Q&A: Dr. Richard Sandor on launching the AMERIBOR benchmark
Dr. Richard Sandor has had a storied career in the financial industry.
From his role in the establishment of interest-rate futures in the 1970s, to the founding of American Financial Exchange (AFX) and his current efforts to provide smaller banks with an alternative reference rate better suited to their needs, AMERIBOR, his inventiveness has helped shape the US financial industry into what it is today.
Sandor recently fielded questions from SmartBrief on the adoption of AMERIBOR, and the state of the global futures industry.
SmartBrief: What are the key differences between AMERIBOR and other interbank offered rates, particularly Libor?
Sandor: AMERIBOR is a benchmark based on actual transactions. It is truly a national rate as it reflects the actual borrowing costs for banks all across the United States. AMERIBOR is calculated based on the weighted-average of daily loans transacted on the American Financial Exchange (AFX), which is a transparent, electronic marketplace. Transactions on AFX are subject to surveillance to prevent market manipulation.
SB: What makes AMERIBOR less susceptible to manipulation than Libor?
Sandor: Unlike Libor, which was based upon a poll of a small group of international banks, AMERIBOR is a benchmark based on actual borrowing and lending activity by members of the American Financial Exchange with full transparency and oversight. Through our partnership with Cboe (a federally regulated exchange), the AFX is subject to market surveillance and a rulebook which guides members’ conduct. The AMERIBOR benchmark also adheres to the 19 principles for financial benchmarks of the International Organization of Securities Commissions (IOSCO).
SB: Why should the US have its own distinct benchmark?
Sandor: America is the largest economy in the world and should have its own benchmarks as do many other countries, including the British government’s SONIA (Sterling Overnight Interest Average rate), the Japanese TONAR and the Swiss SARON.
As Libor is phased out, we envision as its successor a family of benchmarks.
AMERIBOR fits the needs of banks and companies that would prefer an unsecured rate based on actual transactions. Economists do not agree on much, but one thing they do agree on is that choice is good and benefits all capital market participants.
SB: US bank regulators, including the Federal Reserve, have said banks will remain free to choose which rate they use to replace Libor. But the Fed has been directly involved in the development of AMERIBOR’s biggest competitor, SOFR. Has that made pitching AMERIBOR more challenging?
Sandor: It is a misconception that AMERIBOR competes with SOFR. We fully support SOFR and both AMERIBOR and SOFR serve the needs of the market for an alternative to Libor. We believe choice of benchmarks is a critical component of the transition and a healthy development for US capital markets.
SB: You are known as the “father of financial futures.” What was more challenging: Getting AMERIBOR off the ground these last few years, or developing the first interest-rate futures market in the 1970s?
Sandor: Both were very challenging as these innovations represent a disruption to the status quo, and in my experience adoption takes time and a tough skin. I have spent my career on the forefront of financial innovation – often dismissed until the first risk-takers boldly step up and the concept gains traction. The adoption of the first interest-rate futures product was challenging since a futures product based on US Treasury bonds was unheard of at that time. The learning curve was steep and, since there was little price movement in Treasury bonds, this made the process even more daunting. But when Paul Volker began his term at the Federal Reserve, and inflation started to skyrocket, the need for hedging Treasury bonds became more acute. It was an idea whose time had finally come. Much the same as AMERIBOR is today—an idea whose time has come. The idea for an alternate benchmark to Libor was happenstance. We were working on market-based solutions to water quality and scarcity when a story in the Financial Times on Libor manipulation caught my attention. It became clear that the situation with Libor was not sustainable. So we turned our attention to finding a solution and launched AFX in 2015 after four years of research and development. I believe that this is my most exciting and important venture to date. No change of this magnitude has occurred in modern financial history.
SB: How would you describe the state of the futures industry today?
Sandor: There will always be a need to hedge risk, and with that, there will be a need for traders to take on that risk. And the ability to do so in deep and liquid markets will always be important. When I started in this business, we accomplished this activity face to face, but with the advent of electronic trading, the means of transmission changed, but the core needs remained the same. I see a bright future for the futures industry as technology improves the way we do business. There is also growth in new products (e.g. environmental products such as air emissions and water) and also geography (China and India), which we worked on more than 25 years ago and have now become a reality.