LIBOR Will Eventually Die, Say Former CFTC Chair and AFX Chair

May 13, 2020 01:53 PM
American Futures Exchange launching futures on AMERIBOR
Sandor sees a world in which a variety of interest rate benchmarks operate
AMERIBOR futures focus on hedging for small and regional banks
Richard Sandor launches AMERIBOR futures on American Financial Exchange (AFX)

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LIBOR, the interest rate benchmark used in nearly $400 trillion of global loans, will eventually disappear despite a recent surge in its use during the Coronavirus-induced loan activity, stated former CFTC Chair Chris Giancarlo and American Financial Exchange (AFX) Chairman Richard Sandor in a meeting with journalists on May 12, 2020. “It’s just a matter of when.”

“The scandal-plagued LIBOR is an embarrassment in some quarters,” Giancarlo, who sits on the AFX board of directors, noted, pointing to regulatory concerns over market manipulation of the index. In 2014 when he was Chair, the CFTC engaged in enforcement actions against 5 of the largest global banks, forcing them to pay $1.4 billion in penalties for manipulating the index.

Sandor founded the AFX Exchange, when the subject of LIBOR manipulation hadn’t yet made headline news. The index was initially slated to be replaced in late 2021. However, the exact date is now in doubt due to the Covid-19 pandemic, with Sandor estimating that it will occur during the early part of this decade. In 2017 the Federal Reserve Bank of New York and the U.S. Treasury department introduced the SOFR to replace LIBOR with the large banks.  

Sandor launched AMERIBOR in late 2015  with an initial focus on U.S. mid-sized and regional banks to borrow and lend overnight funds on a regulated and transparent market. The weighted-average volume of transactions on the AFX overnight market is the basis for calculating the AMERIBOR benchmark.  AFX has since expanded membership into nonbanks such as insurance companies, private equity firms, asset managers and more recently, corporations such as American Electric Power (one of the largest investor-owned utilities in the country).

The AFX Exchange, which averaged a record $2.6 billion traded per day in the second quarter and $55.8 billion in value of contracts traded in April alone, has announced plans to add a 1-month futures contract to round out a term structure. The contract is scheduled to launch in June 2020. Sandor noted the AMERIBOR index was significantly tested during the coronavirus period and met the challenge by performing with low price volatility. The 30-day contract comes at a time when AFX banks are issuing commercial loans based on AMERIBOR, thus helping to provide a hedging mechanism and helping create a forward term structure.  

Editorial Note: The third paragraph of this article was changed on 5/14/2020 to reflect the end of LIBOR from "early" 2021 to "late." 

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About the Author

Mark Melin is a leading expert on non-correlated investing. He has taught managed futures at Northwestern University executive education program and has written, edited or contributed to four books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008) Mark is a journalist covering hedge funds for ValueWalk.com. Follow him on Twitter @MarkMelin