How a Financial Pioneer Turned His
Attention to Replacing Libor
By ALEXANDRA HARRIS and NICK BAKER
PHOTOGRAPH BY LUCY HEWETT
Credit
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 photography. Some 200 of their pieces adorn the
walls at the American Financial Exchange, an electronic market-
place where small, midsize, and regional banks can lend and borrow
short-term funds, and where Sandor is chairman and chief
executive officer.
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, reduc-
ing 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. Financial Conduct Authority, said it
would stop making banks contribute estimates to the index by
the end of 2021. The move would wean the market off the bench-
mark, though it would stop short of killing it.
Regulators around the world rushed to find replacements.
The U.K. opted to enhance an existing benchmark called the
Sterling Overnight Index Average, or Sonia. The U.S. decided to
create a rate based on overnight repurchase agreement transac-
tions secured by U.S. Treasuries: the Secured Overnight Financing
Rate, or SOFR. Intercontinental Exchange Inc. (ICE)—which
happens to be the company Sandor sold his Climate Exchange
Plc to in 2010—made its own alternative: the Bank Yield Index, a
benchmark that is a rolling five-day average of term funding trans-
actions by Libor panel banks. In addition, ICE BenchmarkAFTER RICHARD SANDOR sold his carbon exchange for almost
$600 million in 2010, the Chicago trading legend set out to find
another big idea.
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 drowning in paper. Then at the Chicago Board of Trade
in the 1970s, he was a driving force in extending derivatives beyond
corn, soybeans, and other tangible commodities. Now futures let
traders hedge or speculate on financial intangibles such as interest
rates and the S&P 500. Indeed, the U.S. Treasury bond futures
that Sandor got going in 1977 turned into such a valuable franchise
that the Chicago Mercantile Exchange paid $11 billion to buy the
Board of Trade in 2007.
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 scandal was roiling the heart of global finance, the benchmark
for rates on mortgages, student loans, and a gazillion other things
that together are valued at hundreds of trillions of dollars. “Libor
is going to lose its preeminence as a benchmark,” Sandor remem-
bers thinking. “Let’s bet the ranch on that.”
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
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