After Richard Sandor sold his
He’s good at that.
When he was an economics professor at the University of California at Berkeley, a half-century ago, Sandor drafted one of the first plans for an all-electronic market, around the time Wall Street was
A decade ago, when Sandor was looking for his next big thing, he thought it would be water. “It’s going to be the commodity of the 21st century,” the 78-year-old recalls in an interview at his office in Chicago’s Wrigley Building. But in 2011, news about the London interbank offered rate, known as Libor, caught his attention. A
And so Sandor—whose nickname “Doc” was on the yellow badge he wore in the trading pits, a nod to a doctoral pedigree that stood out on the rough-and-tumble floor—created his own rates index, dubbed Ameribor. His aim was to fix something he thought was wrong with Libor from the start. Traditionally, Libor was derived from a daily survey of large banks, which provided estimates of how much it would cost them to borrow from each other without putting up collateral. It turns out a bunch of the banks manipulated it for years, fudging numbers to serve their interests.
The problem, Sandor says, is that it wasn’t based on real transactions. “It’s not a free market, where prices are determined by supply and demand,” he says. “It’s not the Chicago way.”
Sporting black-and-teal eyeglasses and a fedora, Sandor stands out in Chicago’s financial community. With his wife, Ellen, who is an artist, Sandor has amassed one of the world’s top private collections of
His efforts to create a new interest-rate benchmark initially elicited eye rolls from experts. After all, the Federal Reserve was already several years into its campaign of holding rates at zero. Institutions could access cheap capital in the debt markets, reducing the need for interbank lending, which Libor is supposed to measure.
But two years ago came a huge opening for Sandor. The head of Libor’s overseer, the U.K.
Regulators around the world rushed to find
It’s unlikely that any of these will ever match Libor’s predominance. Although the
The Basel, Switzerland-based Bank for International Settlements, which serves as the bank for central banks, said in March that a one-size-fits-all alternative to Libor may be neither feasible nor desirable. And that’s what Sandor is betting on. “Multiple benchmarks and choice, as an economist, is good for the market,” he says. “What is this love affair with a single index?”
He’s going big by aiming small. There’s about $18 trillion in the U.S. banking system, according to Federal Deposit Insurance Corp. data. Roughly half of that is stashed at the largest banks. That leaves $9 trillion or so in the hands of thousands of smaller banks. And Sandor thinks half of that money—around $4.5 trillion—is held in variable-rate products that need a new benchmark to reflect their true costs.
Ameribor is a daily rate based on the volume-weighted average of transactions in the overnight loan market between preapproved counterparties, which include banks, broker-dealers, and private equity firms, on the American Financial Exchange.
For someone accustomed to schmoozing finance professionals in London, New York, Paris, Shanghai, and Singapore, selling institutions on Ameribor required a different itinerary. Sandor found himself meeting with bankers in smaller towns, such as Tupelo, Miss. (population 38,206), and Bentonville, Ark. (population 51,111).
Now, he can even point you to the best barbecue joint in the U.S.
Ameribor’s chilly reception was similar to what Sandor remembers hearing when he evangelized for financial futures decades ago. “It’s a stupid idea. Interest rates don’t fluctuate,” he says.
But when the Fed convened ARRC to find a new rate in 2014, Ameribor suddenly seemed less outlandish. In December 2015, Sandor’s American Financial Exchange introduced the interest rate with a handful of banks at Cboe Global Markets Inc., the market operator formerly known as the Chicago Board Options Exchange. The platform hosts more than 160 companies, mostly banks, and just had a record week, as $13 billion traded on Sept. 16-20 amid turmoil in the repo market.
AFX introduced Ameribor futures, also
The futures launch is just the beginning of Ameribor’s influence. To expand, Sandor and his team will keep meeting with bankers, academics, accountants, and lawyers, trying to prove to them that the benchmark is a true representation of interbank lending costs. And that means more time traveling through tiny towns, helping the smaller banks who finance “the milk farmers and whatnot to the burgeoning tech sector in Indianapolis.”
Oh, and the best barbecue?