Richard Sandor Looks to the Future 42 Years After the Launch of Treasury Bond Futures
American Financial Exchange
Based on his decades of experience developing financial markets, Richard Sandor, chairman and CEO of the American Financial Exchange, predicts there will be multiple interest rate benchmarks when Libor is gone.
When US Treasury bond futures were launched 42 years ago, the expectation was that interest rates would become more volatile and a hedging mechanism was needed. I think we're in a similar situation today because there is a structural change underway. We started the American Financial Exchange (AFX) in 2011 thinking that it would be a 10-year journey. Then, by pure fortuity, we learned that Libor will officially end in 2021. Looking back at the situation when Treasury futures were launched, we were still two years away from former Federal Reserve Chairman Paul Volcker’s “Saturday Night Massacre,” when the Fed allowed interest rates to fluctuate. Now it's going to be a couple of years until LIBOR ends. It is the same horizon that existed in 1977. Multiple benchmarks will emerge and we view this as beneficial to all market participants.
And many participants will come from Asia. There is a special place in my heart for Asia. We had the privilege and honor in working in China, India, Singapore and Vietnam over the years. New product innovation in the next ten years will be coming from Asian economies. There continue
s to be positive signs coming from China, for example, where the central government is looking to further liberalize interest rate markets. It is important for regulators to be vigilant and for the industry to continue to build human capital and market infrastructure. It is also critical to develop products that serve real economic needs of the region. That will help spur growth in the real economy.
Multiple interest rate benchmarks will best serve the market
Post-Libor, it's important to address the perception that the world should have one interest rate benchmark. Libor is an anomaly. It is the only asset class I know of with only one benchmark. In the commodity area, you have West Texas Intermediary and Brent crude, Dubai and Shanghai. And in equity markets, you have the S&P 500, Dow Jones, Nasdaq, Russell and Value Line. You have more stock indexes than you have stocks. In fixed income, you have governments, munis, corporates, long-term and short-term issuance. And now the world is asking: What is the substitute for LIBOR? It's not the proper question. It’s a well-known fact that you can have simultaneously different futures to identify different markets. So, from what we can infer from history, multiple benchmarks will emerge. It’s already happening with the introduction of SONIA, SOFR (Secured Overnight Funding Rate), and Japanese and Canadian benchmarks.
Secured vs. Unsecured
SOFR will satisfy large financial institutions. But what about regional banks? They need a new unsecured rate and a rate that is good for 5,000 banks that don't own government (securities) and borrow unsecured. If they are to do asset management and asset liability management, and borrow unsecured, they should be creating assets that are tied to the unsecured rate. There can be alternatives. We thought the best way to do that is to launch AMERIBOR futures.
With the launch of AMERIBOR futures and the fact that AFX now adheres to all 19 principles for financial benchmarks of the International Organization of Securities Commissions (IOSCO), AMERIBOR will become a benchmark for not only the United States but also other nations that have dollar-denominated debt. We believe the more futures there are, where you can express an interest rate opinion relative to other interest rate opinions, is going to make both markets more efficient just as arbitrage always does.
When and if Libor goes away, I am happy to exist in a SOFR world because SOFR and AMERIBOR are complementary and not competitive. All of the work that SOFR and the Alternative Reference Rates Committee (ARRC) is doing helps AMERIBOR because of the need to transition from L
Iibor. To make that orderly transition, we have to make sure we prepare like it’s Y2K.
Dr. Richard Sandor is the Aaron Director Lecturer in Law and Economics at the University of Chicago Law School. He is also Chairman and CEO of the American Financial Exchange (AFX), theafex.com, an electronic exchange for direct interbank/financial institution lending and borrowing. Sandor is known for his pioneering work in developing the first interest rate futures contract in the 1970s, when he served as chief economist and vice president of the Chicago Board of Trade (CBOT).
A version of this article previously appeared on John Lothian News.