Cboe details plans as Ameribor suite nears fruition

An old market adage claims that timing is everything but, as the runners and riders emerge in the race to capture pockets of the lucrative post-Libor rates market, calling winners at this stage would be premature..

Dr Richard Sandor, sometimes referred to as “the father of the futures market” has said that the fortuitous timing of the launch of American Financial Exchange’s (AFX) Ameribor rate, just as Libor was being phased out, was a complete accident.

Sandor and his team started developing the idea in 2011. “The answer is if you want to be on time, you have to be early,” he told Global Investor in 2019.

Fast forward to this week and Cboe Global Markets has launched its Ameribor Term 30 future, a credit sensitive rate just when global regulators seem to be entrenching positions supporting risk free rates. Cboe is not alone in this, its local rival CME launched its credit sensitive future on August 23, designed to complement trading in US SOFR-linked products.

Firms argue there is a need for credit sensitive rates to hedge the credit component of funding risk, and that will always have to be reflected for prudent risk management at financial firms.

They also point out that the methodology of the two credit sensitive rates with futures contracts that reference them - Ameribor and the Bloomberg Short Term Bank Yield Index - are transaction-driven rather than based on estimates. In Ameribor’s case, the rate is calculated based on actual transactions executed on its platform and on transactions with a principal value of at least $25 billion (£18.2bn) in most market conditions.

AFX’s membership comprises 181 US banks, 45 non-banks members including futures commission merchants and asset managers, and over 1,000 correspondents with assets of more than $5.3 trillion. The rate, and the product, is primarily reflective of US regional banks.

Global Investor caught up with Michael Mollet, vice president of Futures at Cboe Global Markets to discuss the first week of the launch of the future based on the Ameribor Term 30 Interest rate benchmark, its fourth Ameribor-based contract.

“From our standpoint, this has always been a longer-term initiative,” Mollet said. “This was never going to be a case of turning on a spigot, as it will take time for market participants to decide where they want to go with the Libor transition. But we are now reaching the point where the building blocks for Ameribor futures are coming together: people understand the benchmark rate and what the dynamics are with the derivatives.

"Once we’ve launched the Ameribor Term-90 futures, we will have a more complete product suite and at that stage, we will shift our efforts towards building adoption and awareness.”

The new contract launched on the Cboe Futures Exchange on Monday, and, while volumes in the futures overall have been slight so far, there are encouraging signs from clients.

“From a liquidity provision perspective, we have been pleasantly surprised by the scale of interest and inquiries we have received around the new futures,” Mollet said. “That included interest from firms who were market-makers in our previous Ameribor product, as well as new market participants who are interested in being a part of any incentive programs to provide liquidity.”

Nevertheless, booming trading in exchange trading of risk free rates, which had lagged the wider over-the-counter (OTC) market, and in particular US adoption rates this year may create a virtuous circle as market participants start to create the right mix of strategies for themselves.

“Operationally, the launch of Ameribor Term-30 futures went smoothly,” continued Mollet. “We will continue to focus on developing functionality to help clients trade combinations of Ameribor futures and maturities.”

For now, the demand seems likely to be concentrated on those firms for whom it is most clearly useful – a regional US bank proxy for one month Libor that easily reflects their funding profile while complying with the spirit of the regulatory reform process.

“For now, we see adoption being heavily concentrated among the regional banks where this rate more accurately matches their lending and funding needs,” said Mollet.

“Throughout the Libor transition process, it has never been clear that one obvious replacement would emerge. Rather, we think it is likely to be a mix of available options depending on market participants’ hedging needs. Cboe is focused on putting out a multitude of products and letting the marketplace decide which one they want to adopt, and guiding us where we need to go.”