financial services, consumer products. He really directed the financial services focus that I had, put me on some very interesting engagements where I got to work closely with the regulators and do some really cool derivatives transaction investigations. And that was just, I mean, I think it was pivotal for my career.
Josh King:
Around the time when the deal was announced in which Interactive Data was acquired by ICE, ICE chairman and CEO, Jeff Sprecher said that ICE was, and I quote, "Focused on harnessing our data into more usable value added information that our customers can easily consume and make more educated risk management decisions and comply with regulatory requirements." Can you give an example of the kind of services that you're focused on and bringing to the marketplace to help solve problems for institutions and investors alike?
Rob Haddad:
Yeah, absolutely. I think that quote really nails it on the head. When we think about how we leverage our reach within the industry, combine that with technology to make things more efficient, to make them run faster and solve problems for our clients, that would otherwise be more costly on their end. I think one example of a disruptive type of service like that is with respect to real time fair value, which supports global equity, ETF trading. And coming back to it, you think about an ETF, well, that's traded on the marketplace. Well, it is, but it also, in some global equity ETFs represents a basket of securities that haven't traded since 2:00 AM, if that is representative of Japanese equities or Hong Kong equities later in the morning.
Rob Haddad:
So, the concept of having a fair value estimate through a day to compare against those ETF market quotes is a really important thing, because you need to have an unbiased estimate to compare if you're potentially looking at a market price that is undervalued or overvalued based on the reactions in the market.
Josh King:
Coming out of the 2008 financial crisis, one badly needed product that was evident to the market, was a better way to create a sign and understand liquidity scores, something you've explained to me in terms of a mortgage. How does that work?
Rob Haddad:
Yeah. Well, you're bringing back a painful subject for me, Josh. The year was 2010. I was looking to sell a house. I had a child on the way. I had a town home.
Josh King:
What town?
Rob Haddad:
Town of Bellingham, Massachusetts. In fact, I put it on the market, let's call it September. Give me a little bit of credit for that. September of 2009. It sold in March of 2010, while I was already at another house. So, out of sight, out of mind. I was 45 minutes away. So, it didn't feel like anyone else. I was floating two mortgages at the same time. But what that makes me think about is my own liquidity needs. If I was willing to wait, take that house off the market, which ultimately I did do for December, January, February, and do some improvements and maybe increased the appeal of it, maybe then I have a quicker time to get my cash back. Otherwise, I could have sold it in 2009, but I would've had to take, let's call it a 20% haircut to be able to do that.
Rob Haddad:
So, what that helps me realize is that everybody else already has these types of decisions to make. And whether you choose to sell a house in, let's say January, the median home price, roughly around 280 grand, or you wait until June where it rises to about 305 grand on a median waited basis. That is a decision. If you need that money right now, you're willing to take a hit. But if you can wait and hold off, you may get a better price, better execution. So, when we think about liquidity, it's about that give and take, the give and take between time and what your needs are and the amount of cost you're willing to accept for getting that liquidity captured at the time that you wanted.
Josh King:
Rob, with the problem identified, what drove your thinking when building the ICE Liquidity Indicators service.
Rob Haddad:
When we think about the fixed income markets, the biggest challenge is that you do not have a lot of transparency. You do not have a lot of trading. And so, the central concept for us was that we don't have enough market data on every one of these bonds to form of view, but that's not to say that even though that bond hasn't traded in six months, that it doesn't have potential to trade. So for us, that was a central aha moment was we need to estimate what the potential to trade is. Not just what the observable trade is, because everybody can see that, but it's what that potential is.
Rob Haddad:
And so, from our process, what was also interesting at the time was that there was nothing out there. There was no other solution. And our clients were just starting to be interested. So, we really had to validate that. We really had to start putting together some prototypes, surveying the marketplace.
Rob Haddad:
It's funny. I always joke 2014 was the year, we put out an industry survey without a product, which is a couple of concepts, and we received 175 responses back. And so, I was joking at the time that should just be my business case, a front page with 175 responses, and then let's call it a day. Let's not do all this market sizing and addressable market.
Josh King:
Why were so people so eager to give you the responses?
Rob Haddad:
We came to understand that there's this need. This is a gap in how people view the world. Credit risk, market risk were known quantities at the time, but liquidity risk was more of a challenge. Obviously, more strides in the equity markets at that time. But with fixed income, that's an enormous market that doesn't have as much transparency, and therefore has more liquidity risk associated.
Josh King:
So, at that moment, when they're constructing their models, what are they seeing? What information do they have to make their calls on?
Rob Haddad:
So, one thing that we produce as part of our derived analytics is a comparison of someone's position size to the projected trade volume capacity, is what we call it. So, if you can compare your position size to that amount, then you can consider how it adjusts as you elevate or decrease your acceptable price threshold. Right?
Rob Haddad:
So, for example, if you hold a million dollars in a position and the projected trade volume capacity, let's call it 500,000, but you're willing to accept a 20% hit. That's a big hit. Sure, you can get out of that within a day. However, if you're more stringent and you say, "Well, I'm only accepting 25 basis points or half a percent." Then it becomes more challenging. And that's really where the analytics help to bring that out and really validate with PMs and traders to see if that makes sense.
Jamila Abston:
Yeah. I mean, Rob, this makes total sense from where I sat at the commission, right? So, the idea that there's a place to go that might have a more informed view from talking to other clients, even in your position at ICE, that was something that would be highly valuable. So, I totally get why there was an interest, because at this point it's just everyone for themselves using the minimal data that they can get to make decisions in the fixed income market.
Josh King:
Why has the product become central to how many firms are operating? This is the SEC Liquidity Rule.
Jamila Abston:
So, the rule, I think it really drives a lot of what you're seeing from ICE and other service providers, as they try to come up with the solutions for this. The rule requires two big things. One it's enhanced reporting. So, before, there were a few forms that every asset manager has to provide Form ADV one and two, and a few others. If you're a private fund advisor, form PF. Now, the requirement is Form Import N-CEN and N-LIQUID. And just to be very quick and high level, portfolio holdings, credit and liquidity, right? So, that's one side of the rule.
Jamila Abston:
The other side is for firms to develop a robust liquidity risk management program, that the board needs to be involved in developing that and monitoring that. So, those two big prongs really drove firms initially, to get a little frightened, what does this mean? Although, the global regulators were already on the bandwagon with this. The US didn't have this requirement from an asset management perspective. So, this was the first like big, "Oh my gosh, we have to do something post crisis." Crisis in '08. It wasn't until October, 2016 when this was adopted and enacted. So, there was eight years of Dodd-Frank and a lot of other regulatory pressures, but this was the final August golden nugget for Mary Jo White before she left as chair of the SEC. So, the rule required those two big things.
Jamila Abston:
And then it was like, "Where do we get this liquidity data from?" We've been doing liquidity management from a portfolio management perspective in house, but there's these new four buckets that the SEC is requiring them to be organized according to. And there's this 15% limit that we've always known, but is it to be more aggressively looked at by the SEC? A lot of questions. So, that role and those prongs drove a lot of the vendors that were saying, including obviously ICE, to come up with some very easy user friendly solutions, that's just drawing all of the firms to what I think is the solution that they need.
Josh King:
Jamila, was there a lot of resistance in the US to providing this new amount of data compared to the way the rest of the world was?
Jamila Abston:
Absolutely. I mean, a lot of pushback. The SEC got numerous letters. They took in comment letters, but they also got unsolicited letters, a lot of peer discussions. The trade organizations and professional organizations pushed back on this movement. They felt like the asset management community was not like the banking community. They didn't need this, that this was over regulation. But being there as a former examiner and having to answer the calls from a lot of very worried investors, institutional investors, pension funds, asking about redemptions and not having an answer, not knowing how liquid the funds were, because the SEC didn't have that data. My view is very different. I think this is necessary and certainly beneficial for the investing public.
Josh King:
After the break, we continue our conversation with Jamila and Rob into how the SEC Liquidity Rule has evolved and how liquidity measurements will affect finance, after this.
Betty Liu:
Betty, here again, and as promised, here's a quick answer from John Chen, chairman and CEO of Blackberry on the most important soft skill for a manager.
John Chen:
I think transparency is very important. And I think fairness is very important. If you could be transparent and could be fair, sometime it might be tough, but people will follow you, because they know where they sit. They don't have to second guess what you're saying. And I think that makes the sign of a true, good manager.
Betty Liu:
You can watch John Chen's answer and other short videos by visiting radiateinc.com. That's www.radiateinc.com.
Josh King:
Welcome back inside the ICE House. We're with Rob Haddad, head of product strategy and innovation at ICE Data Services. Jamila Abston, partner in the EY Financial Services office. Our conversation today is centered around liquidity and how ICE Data Service is working to provide solutions to meet shifting regulatory needs.
Josh King:
Jamila, you were with EY during the financial crisis. What drove your decision to join the SEC and how did your experience helping companies adjust to the changing regulatory frameworks created during that period prepare you for the job?
Jamila Abston:
Josh, the SEC, it's a long process to become professional there. So, I started the process months before the crisis hit, thinking I was going to probably the best agency in the world to understand the financial markets. And I still believe that. But I started way before September, October, November. So, it was a fluke that by the time I transitioned over to the SEC, it was right in the heart of the crisis. And I tell you, I had a heart attack, a meltdown. I actually called my old partners at EY and asked, "Should I come back? This agency is getting run through the mill and the news every day. I don't know if this is the right place to be."
Jamila Abston:
And I had great guidance, again, hearkening to the beginning of our conversation from some partners who said, "It's either going to be the best place to be, or the worst place to be. And it's too early to tell. So, just sit it out." And I'll say, that advice was spot on. It was the best place to be. The SEC, doubled out on technology, hiring the right people, early promotions, getting some quants on staff, just doing the right things, and then focusing on data as a way to monitor the industry.
Jamila Abston:
So, I'm glad I stayed. It was the best time to be there. Obviously, a lot of regulation. I think EY, and having the time doing a lot of investigations of financial services companies helped prepare me for that time, because it was really eyes wide open, like having to look at the industry very differently. The last thing the SEC could do is continue business as usual. It was deep dives. It was a lot of analytics. I brought all the tools and the things that I learned at EY over and tried to teach everything I knew to all of the SEC examiners. And I took all of their gut instincts and their experiences on, from my view, as I did exams.
Josh King:
Can I just say Jamila, so I've had the pleasure of speaking with many folks at the SEC, especially over the last year and a half, maybe half a dozen trips down to DC. I don't know if I've seen a nicer examiner. How would that process work as you were examining these companies? And now you're on the other side consulting. How have you found that transition play out for you?
Jamila Abston:
Well, obviously the industry loves me a lot more on this side. I mean, I'm certainly a favorite now. I think it's the best place to be now because you can give the forewarning, "Hey, I know this may not seem like a big issue." But when I was at the SEC, this was something that we focused on. You can also narrow the scope for some firms, right? A lot of firms want to just take everything on, rebuild, get a grade A compliance program. And if you have the money, great, but a lot of firms are struggling right now with cost decisions. So, guiding them on what you need to focus on, I've been able to do that. I've really enjoyed that. I do miss being able to do surprise exams and roll in a little heavy handed. With the FBI, I've done that a few times.
Josh King:
Paint a picture of that moment.
Jamila Abston:
Oh my gosh. So, sometimes firms are under duress and there's a run of money. There's somebody that's running money out of the firm. They're liquidating all the accounts. And we get a tip, right? We just go right there that same day, call the FBI. They bring over vest. They have the guns. The SEC is a civil agency. I never got to carry a gun, but just being with them as we we're banging down doors and being able to watch them seize property, arrest someone, super, super cool experience. I guess, to some people, it may not be cool, but certainly it was cool for an accountant from Florida A&M University, originally from Mobile Alabama. Never thought that would be a part of my story.
Josh King:
Getting away from the guns and vests for a minute, the rule that we've been circling around, I think it's known as 22e-4, began as an initiative during your time at the SEC. Do you remember when you became aware of the issue? And give us some perspective on how the rule began to form?
Jamila Abston:
Yeah. So, after the crisis, again, the global regulators were moving aggressively to get solutions. They wanted to monitor liquidity and the asset management community, they wanted to do daily and monthly like monitoring. As soon as the crisis happened, the SEC was a lot more conservative in their view, trying to understand really what's the pain point here and what do we need to monitor? Let's not just take a blunt instrument to the asset management community. So, conversation started in '08, '09. Investment management made this a priority about 2010 to 2011 to start early drafts. And what was really interesting was that all of the different offices and divisions of the commission came together to work on this.
Jamila Abston:
So, although, the exam team is normally boots on the ground and not necessarily involved in legislating or writing the rules, they were asked questions about how do you understand what's going on from a liquidity perspective with the firms you're looking at? What are you requesting? What is the data that they have? What systems are they using? So, those conversations started very early, 2010, 2011. It took until 2016 to get something that made sense. The four buckets, that was a long discussion. Why four? How to come up with four? Why not six? Why not eight?
Jamila Abston:
Some of the large asset managers have very complicated liquidity management systems and lots of buckets and lots of ways they look at things. Certain funds have different pain points and pressure for liquidity than other funds and other types of asset classes. So, it was a really long discussion. I applauded the SEC for taking its time. And although it was still regulation that no one probably wanted, again, I think from my seat, it was necessary to get a handle on shareholder redemptions and liquidity of the market.
Josh King:
From the first time that beginnings of the rule came out, there have been many amendments working toward a final rule for 22E-4. Jamila, you're now consulting with fun companies as they work to adopt this rule into their new workflows. How have you seen that transition taking place with the firms that you're working for?
Jamila Abston:
It's a frustrating period for them, I guess to say the least, but that's a part of the process with any new rules. I mean, if we think about what happened with the Department of Labor rule over the past year and a half, it's been a lot of up and downs and a lot of changes. In the beginning, it was let's wait and see. Let's wait and see if this stays in place. Mary Jo White put this in place October 2016. There was a new presidential administration with a very different view on regulation. So, there were a lot of firms that didn't want to do anything, right?
Josh King:
Wait out Jay Clayton to see if he moves the pendulum backward.
Jamila Abston:
Exactly. So, we get Jay, it takes until May, till he's in his seat. At that time also, President Trump he delayed a lot of hirings. He froze hirings for a period of time. So, then the SEC had to get those director roles filled. So again, the industry is benefiting from this slow, getting up and going. I mean, this was the first time we'd had five commissioners since 2015. So, all the decisions that hadn't been made were now being made. So, they got a little grace period there. And then the industry started working with the ICI and Cifman, other professional organizations to lobby to the SEC for a delay. And it didn't look like they were going to get one, but they waited it out. And they got one based on the fact that the SEC had an EDGAR breach. And they decided to delay taking in data, obviously as a regulator, because if they can't protect their own data, maybe they should hold off a little bit and take data from the industry.
Jamila Abston:
So, there was a nice nine month delay. We're now rounding that out, getting closer. And so, most firms are full force talking to vendors like ICE, about what to do with liquidity management numbers, talking to other firms that they need to do fund administration with, to seeing if there's ways to leverage their fund administration data. Firms are all getting on board now and putting in things that need to be put in place before 2019 for some, and then the end of the year for most.
Josh King:
So Rob, what have been the key areas of focus for mutual fund companies when adopting a solution and gaining comfort and liquidity measurements when preparing to comply with the rule?
Rob Haddad:
Yeah. And by the way, Jamila, I think the SEC involved examinations from all the street credit you built up from joining that FBI raid. That is having the nest egg of investors in mind. That's pretty cool. I think to Jamila's point, really mutual funds are all about implementation right now. So, this original proposal came out in 2015 and has gone through a number of iterations, number of forms and shapes. And I think the comment letters actually did a really nice job shaping what this final rule looks like.
Rob Haddad:
So, when we think about how mutual fund companies are now on board, they're really in this implementation mode. So, it's about understanding all the different assumptions. So, what assumption can I make on this concept of acceptable price movement? What assumption can I make on this assumption of reasonably anticipated trade size, affectionately, termed RATS? We got to put that out there, RATS.
Josh King:
We do.
Rob Haddad:
And so, when we think about all these different assumptions, that comes down to testing. So, a lot of firms test with the system, make sure the outputs are in line with their expectations. And also as part of Jamila's point is thinking through where they need to draw that line on process. So, what are the got you moments? What do they need to really focus on, that they're in line with consensus on how everybody else is viewing this rule, and where do they not need to spend as much time? So, I think that's where people are ironing out those details right now.
Jamila Abston:
I think you're right. And one of the areas that I have to throw out to you is the 15% illiquidate, that line. What are you hearing from clients? I mean, we're hearing a lot of, "What goes in this bucket?" Like, "Tell me exactly what to put in this bucket and I will be safe from the regulators." It's a lot of nervousness around that particular category. What have you been hearing, Rob?
Rob Haddad:
Yeah, I would agree. And as you highlight, it's been a longstanding concept, this 15% rule. The only difference is now it's codified and now there's more substance around how you get to it. And before it was, "Well, just can you sell it in seven days or not?" Without this notion of price impact.
Rob Haddad:
And I think what we're finding is that the large majority of firms are being super conservative on this point, because if they're providing all these assumptions and the liquidity metrics are not in line with what they expect, they're going to override it. And they're going to say, "Well, my portfolio manager has no intent to ever sell this bond. We're calling it a liquid. I don't care what this model says. We believe it's a liquid. We're not going to put it out to the market. And we don't want to have any issue pretending that we are." So, I think that's what we've seen so far is just conservativeness around those buckets so far.
Josh King:
So, as we wrap up, Jamila, once the liquidity issue is settled, what do you each see as the next big issue facing the firms you're working with?
Jamila Abston:
This is such a big question. I think once liquidity is set in place and everyone has gathered themselves and understands the benefits of this, I wouldn't be surprised if there was some type of monitoring, not the same, obviously, but similarly for the private funds, the hedge funds and the private equity space. So, it's a very different business, but there needs to be the same thing, some look through, some way to determine if there was some crisis event that could affect private equity and hedge fund investments. How does the SEC monitor that? Couple that with cryptocurrency, and those I think are the next areas of focus.
Josh King:
Rob?
Rob Haddad:
Yeah, I think from the rule perspective, I think it's going to be interesting to see how firms assess and back test improve, that what they're doing is appropriate under the SEC's rule. Still yet to be determined how it's going to play out, but that'll be pretty fascinating.
Rob Haddad:
I think from a liquidity perspective, there's also a whole slew of other uses for liquidity that have nothing to do with regulatory compliance. For example, a number of hedge funds as Jamila was highlighting are actually using that information to help understand if something is richly priced or cheaply priced, and if they can get an extra illiquidity premium out of purchasing that instrument. So, from investment selection process.
Rob Haddad:
We're also seeing uses of liquidity in terms of best execution analysis and analyzing, well, if my trader is trading a very liquid bond and another trader is trading a very illiquid bond, we should take that into account. If the person trading the illiquid bond has a much harder job to get great execution, we shouldn't ding them for that. So, there are different ways to use the information, to help support both regulatory compliance, as well as investment strategies going forward.
Josh King:
New products to help firms deal with the issues, Rob.
Rob Haddad:
We're working on a number of elements around what I would characterize as a fun complex dashboard. When we think about liquidity risk metrics at the security level, at the instrument level, with all the different assumptions that go into it, many our clients want to see that holistically. They might have 185 funds that on a daily basis, they don't want to look at every individual item. They want to see a fund complex view of what's at risk. If they have an US treasury fund, they probably don't need to focus much attention on that. That's largely highly liquid. But if they have an alternative investments fund, where it's teetering on the line of being close to 15% at liquid, that might cause more focus and attention. So, we're focusing on that to streamline and create more efficiency around part of this monitoring process.
Josh King:
Jamila, if people want to get access to more EY thought leadership on the topic, where do they go?
Jamila Abston:
Easily, www.ey.com. And you can just do some searches on whatever topic you want. We have tons of thought leadership, webcast, podcasts, all lots of information for you.
Josh King:
Thanks so much, Jamila, Rob for joining us today inside the ICE House.
Jamila Abston:
Thank you.
Rob Haddad:
Thank you, Josh.
Josh King:
That's our conversation for this week. Our guests were Jamila Abston, partner in the EY Financial Services office and Rob Haddad, head of product strategy and innovation at ICE Data Services.
Josh King:
If you like what you heard, please rate us on iTunes, so other folks know where to find us. And if you've got a comment or a question, you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet it us at NYSE.
Josh King:
Our show is produced by Pete Ash and Damon Level, with production assistance from Ken Abel and Steven Porter. I'm Josh King, your host, signing off from the Library of the New York Stock Exchange. Thanks for listening. Talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources, and not independently verified. Neither ICE nor its affiliates, make any representations or warranties, expressed or implied as to the accuracy or completeness of this information, and do not sponsor, approve or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security or recommendation of any security or trading practice.
