After Richard Sandor sold his carbon exchange foralmost $600 million in 2010, the Chicago trading legend set out tofind another big idea.

He's good at that.

When he was an economics professor at the University ofCalifornia at Berkeley a half-century ago, Sandor drafted one ofthe first plans for an all-electronic market, around the time WallStreet was drowning in paper.Then at the Chicago Board of Trade in the 1970s, he was a drivingforce in extending derivatives beyond corn, soybeans, and othertangible commodities. Now futures let traders hedge or speculate onfinancial intangibles such as interest rates and the S&P 500.Indeed, the U.S. Treasury bond futures that Sandor got going in1977 turned into such a valuable franchise that the ChicagoMercantile Exchange paid $11 billion to buy the Board of Trade in2007.

A decade ago, when Sandor was looking for his next big thing, hethought it would be water. "It's going to be the commodity of the21st century," the 78-year-old recalls in an interview at hisoffice in Chicago's Wrigley Building. But in 2011, news about theLondon interbank offered rate, known as LIBOR, caught hisattention. A scandal was roilingthe heart of global finance, the benchmark for rates on mortgages,student loans, and a gazillion other things that together arevalued at hundreds of trillions of dollars. "LIBOR is going to loseits pre-eminence as a benchmark," Sandor remembers thinking. "Let'sbet the ranch on that."

And so Sandor—whose nickname, "Doc," was on the yellow badge hewore in the trading pits, a nod to a doctoral pedigree that stoodout on the rough-and-tumble floor—created his own rates index,dubbed "AMERIBOR." His aim was to fix something he thought waswrong with LIBOR from the start. Traditionally, LIBOR was derivedfrom a daily survey of large banks, which provided estimates of howmuch it would cost them to borrow from one another without puttingup collateral. It turns out a bunch of the banks manipulated it foryears, fudging numbers to serve their interests.

The problem, Sandor says, is that it wasn't based on realtransactions. "It's not a free market, where prices are determinedby supply and demand," he says. "It's not the Chicago way."

Sporting black-and-teal eyeglasses and a fedora, Sandor standsout in Chicago's financial community. With his wife, Ellen, who isan artist, Sandor has amassed one of the world's top privatecollections of photography. Some 200of their pieces adorn the walls at the American Financial Exchange, anelectronic marketplace where small, midsize, and regional banks canlend and borrow short-term funds, and where Sandor is chairman andCEO.

His efforts to create a new interest-rate benchmark initiallyelicited eye rolls from experts. After all, the Federal Reserve wasalready 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 tomeasure.

But two years ago came a huge opening for Sandor. The head ofLIBOR's overseer, the U.K. Financial ConductAuthority, said it would stop making banks contribute estimatesto the index by the end of 2021. The move would wean the market offthe benchmark, though it would stop short of killing it.

Regulators around the world rushed to find replacements. The U.K. opted to enhance anexisting benchmark called the Sterling Overnight Index Average, orSONIA. The United States decided to create arate based on overnight repurchase agreement transactions securedby U.S. Treasuries: the Secured Overnight Financing Rate,or SOFR. Intercontinental Exchange Inc.(ICE)—which happens to be the company Sandor sold his ClimateExchange Plc to in 2010—made its own alternative: the Bank Yield Index, abenchmark that is a rolling five-day average of term fundingtransactions by LIBOR panel banks. In addition, ICE BenchmarkAdministration, the current operator of LIBOR, has evolved thebenchmark's methodology so that submissions are based ontransactions to the greatest extent possible.

It's unlikely that any of these will ever match LIBOR'spredominance. Although the Alternative Reference Rates Committee(ARRC), a collection of market participants and regulatorsengineering the transition in the United States, is pushing SOFR asthe heir, many are wary of adopting it. LIBOR has long been used asa barometer of stress in credit markets, but SOFR wasn't designedfor that. It only tracks overnight repurchase agreements and lacksa forward-looking curve with tenors extending beyond a day, thoughFed staffers have issued a paper about inferring term rates fromSOFR futures prices. By contrast, LIBOR has rates ranging fromovernight to one year.

The Basel, Switzerland-based Bank for International Settlements,which serves as the bank for central banks, said in March that aone-size-fits-all alternative to LIBOR may be neither feasible nordesirable. And that's what Sandor is betting on. "Multiplebenchmarks and choice, as an economist, is good for the market," hesays. "What is this love affair with a single index?"

See also:

• 'Zombie LIBOR' Threatens Market's ComplacentView
• The Short Road from LIBOR's Death to'Armageddon'
• LIBOR's Looming Demise Is a Massive FinancialEngineering Task
• Battle of the Benchmarks Continues

He's going big by aiming small. There's about $18 trillion inthe U.S. banking system, according to Federal Deposit InsuranceCorp. (FDIC) data. Roughly half of that is stashed at the largestbanks. That leaves $9 trillion or so in the hands of thousands ofsmaller banks. And Sandor thinks half of that money—around $4.5trillion—is held in variable-rate products that need a newbenchmark to reflect their true costs.

AMERIBOR is a daily rate based on the volume-weighted average oftransactions in the overnight loan market between preapprovedcounterparties, which include banks, broker-dealers, and privateequity firms, on the American Financial Exchange.

For someone accustomed to schmoozing finance professionals inLondon, New York, Paris, Shanghai, and Singapore, sellinginstitutions on AMERIBOR required a different itinerary. Sandorfound himself meeting with bankers in smaller towns, such asTupelo, Miss. (population 38,206), and Bentonville, Ark.(population 51,111). Now he can even point you to the best barbecuejoint in the United States.

Ameribor's chilly reception was similar to what Sandor remembershearing 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 ratewith a handful of banks at Cboe Global Markets Inc., the marketoperator formerly known as the Chicago Board Options Exchange. Theplatform hosts more than 160 companies, mostly banks, and just hada record week, as $13 billion traded on September 16 to 20 amidturmoil in the repo market.

Frost Bank, founded in the 19th centuryin the back of a San Antonio store selling supplies to frontierTexans, took part in the first overnight loan transaction in 2015and still uses AMERIBOR all the time. "It is the best proxy outthere for where we can incrementally fund ourselves in theshort-term space," says Mark Brell, an executive vice president atthe bank.

AFX introduced AMERIBOR futures, also at Cboe, on August 16.That's right out of Sandor's playbook from 1977,when the Chicago Board of Trade began offering contracts on the30-year Treasury bond. He says the first step is "the building ofthe cash market," proving that it's volatile and that there's aneed to trade. The next step is building a hedging tool, "becausethat's the natural evolution of markets." Those 30-year futuresbegan trading when the U.S. had about $550 billion of debt outstanding.The government sold more than that in the month of August 2019.Today, volume across the Treasury futures franchise (which hasexpanded to include almost every maturity) has exploded as the debthas swelled to $16 trillion.

The futures launch is just the beginning of AMERIBOR'sinfluence. To expand, Sandor and his team will keep meeting withbankers, academics, accountants, and lawyers, trying to prove tothem that the benchmark is a true representation of interbanklending costs. And that means more time traveling through tinytowns, helping the smaller banks who finance "the milk farmers andwhatnot to the burgeoning tech sector in Indianapolis."

Oh, and the best barbecue?

Sandor says it's Joe's Kansas City Bar-B-Que. "Joe's is a must."It's located at a gas station at West 47thStreet and Mission Road in Kansas City, Kan.

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