Special Report: The Launch of Ameribor
Richard Sandor: The Man Who Wants To Transform A $9 Trillion Market On Mainstreet
Jim Kharouf – John Lothian News
The American Financial Exchange (AFX) is set to list its first Ameribor futures products – 3-month and 7-day Ameribor futures – on August 16, 2019, the 42nd anniversary of the launch of Treasury bond futures. John Lothian News contributing editor Jim Kharouf sat down with Richard Sandor, chairman and CEO of AFX, to talk about new contracts, how the interest rate benchmark space is evolving and why now is the time for a new interest rate contract.
Sandor knows plenty about starting new markets, from listing the first interest rate contracts on the Chicago Board of Trade in the 1970s to launching the Chicago Climate Exchange (CCX) in 2003 as the first U.S. emissions cap-and-trade market for all six greenhouse gases. After creating a viable spot market with AFX beginning in 2015, Sandor’s now says it is time to build futures markets for the US’s regional, mid-sized and community banks, which collectively hold $9 trillion in assets. This could reset the way banks set rates and create new products from credit cards to commercial loans.
Q: You’re set to launch Ameribor futures on August 16, the 42nd anniversary of the launch of the Treasury bond futures contract. What similarities do you see in the two markets and products 40-plus years later and what’s new?
A: The similarities are that both contracts are a segue into a very different world. In the case of Treasury futures, it was a propitious time because interest rates were quiescent. The markets for Treasuries were inefficient. There were only 18 billion Treasuries cumulatively issued by the US government in August 1977. You compare that to the 2 7/8ths which just reopened with 16 billion, and add it to the previous amount of 41 billion. So this one coupon with Treasuries is three times the size of the cumulative issues of the US government in 1977.
They were launched also with the expectation that interest rates would become more volatile and a hedging mechanism was really needed. Also in anticipation that we would ultimately pay the price for deficits and debt built for the Vietnam War. There was also the belief that transparency would be good for all by tightening the bid/ask spread.
I think we’re in a similar situation here where there is a structural change going on. We started AFX in 2011 thinking that it would be a 10-year journey. By pure fortuity, 2021 is when LIBOR will officially end. In addition, when Treasury futures were launched, we were still two years away from former Fed Chairman Paul Volcker’s “Saturday Night Massacre” when the Fed allowed interest rates to fluctuate. And it’s going to be a couple of years until LIBOR ends. It’s amazing because it is the same horizon that existed at that time.
Most importantly, it’s viewed as early, as Treasury futures were. And to be on time, you have to be early. It took four years of research to launch the American Financial Exchange. We’re executing our strategy now once we built a critical mass in the spot market so we could ultimately launch a futures market. That allows banks to hedge in an instrument that reflects their unsecured borrowing costs. Most importantly, our banks, which are the regional, midsize and community banks, borrow every day in Ameribor. Now they’ll be able to hedge it. Once they hedge it, you can expect to see floating rate loans, credit cards, mortgages and even debt to emerge. And that will build the open interest in the nearby and more distant contracts.
Q: When you look across the evolving interest rate benchmark space, Libor is going away and SOFR is coming, and Ameribor has gained momentum. Why is now a good time to launch these contracts?
A: It’s very important to address the perception that the world should have one interest rate benchmark. LIBOR is an anomaly. It is the only asset class I know of with only one benchmark. In the commodity area, you have West Texas Intermediary and Brent crude, Dubai and Shanghai. And in equity markets, you have the S&P 500, Dow Jones, Nasdaq, Russell and Value Line. You have more stock indexes than you have stocks. And in fixed income, you have governments, munis, corporates and long-term, short-term. And now the world is asking, what is the substitute for LIBOR? It’s not the proper question. We live with three wheat contracts – cookies, bread and pasta. And no one would ever hedge pasta in the cookie market, nor hedge cookies in the bread market. It’s a well-known fact that you can have simultaneously different futures to identify different markets. So one infers from history that multiple benchmarks will emerge, and that’s already happening. You have SONIA, SOFR, Japanese and Canadian benchmarks. It’s already here.
So why now? Ultimately, we need a new unsecured rate and a rate that is good for 5,000 banks that don’t own government (securities) and borrow unsecured. If they are to do asset management and asset liability management, and borrow unsecured, they should be creating assets that are tied to the unsecured rate. There can be alternatives. We thought the best way to do that is to launch futures.
Q: I’ll push it a step further. What are some of the pieces that are now in place for a futures contract launch?
A: There are five conditions that exist. You need a competitive market, price movement and therefore the need to hedge. And you don’t have to look very far to see that interest rates move, or see a cash market with critical mass. Our one-week contract reflects that need to hedge because of the minimum reserve requirement that the Fed is giving out every two weeks. The one-week contract really allows banks to hedge and be in compliance with FRB 2900, which is the minimum reserve requirement. We think we have natural hedgers for that product. The goals are set by the government every two weeks, and a weekly contract allows them to hedge all of it or a week at a time, depending on deposits, in-flows and out-flows. So it is perfectly designed to meet a hedging need. The 90-day is more self-evident, because that’s a rate that will be used to hedge loans, credit cards, adjustable rate mortgages and things of that nature. The hedging need is driven by central bank requirements and an alternative mechanism for people who start using Ameribor.
In addition, the real critical element is education to make sure the cash market is being facilitated by infrastructure. What do I mean by that? We are certified IOSCO compliant. For banks to tell their customers and for international recognition, we follow the 19 core principles that include transparency, anti-manipulative rules and so on. The spot market is transparent. We’re the only market that you can see time and sales for the entire spot market. You can’t see that in any other market. In equities, you only know that 10,000 Apple shares are trading at XYZ. You don’t know what is above and below the market. So we’re going to be the most transparent spot market anywhere because we are not an agent spot market. The more transparent you can be, the better off everybody is.
Q: What is the trading opportunity here for participants as hedgers or speculators?
A: For certain people who want to do event risk, the one-week contract will give you more precision on the likelihood the Fed is going to increase or decrease. The whole question of sorting out credit premium for Fed Funds, you’ll now get a measure of credit spreads within the interbank market. So for hedgers it’s clear.
For traders, the real question is going to be, what are the real relationships that are market driven and totally transparent between and among Ameribor, SOFR, eurodollars, Fed Funds, all of which can be transactionally effective on organized, transparent futures markets? We believe the more futures there are, where you can express an interest rate opinion relative to other interest rate opinions, is going to make both markets more efficient just as arbitrage always does.
Maybe the markets will be totally efficient from day one. But I would be totally surprised if there weren’t anomalies. In Treasury bonds, you could buy the cheapest to deliver and sell the bond and make a point. And that still, while doing that, was efficient for everybody. The arbitrage provided the liquidity and the liquidity provided for the hedgers to operate as long as the basis remained cheap for a long time. Hedgers were able to execute with more liquidity and without a basis loss. The same exact thing happened in Eurodollars. The one-year strip traded at over 100 basis points from the one- year deposit and that persisted. Even Fed Funds, in the early days, you had hypothetically a particular contract – say May where you priced in a rate cut and June didn’t. So you could buy May and sell June because it wasn’t efficiently priced.
Q: What needs to be done now, with market makers, education of members and so on?
A: The bucket list is phenomenal and I feel like I am carrying two buckets, each with holes in them. We have market readiness meetings every other day. So for our members, are they ready? Do they have risk management practices? Many haven’t ever used it. We have an exchange package of 120 pages for the risk management as a template and guideline. We don’t expect them to adopt it, but it has proven a good framework for their lawyers and risk managers to follow. And what does an FCM need? How many confirms do you need so traders do not have to make margin calls? This stuff we regard as routine. So there is stuff that is readiness for those who have never before used the market.
And there is readiness for those who have used it, and you have to educate them. You have to educate the lawyers about futures, the accountants about hedge accounting and what that means, the press and academics because they will be writing about it. We’re now formally creating an academic advisory committee for academics who want to look at our order book. It’s never been studied before. We’ve already had Federal Reserve economists ask if this data is going to be available And the answer is yes.
Last summer we went to an MIT and University of Chicago conference with 75 newly minted PhDs in economics. What are you teaching in your course and how do benchmarks fit in? Then you need to bring your message to local universities. What are you teaching your students? You have the press, academics and students, lawyers, accountants and then of course, regulators. You have to go to the CFTC of course, but also the Fed, OCC and FDIC to inform them. There are hundreds of little dials that need to be calibrated to do it. And then go to IOSCO to tell them what we are doing and how we satisfy the 19 core principles and what you can do. It’s more art than science. We’ll make some mistakes but we won’t make the obvious ones because we’ve been to this rodeo before.
We know, once you advocate a transformational change of the size we have, you bring in a level of education that has to meet the transformational objective you have. We know it because of Treasury bonds and climate markets. We’re educating the 5,000 non-SIFI banks that represent $9 trillion. That is pretty monumental. You have to educate the loan officers and the customers. And then you have to educate the industrials on how to price commercial paper. If you are using LIBOR. How about when LIBOR goes away? Have you thought about that?
The transition and why we’re happy to exist in a SOFR world, is that SOFR and Ameribor are complementary and not competitive. All of the work that SOFR and the Alternative Reference Rates Committee (ARRC) is doing helps Ameribor because of the need to transition from LIBOR. To make that orderly transition, we have to make sure it is like Y2K.
Q: That is a long list.
A: Yes, and it is just the beginning. We have an event planned at the Union League Club in Chicago to educate. We’ll have to do it in New York and in London at some time because of the amount of dollar trading and Brexit. We may do it in Frankfurt, Amsterdam and Paris. We’ve already had interest from European and Chinese bankers asking, “What about a local rate like Ameribor for our sovereigns?”
Q: What’s next for AFX in terms of new products?
A: We’ll ultimately look to do an ETN or an ETF and get our members to issue Ameribor-based loans. Also, we’re starting to educate the swap dealers. We have a whole new audience to educate. It’s not only big banks but so many of our banks perform a risk management function of offering swaps to the smaller banks. You have all of the swaps dealers, all of the regional banks and dealers. And we’re also trying to be inclusive. By that I mean we set out to try to address the concerns of regional, midsize and community banks, but also to promote diversity. We now have African- American banks, Latino banks, Korean and Chinese banks, all which are called minority-owned banks by the FDIC. We also made an effort to recruit banks with female CEOs for gender diversity. So we’re trying to paint a big rainbow of not just those 5,000 banks but the minority-owned banks as well.
If that’s not enough for this small company, I don’t know what is. We’re stretched as wide as we can. We want Ameribor to be the people’s rates.
From Treasuries to Ameribor Futures: Doc Sandor talks about financial innovation
A Plethora of New Reference Rates
Thom Thompson – John Lothian News
Ameribor is not the only new short-term interest rate vying for market attention. As part of the post- financial crisis reforms, global regulators are overseeing the abandonment of LIBOR, the London Interbank Offer Rate, in favor of new short-term interest rate indicators that they hope will supplant LIBOR rates, especially as the bases for OTC swap contracts.
The Financial Stability Board, representing the financial regulators from the G20 countries, was challenged by the emergence of evidence of rate-rigging in the global LIBOR markets during the 2008 financial crisis as the result of a lawsuit filed by Charles Schwab. Today there are recognized, government endorsed replacements for euro, yen, Swiss franc, dollar and pound LIBOR rates trying to push the incumbents aside. They are, respectively, ESTER,TONAR, SARON, SOFR and SONIA.
LIBOR is derived from a survey of major banks doing business in the London interbank market. It developed originally as a very informal indicator and, over time, grew in its usefulness – for example, as the basis for futures and swaps contracts – and in prominence as providing the globally quoted benchmarks for short-term interest rates. $400 trillion worth of contracts are reportedly tied to LIBOR rates today. Clearly, the rates are popular even if the methodology for setting them has been questioned.
LIBOR rates reflect the rate at which the major dealing banks are willing to lend the various currencies for 30-day, 90-day and other short terms. They are free market-determined, commercial interest rates that are used for commercial financing.
The new rates, in contrast, are not only government-endorsed, they are also government-run. LIBOR rates were administered by the British Bankers Association and later moved out from under the cloud that formed around the association after the financial crisis to ICE Benchmark Administration. The replacements are administered officially by government agencies. SARON, the Swiss one that will be run by the stock exchange, is the exception. LIBOR rates are the basis of a number of government-sanctioned financial products like the CME Group’s eurodollar futures, and LIBOR rates are generally based on quotes from government-regulated banks. They have not been subject to direct regulation.
SOFR, the U.S.’s LIBOR replacement, uses data from overnight Treasury repurchase agreements that are either cleared or transacted at Bank of New York Mellon. These platforms allow non-bank entities to transact, broadening the representativeness of the index. About the switch to an overnight rate from 30-day and 90-day time horizons, the U.S. Office of Financial Research said, “Because repos are a key source of short-term funding in the financial system, a rate based on these transactions is a good candidate for an alternative reference rate.”
All of the new interest rates are based on transactions rather than quotes or surveyed indications of interest. This should help at least the appearance of integrity for the new rates against the backdrop of the LIBOR rate fixing scandals.
Moving to overnight rate-based instruments from short term rate contracts and products increases the basis risk for commercial users, which do not participate as greatly in overnight interest rate markets compared to banks and major financial institutions. It will be interesting to see how (or maybe, if?) SOFR-adjacent products and markets develop to address different term-structures. Kurt Dew, a consultant who attended the birth of eurodollar futures as an economist at the CME, has noted in a series of blog posts that an overnight risk-free interest rate might not be the perfect substitute for the LIBOR regime, which reflects riskier and longer term funding requirements.
As any economist would tell you, the LIBOR rates have had the benefit of originating out of commercial demand and were designed by commercial entities. A regulator would note that perhaps there have been insufficient incentives to avoid manipulation and fraud. The markets have not rushed to embrace instruments based on the new rates – although, to be fair, eurodollar and euribor products grew slowly. In the first half of this year, CME eurodollar futures, the easiest product to track in this sphere, had a 100 times greater volume than CME SOFR futures: 379 million eurodollar contracts to SOFR futures’ 3.5 million contracts.
The Spread: Libor Edition
Spencer Doar – John Lothian News
This Thursday, Cboe Futures Exchange will be launching AMERIBOR (American Interbank Offered Rate) futures. AMERIBOR is the brainchild of Richard Sandor, chairman and CEO of the American Financial Exchange, and is an alternative to LIBOR (London Inter-bank Offered Rate).
In this episode of “The Spread,” we look at the history of the LIBOR, a financial innovation that grew to underpin trillions of dollars of derivatives contracts before becoming the centerpiece of one of the largest financial scandals of our time.
Wedbush’s Bob Fitzsimmons talks with Richard Sandor
Bob Fitzsimmons – Wedbush Futures
In this video interview with Webush Executive Vice President Bob Fitzsimmons, Dr. Richard Sandor talks about the idea behind Ameribor and the special niche it fills.
The Highest Paid Grip in Chicago and Parts Beyond
John J. Lothian – John Lothian News
On Friday, August 2 I was the highest paid “grip” in Chicago as I helped drag JLN’s video and lighting equipment to the Wrigley building in Chicago on Michigan Avenue for a video shoot with American Financial Exchange CEO Richard Sandor and Wedbush Executive Vice President Robert Fitzsimmons. JLN Producer Mike Forrester did all the hard work on the shoot. I just helped schlep the equipment and listened intently.
The shoot was in preparation for the launch of Ameribor on August 16, 2019, which happens to be the 42nd anniversary of the launch of the most successful futures contract in the 20th century, the 30-year U.S. Bond futures at the Chicago Board of Trade. Sandor picked this date intentionally.
The geniuses behind that launch were then-CBOT Senior Economist Richard Sandor and his political counterpart, CBOT Chairman Les Rosenthal.
Sandor says he is more excited about the launch of Ameribor than any other futures contract he has been associated with, including the 30-year bond contract and even the carbon emission contracts. And he is right to be excited. This is the right contract at the right time, on the right exchange, with the right people behind it.
When Richard Sandor launched the bond contract, the only comparison for him was the launch of the Ginnie Mae. While the Ginnie Mae was successful in a sense, it was lost to history because of flaws in the contract that could never be overcome.
Sandor has learned a lot about how to build and launch new products since then. He even knows a lot about launching new exchanges.
With Ameribor, the AFX has partnered with Cboe Global Markets and their Cboe Futures Exchange, the CFE. The contracts belong to AFX but are traded on CFE.
The Ameribor contract concept was born from the beginning of the LIBOR scandal. Sandor and his team set about creating not just an alternative to LIBOR, but an American short term interest rate benchmark.
That benchmark is Ameribor, which has been specifically designed to eliminate any possibility of the structural problems that allowed the LIBOR manipulation to occur.
This will be an American benchmark for short term interest rates, something we should have had a long time ago. In an age when the UK is tearing itself apart and from its place in the EU community, why should business loans, mortgages, credit cards and other debt be priced to the London Interbank Offered Rate? Wouldn’t a rate built from real transactions from the type of small regional US banks that loan money for small, medium and large businesses be a better alternative? And those banks dot the U.S. in cities across the country.
Sandor has been indefatigable at the age of 77 in spreading the word about Ameribor. The man is full of experience and purpose and not to be underestimated.
These facts, the LIBOR scandal, and the need for a new product – one branded so well and created and launched by one of the most experienced, enthusiastic and brilliant futures industry leaders – make me nearly as excited as Richard Sandor.
It is 3 days until the launch of Ameribor futures on the CFE. Get ready.
Ameribor Contract Specs
Stories from other media about Ameribor
Pioneer of Financial Futures Now Brings You Libor Alternative—And Futures To Match
By Mary Childs – Barron’s
June 22, 2019
In 1975, Dr. Richard Sandor used to mess up the signals on the Chicago trade floor. Traders would rib him: “Doc!”—because of his Ph.D.—“you’ve got your hands wrong!”
Cboe Futures Exchange and American Financial Exchange Announce Planned Launch of AMERIBOR® Futures
AMERIBOR futures debut planned for trade date August 16, 2019; Banks and other financial institutions may use new futures to hedge variable overnight funding costs and interest rate risk; traders may execute interest rate trading strategies; AFX experienced record volume and membership in 2019
Cboe Global Markets, Inc. (CBOE), one of the world’s largest exchange holding companies, today announced plans to launch futures on the AMERIBOR® (American Interbank Offered Rate) interest rate benchmark on Cboe Futures ExchangeSM (CFE), subject to regulatory review. The new futures are expected to launch on trade date August 16, in honor of the 42nd anniversary of the launch of Treasury bond futures.
Cboe Futures Exchange and American Financial Exchange to launch AMERIBOR Futures
Valentina Kirilova – Leaprate.com
Cboe Global Markets, Inc. (Cboe: CBOE) announced end of last last week plans to launch futures on the AMERIBOR® (American Interbank Offered Rate) interest rate benchmark on Cboe Futures ExchangeSM (CFE), subject to regulatory review.
Regulators Warn Not To Continue With LIBOR, Richard Sandor Sees a Future With Multiple Interest Rate Benchmarks
Mark Melin – Futures Magazine
What’s Happening With LIBOR Interest Rates? UK Financial Conduct Authority (FCA) CEO Andrew Bailey joined a growing choir of regulators to loudly state that LIBOR would end on its mandated expiration date at the end of 2021.
LIBOR is due to die in 2021. Hurry up and drop it, say regulators
Too late to get a new plan; Fifty ways to leave your LIBOR
Jun 8th 2019
Just drop off the key. Yes, it means breaking a complicated yet rewarding long-term relationship: $240trn-worth of derivatives, loans and bonds are priced off libor, the London Interbank Offered Rate; $200trn-odd are in dollars alone. But this key interest rate is due to die. Almost two years ago Andrew Bailey, the head of Britain’s Financial Conduct Authority (fca), libor’s regulator, in effect said it would expire at the end of 2021. In recent days American and British supervisors have again urged banks: hop on the bus.