Environmental Financial Products (EFP) and CBOE Holdings are to launch the American Financial Exchange (AFX), an electronic marketplace for small and mid-sized banks to lend and borrow short-term funds.
EFP is a prominent, successful exchange incubator headed by Dr Richard Sandor, universally recognised as the "father of financial futures." CBOE is the creator of the listed options market and numerous other market and product innovations, including securities index options and the CBOE Volatility Index (VIX Index).
AFX was designed to bring the benefits of exchange trading, including standardisation, transparency and a rules-based process, to interbank lending, while substantially reducing transaction costs through an electronic market. Importantly, AFX will also respond to the critical need for a transaction-based interest rate benchmark through weekly auctions of a new benchmark rate for US interbank lending, called Ameribor. The first AFX auction of Ameribor, which is based on proprietary calculation methodology developed by EFP, is expected to take place in the fourth quarter of 2015.
"Mid-sized US banks are disproportionately responsible for lending to small businesses, directly contributing to job creation and economic growth in the real economy," says Dr Richard Sandor, Chairman and CEO of Environmental Financial Products. "An efficient and transparent market can benefit participants and the economy as a whole by providing an efficient way to borrow and lend money, as well as generating indices that truly reflect the bank's cost of funds."
Dr Sandor will act as Chairman and CEO of AFX.
"We couldn't be more pleased to work with Dr. Sandor and his team to create and develop the AFX marketplace," says Edward T Tilly (pictured), CEO of CBOE Holdings. "The opportunity to bring transparency, price efficiency and transaction-based benchmarks to interbank lending is very compelling to us and is closely aligned with CBOE's values and core strengths. We look forward to hosting, operating and helping to further develop a new and truly innovative marketplace."
AFX was designed with the input of participating banks, and will continue to evolve based on the needs of mid-sized banks. The initial interbank loan market will be a daily market for overnight and 30-day loans. AFX will focus on 1,740 community and regional banks with between USD500 million and USD125 billion in assets, which hold a combined total of USD4.7 trillion in assets.
"We view having an index interest rate that is truly set by market forces as a real plus in today's environment," says Bill Sirakos, Senior Executive Vice President and Capital Markets Division Head at Frost Bank in San Antonio, Texas. "The potential for growth in the use of the AFX is quite high, both among commercial banks as well as, eventually, today's commercial paper issuers."
CBOE will operate the web-accessible, secure, electronic trade matching engine and will also support surveillance and membership services. Northern Trust will serve as the settlement bank.
AFX has been in development for three years, and has been advised and represented by Sullivan & Cromwell, LLP (regulatory matters), Jenner & Block (corporate matters) and Sandler O'Neill & Partners, LP. Chicago-based Connamara Systems developed the software for the electronic trading platform using EFP's proprietary methodology.
"AFX has been designed to be a monument to transparency, an efficient market for interbank funds and ultimately, an expanded source of liquidity for American banks," said Robert Albertson, Partner and Chief Strategist at Sandler O'Neill. "Ameribor will be a cleansed and true indication of heartland American banking's cost of funds. AFX will not only simplify interbank transactions, it also has the potential to reduce costs and add select corporate, investment and government pools of liquidity – all long overdue."
