Sensible Alternatives

With the potential expiration in 2021 of LIBOR, the ubiquitous benchmark that has been a mainstay for nearly 50 years, focus is shifting to creating new—and hopefully better—benchmarks that will meet the needs of the financial community while reducing the opportunity for manipulation.The University of Chicago Law School and the American Financial Exchange recently convened leading figures in law and economics and international finance to discuss how the new benchmark will affect rate-setting by banks, mortgage lenders, credit cards companies and other financial institutions—and the impact on hundreds of millions of consumers. The topic is of special importance to scholars of law and economics—a field born at the University of Chicago Law School that has transformed nearly every area of law.“Our faculty is known for asking fundamental and important questions,” said Thomas J. Miles, dean of the Law School. “This conference is an example of that because it asks fundamental and important questions about our financial system: Namely, what is the true cost of money? Who should determine that cost? And how should they determine it?”The Law School’s Coase-Sandor Institute of Law and Economics co-sponsored the April 3 symposium to begin a discussion on the transition to LIBOR alternatives being introduced. SOFR, the Secured Overnight Financial Rate designed by the Alternative Reference Rate Committee, is an overnight secured lending rate based on the U.S. Treasury repurchase agreement market; it was published by the New York Fed for the first time on April 3. Ameribor, created by the American Financial Exchange, reflects the borrowing costs of US small-and mid-sized banks using a 30-day rolling average of the weighted average daily volume in the AFX overnight unsecured market. Two years ago when AFX started, it was trading $5 million and $10 million a day with six participating banks. Today, it has 83 member institutions and has traded as much as $780 million in a single day.“With contracts tied to LIBOR that are valued at hundreds of trillions of dollars... (UChicago News)