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US Fed’s Libor-transition panel would back any active benchmark that’s robust, Iosco-compliant
18 May 2020 12:00 am by Neil Roland
The US Federal Reserve panel overseeing the transition from tarnished Libor said it would support any active benchmark — not just the Secured Overnight Financing Rate — as an alternative if the rate is robust and complies with international principles.
The Alternative Reference Rate Committee’s written statement didn’t respond specifically to MLex’s question about the desirability of Ameribor, a transaction-based interest rate benchmark aimed at regional and mid-sized banks.
But the panel, which asked that its statement not be directly quoted, said market participants could choose rates other than the preferred SOFR alternative.
It said it supports rates that meet three criteria: They are robust, compliant with the 2013 International Organization of Securities Commission benchmark principles, and available for use before official support for Libor is to be withdrawn at the end of 2021.
The Fed committee, whose recommendations are voluntary but given great weight by market participants, didn’t define what it considers robust. Last fall, the Fed said Ameribor complies with Iosco principles.
— Ameribor —
Ameribor is determined by trading on the American Financial Exchange, an electronic marketplace for small and mid-sized banks to lend and borrow short-term funds.
The exchange’s volume has soared nearly 23-fold in the last four years, to $2.6 billion a day. For the month of April, volume reached a record $58.2 billion, a 4.3 percent increase over its previous high in March.
Ameribor is the average of daily transactions on the exchange’s overnight unsecured loan market, and contains a credit-spread component.
Chris Giancarlo, a former US Commodity Futures Trading Commission chairman who is an independent American Financial Exchange board member, said he sees Ameribor as a complement to SOFR, which has a secured rate and thus is collateralized.
“Not all banks are the same,” he said. “Different horses for different courses.”
— Mid-sized banks —
Kevin Sabin, chief executive of Arkansas-based Arvest Bank, which has $19 billion in assets, said Ameribor more closely resembles the bank’s cost of funding than does SOFR.
“Obviously, our ability to really utilize it as a substitute for Libor will depend heavily upon its acceptance by both our customers and counterparties,” he said.
Sabin was one of 10 heads of mid-sized banks that wrote ARRC in February saying they objected to the use of SOFR as “the one alternative” index.
Ameribor is “not only representative of our asset structure and risk profile, but it also is a credible and robust rate which is easy to explain to customers, regulators and other market participants,” the letter said.
The banks said SOFR, as a secured rate, requires borrowers to post collateral such as US Treasuries. As mid-sized banks, their letter said, they lack large holdings of government securities and can only borrow on an unsecured basis.
SOFR is more suitable for larger banks with access to collateral, the letter said.
Richard Sandor, head of the American Financial Exchange, said its next spurt of growth is likely to come from the corporate sector.
“Some might use both SOFR and Ameribor,” he said. “We expect the future to be with a family of benchmarks.”
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