Futures trading began on Aug. 16 for the American Interbank Offered Rate, a potential rival to the Structured Overnight Financing Rate as an index to be used with, among other things, adjustable-rate mortgages. Ameribor, for short, was created by the American Financial Exchange, and it is a transparent, transactions-based interest rate benchmark that represents market-based borrowing costs, according to Richard Sandor, the chairman and CEO of the AFX. The rate is calculated daily as the transaction volume-weighted average interest rate of the Ameribor overnight unsecured loans on the AFX. Ameribor futures are trading on the CBOE Futures Exchange. However, based on the work of the Alternative Reference Rates Committee with the backing of Fannie Mae and Freddie Mac, SOFR has emerged as the replacement of choice for the London Interbank Offered Rate for future hybrid-ARM originations. There might be some continuity issues involved with replacing Libor with SOFR. "SOFR is an overnight rate, it's got no tenor and it's a risk-free rate so it doesn't have that risk-spread," said Sadie Gurley, head of diligence services at Digital Risk. Libor has various duration iterations, including three months, six-month and one-year rates, while SOFR is an overnight rate. "They haven't figured out how to create yet a three-month SOFR or a six-month SOFR or a one-year SOFR," Gurley said. So there are different risks taken into account because of that longer-term duration, "and even if it's only slight, it still exists," she said. The duration issue might be true for Ameribor as well. There are over 150 participating institutions, and one of the reasons they tell Sandor they take part in Ameribor "was because this benchmark reflects their borrowing costs and therefore assets related to it would be a good asset-liability management tool." The rate is calculated daily using the transaction volume-weighted average interest rate of Ameribor overnight unsecured loans on AFX. On the other hand, the SOFR calculation is made up of several forms of securities repurchase transactions. Because those are unsecured, there is a risk component that makes the Ameribor overnight rate typically higher than either SOFR or Libor. "Our banks tell us, whether it's all ARMs or credit cards or commercial loans, the transition from Libor to alternative benchmarks such as SOFR or Ameribor is an easy and natural transaction for them to make," Sandor said. But replacing Libor might not be so simple if efforts to replace the Eleventh Federal Home Loan District Cost of Funds Index are an example. During the Mortgage Bankers Association National Secondary Market Conference in May, Renee Schultz, senior vice president of capital markets at Fannie Mae, suggested that the switch from COFI, of which the Federal Home Loan Bank of San Francisco announced this past December that it would cease publishing in January 2020, could be used as a test run for a Libor change. But on July 16, COFI received a one-year reprieve because of government intervention about finding a suitable replacement. "At the request of its regulator, the Federal Housing Finance Agency, the bank is extending that deadline by one year to allow market participants more time to transition to an alternative reference rate," an FHLB of San Francisco press release said.
CBOE commenced trading in Ameribor futures on 16 August. The alternative benchmark rate represents market-based borrowing costs and represents the daily transaction volume-weighted average interest rate of overnight unsecured loans traded on the AFX.