While the Secured Overnight Financing Rate (SOFR) is the chosen successor to Libor in the United States, other rates have emerged as potential alternatives. The latest AFP Treasury in Practice Guide, underwritten by Kyriba, takes an in-depth look at Ameribor.
Ameribor is the brainchild of businessman, inventor and entrepreneur Richard L. Sandor, chairman and CEO of the American Financial Exchange (AFX). Ameribor isn’t aiming to be a competitor to SOFR per se; rather it seeks to serve the needs of small, medium and regional banks across the U.S. that do not borrow at either Libor or SOFR to fund their balance sheets. According to AFX, these banks “need a separate and distinct benchmark that reflects their actual borrowing costs.”
“We decided to be everything Libor was not,” Sandor explained, during a recent call with AFP. “Libor was international, we wanted a domestic index. Libor was opaque, and we wanted it transparent. Libor depended on opinion, we wanted ours transaction-based. Libor was the wild west and totally unregulated, and we wanted a rules-based, regulated exchange. And most importantly, we wanted to develop something that was unassailable and would represent America.”
To accomplish that goal, AFX looked at all of the disparate interest rates around the country. Sandor found it highly illogical that rates differed so greatly from state to state, and came up with the idea of creating a national rate by engaging banks in every state in the U.S. Though banks initially rejected the idea, they began to warm up to it once it became apparent that Libor was, in all likelihood, coming to an end. “People started saying, maybe you have an idea. Maybe Libor will go away,” Sandor said.
AFX teamed up with Cboe Global Markets, and then approached regulators, agreeing to provide yearly updates on their progress. “We visited the Fed, the OCC, the FDIC, the SEC and the CFTC. The idea was to have an overnight, unsecured market. We opened in December 2015 and we were doing $9 million a day,” Sandor said. “We’re now up to $2 billion a day. We have 204 members, 160 banks and 1,000 downstream correspondents. Our banks have $3 trillion in assets, so we’re 22% of U.S. banks by numbers and 15% by assets.”
Sandor says that AFX had a steady, gradual growth model in mind for Ameribor, starting in small towns, but ultimately adding insurance companies, broker-dealers and corporates.
In a written statement last summer, Fed Chairman Jerome Powell commented on the suitability of Ameribor as a replacement to Libor. Asked by the U.S. Senate Committee on Banking, Housing and Urban Affairs whether he supports alternative benchmark rates other than SOFR, he replied that the Fed supports the work of the ARRC and views SOFR as a robust alternative that will help many market participants make the switch from Libor. However, he reiterated that moving to SOFR is voluntary and market participants should transition in the manner that is most appropriate for them, given their own circumstances.
On that note, he continued that Ameribor, a rate created by the American Financial Exchange (AFX), is “based on a cohesive and well-defined market that meets the International Organization of Securities Commission’s (IOSCO) principles for financial benchmarks.” Nevertheless, while he believes the rate is fully appropriate for banks when it reflects their cost of funding, he added that the rate is “may not be a fit for all market participants.”
Sandor responded that Powell’s comments “reinforce the importance of choice” when it comes to the transition away from Libor. He added that Both SOFR and Ameribor “are complementary to each other” and offer robust alternatives as the market moves away from Libor.
These comments reflect those of Robert Owens, director of fixed income strategy for Farmer Mac, who commented on the AFP Conversations podcast that Ameribor is less of a competitor to SOFR and more of an alternative. “Obviously SOFR is the dominant alternative, but I think Ameribor has a nice place, especially in rural America,” he said.
Amol Dhargalkar, managing partner and member of Chatham Financial’s board of directors and senior leadership team, noted that while it is difficult to say whether Ameribor will take off or not just yet—particularly for medium-sized and larger corporates—the comments by Chairman Powell could help in that regard. Moreover, some market participants may favor Ameribor over SOFR due to some key similarities to Libor.
“Most corporates feel as though they will take the lead of their banks on the appropriate index,” he said. “One of the benefits of Ameribor is that it represents unsecured borrowings between financial institutions—typically smaller ones, relative to the large investment banks that provide services to large multinationals. This more closely mimics the concept behind Libor itself, so banks may find it particularly valuable and interesting as a SOFR alternative. This is particularly true for smaller banks whose funding costs may not be best approximated by SOFR.”
For more insights, download Making Preparations for a Post-Libor World.