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Of China, Condoleezza Rice and Iranian nuclear deals

Nikki Mandow set out to talk to visiting US finance expert Rick Grove about derivatives, but ended up finding out a good deal more about the world than just its financial instruments.

I like derivatives, I really do. I mean I once spent a month-long journalism work placement at Futures & Options World magazine.

But get the chance to talk to someone who’s regularly in the same room with people making world-shaking decisions, and there’s a strong temptation to stray off topic.

Rick Grove is one such person.

In New Zealand just before Easter as a guest of law firm Bell Gully and the New Zealand Financial Markets Association, he started our conversation with an anecdote which had little to do with financial instruments.

It’s 1984 and Grove, having spent four years at Princeton studying public and international affairs and three years at Harvard studying law, moved to London where he was invited to become a member of the highly-prestigious international think-tank the International Institute for Strategic Studies.

Not many 26-year-olds get to join the invite-only institute and Grove was understandably a bit overawed when he attended his first meeting. He was relieved to see he wasn’t the only newbie there. A young African American woman, an assistant professor at Stanford University, was also being inaugurated into the institute.

Former US Secretary of State Condoleezza Rice

That young woman was Condoleezza Rice, who would become America’s National Security Advisor in 2001 and US Secretary of State in 2005.

“I cannot say that I was confident at the time that I belonged in the room, but it was clear to me that she belonged there!”

Grove moved from law into banking and “fell in love with derivatives”, which have remained a passion. These days he is chief executive of financial risk management consulting firm Rutter Associates in New York.

A post-IBOR position

Grove’s main reason to be in New Zealand was to talk to a room full of other derivatives enthusiasts about a post-IBOR world.

That’s important. For anyone not in the know, IBORs are Inter-bank Offered Rates - benchmark interest rates used to determine how much parties owe each other under loans, bonds, derivatives, and mortgages.

The most important one is the London Inter-Bank Offered Rate, or LIBOR, which underpins a staggering $US260 trillion of transactions worldwide.

But because IBORs are based on banks’ own reporting of their daily interest rate costs, they are open to manipulation. And between 2005 and 2012 some of the world’s leading bankers did just that. They rigged the system, and IBORs got a bad name.

"Brace yourself for the possibility of disputes, because there is significant value at stake."

Rick Grove

It’s a bit more complicated, but the LIBOR scandals are one reason why IBOR benchmarks are being phased out in 2021 in favour of Replacement Reference Rates (or Risk Free Rates). The transition is unlikely to be smooth, and Grove talked about the economic and legal issues facing companies in New Zealand and around the world as they make the change.

Headline topics included “Spread: the importance of avoiding ‘value transfer’” and “Continuity of contract if there is no fallback?”

It was frighteningly fascinating.

His advice to the New Zealand financial community?

“Do an inventory of where you are exposed to IBOR transactions - have an idea before 2021 when they will disappear. Do the best you can to negotiate replacement rates and spreads before the end of 2021. And brace yourself for the possibility of disputes, because there is significant value at stake.”

Bell Gully derivatives specialist David Craig

The head of Bell Gully’s derivatives practice, David Craig, says the changes will be a significant development in New Zealand even though our own reference rate, the Bank Bill Benchmark Rate or BKBM, will not be replaced.

“New Zealand’s most prominent reference rate – BKBM – hasn’t attracted the same criticism and concern as the IBORs. This is because of how BKBM is calculated. However, it would be wrong to assume New Zealand will be unaffected by the IBOR replacements. There is a huge volume of financing and derivative transactions indexing IBORs that have been entered into by New Zealand parties. We definitely have skin in this game,” he says.

China and other thorny issues

Meanwhile, Grove has never lost his fascination with international political strategy. And as his workload has become more manageable, he’s been able to increase his commitment to the International Institute for Strategic Studies.

“You have to be optimistic about the [China-US]  trade war. Both sides want and need an agreement.”

Rick Grove

He says he spends a lot of time thinking about the trading relationship between China and the US - not just because of personal interest, but because it’s a key factor in the world’s financial markets.

“You have to be optimistic about the trade war. Both sides want and need an agreement,” he says. But whether any deal is significant, or just lip service remains to be seen.

“It’s easy to agree on some things. So they might agree on Chinese purchases of more US soybeans, but it’s not going to change the trade deficit dramatically.

“It can be presented as progress, and maybe it is progress. At least it should ease international supply chains and the concerns from the outside about needing to choose sides.”

Grove chairs the US Friends of the IISS and hosts a bi-monthly discussion session with senior policy makers and a diverse range of invited guests. Former Australian Prime Minister Kevin Rudd has been a speaker; as have been the UN Ambassadors from Afghanistan, India and Pakistan, the Deputy Consul-General from China, former US Ambassadors to the Middle East Ryan Crocker and Daniel Kurtzer, and General David Petraeus, former Director of the CIA.

Wendy Sherman in Geneva in 2015 after a high-level diplomatic meeting on Iran's nuclear programme. Photo: Getty Images. 

He recalls an April 2019 IISS forum with Under Secretary of State Wendy Sherman, strategic advisor to US Presidents Bill Clinton and Barack Obama. Sherman was chief US nuclear negotiator with Iran in the leadup to the 2015 agreement to limit Iran’s nuclear activities - the same deal US President Donald Trump withdrew from last year.

"I’m not a woman, I’m not the Under Secretary of State. I’m the United States of America."

Wendy Sherman

Sherman talked about the cultural issues - like the fact that the Muslim negotiators wouldn’t shake her hand, because she was a woman, despite her being the leader of the delegation. And then a young woman in the audience asked the question: ‘What is it like to be a woman in a room with all those Iranian men?’

“And Sherman said ‘When I’m sitting in the room with the Iranians on one side, me on the other, I’m not a woman, I’m not the Under Secretary of State. I’m the United States of America.’

Who would have expected stories like that from an afternoon discussing derivatives?

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