By John Hintze
Emerging exchange generates alternative Libor replacement that’s complementary to SOFR.
While regulators and big banks are pushing the development of the Secured Overnight Financing Rate (SOFR) to replace Libor, another alternative, Ameribor, is quickly gaining ground. This comes along with growth of Ameribor’s creator, AFX, which produces its benchmark by facilitating funding between mostly financial institutions and, so far, one large corporate.
The American Financial Exchange, or AFX, launched in 2015 and has grown rapidly over the last year, without assistance—unlike SOFR—from the Federal Reserve Bank of New York or major banks. Its daily average volume of transactions quadrupled in the year that ended in the first quarter of 2019, to nearly $1.5 billion, and it now lists 141 institutions as members, up from 72 early last year. Most are regional banks, and 25 are nonbanks, including insurance companies, broker-dealers, asset managers and Deere & Co., the first nonfinancial corporate. There are an additional 557 banks that access the AFX through correspondent banks.
Thousands of inputs. SOFR is generated from thousands of secured, overnight repurchase-agreement (repo) transactions, and so is far less likely to be manipulated than Libor, the current reference rate for $20 trillion in floating-rate financial products, which relies on fewer and fewer large banks submitting their interbank funding rates. The AFX generates Ameribor from transactions stemming from a broad array of institutions representing upwards of $1.7 trillion in assets, according to Richard L. Sandor, who pioneered the first interest-rate futures and was instrumental in developing several climate exchanges.
“We’re complementary to SOFR,” Mr. Sandor said. “We want to develop products, loans and other types of debt that are indexed to Ameribor. We would be the index used by regional banks.”
Corporate benefits. So far, AFX has mainly been a funding tool for financial institutions. Deere, the giant farm-equipment manufacturer, recently joined the exchange at the corporate level, suggesting it may be using AFX as a venue to invest cash. Deere did not respond to requests for more information.
John Deere Financial, which helps customers finance purchases of John Deere equipment, could potentially also use AFX to fund loans. Tom Broughton, chairman, president and CEO of Birmingham, Ala.-based ServisFirst Bank, said that in February his bank priced an $8 million commercial real estate loan, with a five-year maturity and 15-year amortization, off Ameribor. He added that ServisFirst has priced lines of credit as large as $10 million with the benchmark.
Meanwhile, a few corporates have priced bond issues over SOFR. Toyota Financial, for example, priced $500 million in three-month commercial paper off SOFR in October. And companies reportedly are starting to name the reference rate as a fallback in their loan documents, given Libor is anticipated to fade further after 2021 when the banks’ obligation to submit interbank lending rates disappears. Mr. Broughton said his bank has started to use Ameribor as a fallback rate in loan documents.
Risk reduction. NeuGroup members tend to borrow hundreds of millions and even billions of dollars at a time at the corporate level from the nation’s largest banks. Regional and community banks may still play a role in their local funding needs, and Ameribor appears to significantly reduce risk for those lenders during times of financial stress. Mr. Broughton noted that if SOFR had existed during the 2008 financial crisis, the bank’s cost of funds would have exceeded the rate it was charging on its loans. That’s because as a secured rate, SOFR almost certainly would have fallen as investors fled to quality, and borrowing costs increased.
“Because Ameribor represents banks’ cost of funding, banks’ assets linked to it are automatically hedged,” Mr. Sandor said.
Ameribor’s transaction volume has been on an upward trajectory. Mr. Broughton noted that a reversal in that trend could signal risk in using the benchmark, but so far “we see a lot less risk than with SOFR,” he said. “There’s sufficient liquidity and volume on the AFX to make us feel comfortable.”