New Momentum for Ameribor Benchmark Follows Citi's Market-Making Move

Citi's decision to join the American Financial Exchange (AFX) and make markets in Ameribor-based derivatives brought the upstart exchange long-sought affirmation from a major Wall Street player. More are likely to follow, bolstering this U.S. alternative to the Libor benchmark, though it may not result in a quick ramp-up in Ameribor usage.

“Citi joining AFX sends an important message that Ameribor is very much a part of the post-Libor landscape,” said Richard Sandor, chairman and CEO of the five-year-old AFX and architect of Ameribor, an unsecured overnight interest rate with an embedded credit spread.

Ameribor is geared toward the needs of “thousands of banks across America which do not borrow at either Libor or SOFR [Secured Overnight Financing Rate] to fund their balance sheets,” says the AFX/Ameribor website. SOFR, a secured rate, is the Libor replacement that is being stewarded by the Alternative Reference Rate Committee (ARRC), on which Citigroup and other major financial institutions, corporations and trade groups including the International Swaps and Derivatives Association (ISDA) are represented.

Pushed by regulators, market participants have entered the “endgame” to phase out Libor for new transactions by yearend.

Generating Interest

Sandor, who launched AFX in 2015, said that the November 30 announcement of the Citi strategic alliance was followed by calls from banks and other prospective exchange members that have been on the sidelines wondering “whether they would be able to get a swap done of enough size to hedge big loans. All of a sudden, awareness of Ameribor and its swaps and futures has gone up dramatically.”

Tom Broughton, chairman, president and CEO of ServisFirst Bank in Birmingham, Alabama, an early supporter of AFX and Ameribor, called the Citi agreement “a game changer. This is a huge boost for Ameribor as an index, and we should start to see big banks expressing more interest in Ameribor.”

As of early February, only one swap referencing Ameribor had been completed and disclosed, a bilateral notional $24 million, one-month floating-rate swap for Muncie, Indiana-based First Merchants Bank of Muncie, Indiana. The counterparty on the deal, announced December 3, was London-based Man Group.

Citi says it has developed the capability to provide Ameribor swap services, after recognizing demand from existing regional bank clients for an unsecured, floating-rate benchmark that reflects credit risk.

“Some clients are looking for a more credit sensitive component,” said Geoffrey Weber, Citi's head of Americas linear rates trading at Citi. Those are community and regional banks, and larger banks' interest may arrive later, he said, adding, “We've been showing quotes for swaps up to five years. We haven't closed a trade, but we are completely ready and willing to help our clients in their Libor transition.”

Ready for Action

Sandor noted that the AFX exchange, which enables members to provide or receive overnight funding, has attracted sizable regional banks as members, including Zions Bank, First Republic Bank, Northern Trust, Fifth Third Bank, Huntington Bank, KeyBank, Citizens Bank and Regions Bank.

Other major banks also appear to be getting ready to deal in Ameribor swaps.

Reed Whitman, treasurer of $9 billion-in-assets Brookline Bancorp in Boston, said the primarily commercial lender is in the process of signing an ISDA master agreement with Citi to engage in swap transactions. It has also been in discussions with major dealers.

“We said we want to do Ameribor transactions, and they've responded that they're working through the details, making sure their systems are set up,” Whitman said. “Most of the dealers we've talked to say they're working on it. The question is who gets there first.”

Major swap dealers include banks on the ARRC such as Bank of America, JPMorgan Chase & Co. and Wells Fargo Bank.

“Nobody wants to move first, but once someone does there's a fear of missing out,” Whitman said. “One of the major benefits about Citi signing up and being public about it is that other dealers will realize that there's going to be actual trading [in Ameribor-based] derivatives, and they'll want to get a piece of that as well.”

Rate-Swap Potential

Whitman noted that Brookline already has a significant portion of its balance sheet referencing Ameribor, including loans, deposits and intercompany borrowings, and he foresees using Ameribor swaps to hedge both assets and liabilities. The Massachusetts bank is currently in talks with the dealers to do balance sheet hedging of Ameribor-linked products.

“I could also see a back-to-back program developing, if there is customer demand,” Whitman said, should a customer want to swap floating-rate loans for a fixed rate, and the bank pursues a second swap to retain floating-rate exposure.

Dealers' interest in Ameribor-referencing products strengthens the benchmark but doesn't necessarily mean its use will increase dramatically. Alexey Surkov, a partner with Deloitte Risk and Financial Advisory and co-chair of ARRC's Operations/Infrastructure Working Group, pointed out that dealers make markets in high- and low-volume financial products.

“It's their business,” he said, adding, however, that “Ameribor definitely has some support, primarily among regional banks, and so I do expect markets and trading to develop around it.”

Liquidity Building

January trading in Ameribor one-month and three-month futures contracts on the Cboe market was minimal, while trading of SOFR futures on CME was comparatively robust. SOFR swaps have reportedly started to trade, and Ameribor still awaits its first swap. Ameribor, however, leads as a benchmark to price commercial loans, and ServisFirst and others and others have priced corporate loans over it since early 2020.

Liquidity in the benchmarks' futures and swaps markets enables interest rate curves and ultimately forward-looking term rates, a plus for corporate borrowers wanting to forecast their interest-rate payments well in advance. The ARRC's transition plan schedules completion of a term SOFR for the first half of 2021, but market sources say 2022 is more likely.

Whitman sees as the next big development a forward-looking term rate, since that would eliminate accrual issues that may arise if market participants choose different ways to calculate interest payments. Currently, payments can be calculated using a simple or compounded average of the overnight rates for the term in question, either in arrears or in advance. If a hedge uses a different method than the underlying asset or liability, any mismatch should now be minimal because rates are so low.

“Because of the size of our deals and the length to maturity, even if there is a mismatch, it probably won't be meaningful,” Whitman said. “We're OK with it, but not for all my deals forever. At some point the market is going to have to shake itself out around a term reference rate, and I think it will.”