Once Upon a Time in AMERIBOR

Posted: 14 Jan 2021 Last revised: 8 Feb 2021

See all articles by Rupert Macey-Dare

Rupert Macey-Dare

University of Oxford - Saint Cross College; Middle Temple; Minerva Chambers

Date Written: January 2, 2021

Abstract

October 2020 brought news of a pioneering first public issue of long term corporate debt with floating interest based on the AMERIBOR index, from Signature Bank. This was closely followed in December 2020 with the announcement that global bank Citi would begin market-making in AMERIBOR-based interest rate swaps, and then of the first publicized AMERIBOR-based interest rate swap between EDandF Mann and First Merchant Bank. Together this early evidence suggests that, AMERIBOR-based rates may well be becoming attractive to many market participants as replacements for USD Libor, in USD bond and derivative transactions, and after Libor's imminent decommissioning, AMERIBOR might well take over as the floating rate index of choice for many market participants, rather than say risk free alternative SOFR.

N.B. AMERIBOR is a proprietary average interest rate calculated by AFX, the American Financial Exchange, as "the transaction volume weighted average interest rate of the daily transactions in the AMERIBOR overnight unsecured loan market on the AFX" and which "reflects the actual borrowing costs of thousands of small, medium and regional banks across America." It is thus highly relevant to US bank and corporate funding costs and hedging, and touted and designed to be a potential successor to USD Libor for these parties. Products provided or intermediated by AFX to its members include overnight and 30-day (1 month) and 90-day (3 month) unsecured loans and an indicative 30-day AMERIBOR-based forward rate. Chicago Board Options Exchange CBOE which has hosted AFX since AFX's inception in 2015, also provides additional exchange traded futures for simple and compounding average AMERIBOR rates over periods including: 7-day, 14-day, 30-day and 90-day, for contract periods starting out to a year or more.

The first AMERIBOR-based public bond issue which settled on 6 October 2020, was a $375m 10-year fixed-floating (after 5 years) callable, subordinated bond (Section 3(a)(2) Note) for Signature Bank, ISIN USB2669GGCK85. For the 1st 5 years, i.e. until October 2025, the bond pays a fixed rate of 4% p.a. semi-annually. The bond can then be called at par after the 1st 5 years. However, for as long as it is not called over the floating period from years 5 to 10, the bond will pay "three month AMERIBOR" plus 389 basis points. This will give Signature Bank the option to continue this borrowing at 3.89% p.a. above its "three month AMERIBOR" index out as far as 2030 if advantageous at the time e.g. in terms of the market premia then applicable for risk, term, subordination, and liquidity.

This October 2020 bond closely mirrored the structure of Signature Bank's two earlier funding bond issues. In April 2016 Signature had issued a $260m 10 year fixed-floating (after 5 years) callable, subordinated bond, which pays 5.3% interest p.a. semi-annually for the 1st 5 years until April 2021, and then 3m USD Libor + 3.92% for as long as not called over the next 5 year period until 2026. Then in November 2019 Signature had issued a $200m 10 year fixed-floating (after 5 years) callable, subordinated bond, which pays 4.125% interest p.a. semi-annually for the 1st 5 years until November 2024, and then 3m USD Libor + 2.559% for as long as not called over the next 5 year period until 2029.

However as identified in the Risk Factors section of Signature Bank's end 2019 Form 10-K, all its Libor related transactions are exposed to Libor termination risk, and this plus Signature Bank's founder membership of AFX, no doubt contributed to it switching from USD Libor to AMERIBOR-based floating funding in its last bond issue. Indeed this might also pave the way for Signature Bank's earlier bonds to be amended in due course also to reference AMERIBOR rather than Libor, or alternatively to be swapped for AMERIBOR-based alternatives, and similarly for other bond issuers.

An interesting point is that there is not currently a "three month AMERIBOR" rate fixing corresponding say to the daily 3m USD Libor fixing. Hence the "three month AMERIBOR" rate used in Signature Bank's latest bond may be a synthetic rate e.g. derived from traded futures or determined ex post or say from a function of current AMERIBOR. Thus the correlation between "three month AMERIBOR" rate used and 3m Libor fixings, may prove to be lower than the claimed historic 98-99% correlation between AMERIBOR and O/N Libor, but presumably will still be very high.

The pioneering first publicized AMERIBOR-based swap in December 2020 was a 1 year $24m fixed-floating interest rate swap between EDandF Man and First Merchants Bank, with netted monthly payments and a floating "one month AMERIBOR" index, which may also be a synthetic rate. The relatively tiny, non-standard principal amount of this swap, plus the short 1 year maturity, and netted payments, together all mark this out as most probably a tentative, safe, "test-the-waters" first transaction, hedging specific AMERIBOR-based assets and liabilities. However likely future developments, if there are no glitches, include a developing AMERIBOR based interest rate swap market with broadening liquidity and market making from Citi and other banks, and longer term AMERIBOR-based interest rates both being quoted directly, and also being covered as standard in ISDA type Definitions for other derivatives transactions and bonds. Thus we may have just witnessed a critical tipping point from USD Libor towards AMERIBOR, and the moment when AMERIBOR-based yield curves, bond and derivative transactions all "took off"..."once upon a time in AMERIBOR."

Keywords: Libor, AMERIBOR, Swaps, Futures, Derivatives, Index, Libor Transition

JEL Classification: G11, G12, G15, G13

Suggested Citation

Macey-Dare, Rupert, Once Upon a Time in AMERIBOR (January 2, 2021). Available at SSRN: https://ssrn.com/abstract=3758803

Rupert Macey-Dare (Contact Author)

University of Oxford - Saint Cross College ( email )

Saint Giles
Oxford
United Kingdom

Middle Temple

Middle Temple Lane
London, EC4Y 9AT
United Kingdom

Minerva Chambers

London
United Kingdom

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