What Is Ameribor?
Ameribor (short for the American interbank offered rate) is a benchmark interest rate that reflects the true cost of short-term interbank borrowing. This rate is based on transactions in overnight unsecured loans conducted on the American Financial Exchange (AFX). The AFX was launched in 2015 in partnership with the CBOE (formerly the Chicago Board Options Exchange).
- Ameribor is a fairly recent interbank lending benchmark interest rate.
- It is based on unsecured overnight lending among banks on the American Financial Exchange (AFX).
- The AFX interbank market represents smaller and regional banks, making Ameribor a good benchmark for these types of financial institutions.
- Ameribor is seen as a replacement for the London interbank offered rate (LIBOR), along with other rates like the Secured Overnight Financing Rate (SOFR).
When banks have excess reserves, rather than sit idly on that extra cash, they often are able to lend it to other banks in need of reserves. This creates what is known as the overnight interbank lending market. In the past, LIBOR was the de facto benchmark for the overnight rate, with trillions of dollars in loans and derivatives contracts tied to it. In recent years, however, people began to distrust LIBOR due to a string of rate-setting scandals. As a result, LIBOR was phased out in 2021. This has led banks and other financial institutions to seek out a new benchmark overnight rate for the interbank lending market.
Ameribor is one such alternative. While LIBOR and other benchmark rates had been set by a consensus across bank trading desks, Ameribor is determined by overnight unsecured lending on the American Financial Exchange (AFX). This makes Ameribor a transparent, market-driven benchmark that reflects banks’ actual borrowing costs.
On Nov. 30, 2020, the Federal Reserve announced that LIBOR will be phased out and eventually replaced by June 2023. In the same announcement, banks were instructed to stop writing contracts using LIBOR by the end of 2021 and that all contracts using LIBOR should wrap up by June 30, 2023.
How Ameribor Is Calculated
Ameribor is calculated as the transaction-volume-weighted average interest rate of the daily transactions in the AFX overnight unsecured loan market. The rate itself is expressed on an Actual/360 Day Count and Following Business Day convention, rounded to five decimal places. The rate and its accuracy are monitored by a committee on benchmark oversight at the AFX.
The benchmark rate is calculated after the close of trading on the AFX and is published nightly by the CBOE under the ticker symbol AMERIBOR.
Example Computing Ameribor
The following example shows how the Ameribor is computed based on AFX transactions. Say that there were four such transactions in a given day:
- $10 million at 2.55% (transaction weighted volume = 10 × 2.55 = 25.50)
- $20 million at 2.50% (transaction weighted volume = 20 × 2.50 = 50.00)
- $40 million at 2.60% (transaction weighted volume = 40 × 2.60 = 104.00)
- $75 million at 2.50% (transaction weighted volume = 75 × 2.50 = 187.50)
- (total transaction volume = $145 million)
The sum of the weighted volumes of transaction is thus: (25.50 + 50.00 + 104.00 + 187.50) = 367.00
The Ameribor (rounded to five decimal places) would therefore be: 367 ÷ 145 = 2.53103%
Ameribor vs. Secured Overnight Financing Rate (SOFR)
With the demise of LIBOR, the Secured Overnight Financing Rate (SOFR) has become a dominant contender to replace it as the overnight interbank benchmark rate. SOFR is computed from transactions in the Treasury repurchase (repo) market and is seen as preferable to LIBOR-like rates because it is based on data from observable transactions rather than on estimated borrowing rates set by bank trading desks.
Like SOFR, Ameribor is also based on actual transactions data; however, it relies on unsecured loans rather than the secured (collateralized) repurchase agreements used in SOFR (as the “S” in the acronym implies). Because SOFR looks at the Treasurys market, it is also best suited for larger financial institutions. Ameribor instead reflects the actual borrowing costs of thousands of small, medium, and regional banks across America.
What is the American Financial Exchange (AFX)?
The American Financial Exchange (AFX) is a self-regulated electronic exchange that was established in 2015 in partnership with the CBOE. It facilitates short-term interbank lending markets and publishes the Ameribor interbank benchmark rate. AFX has more than 200 members that represent more than 1,200 participating banks (approximately 25% of all U.S. banks). AFX has traded more than $1 trillion since its inception. The AFX trades in overnight unsecured loans, 30- and 90-day unsecured loans, seven-day secured loans, and demand deposits.
Can you trade the Ameribor?
Yes. The CBOE Futures Exchange lists futures contracts on the Ameribor benchmark interest rate. Ameribor futures (under the ticker AMERIBOR) are cash-settled and have maturities of seven days, one month, and three months.
Why is the London interbank offered rate (LIBOR) being phased out?
While the London interbank offered rate (LIBOR) was once arguably the most important short-term benchmark interest rate, it has been revealed to have been subject to rampant manipulation, scandal, and methodological critique, making it less credible today as a valid benchmark. The rate is being phased out so that by the end of 2021, no new contracts could be written using LIBOR anymore, and by mid-2023, all existing LIBOR-based products would be terminated. LIBOR has been replaced by the Secured Overnight Financing Rate (SOFR), although several other alternatives such as Ameribor also exist.