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Derivatives Users Hit as Negative Rates Raise Collateral Costs 

August 24, 2016

John Detrixhe and Richard Partington

Derivatives users are the latest group to be hurt by negative interest rates as they get penalized for the cash they park at Europe’s biggest clearinghouses. Traders can thank European Central Bank President Mario Draghi.

Futures and swaps are used to hedge or speculate on everything from German interest rates to oil prices. To avoid taking a loss if a counterparty to a trade defaults, they post collateral, such as government bonds or cash, at a clearinghouse. In Europe, the biggest ones are in Frankfurt and London. But with German and U.K. debt yields so low, or even negative, clearinghouse customers are sometimes losing money on those assets.

Europe’s big clearing firms are operated by the likes of Deutsche Boerse AG, Intercontinental Exchange Inc. and LCH, which is majority owned by London Stock Exchange Group Plc. To varying degrees, they have customers who lose money on euro collateral, whereas they used to receive a return. Two-year German debt yields minus 0.64 percent. An important benchmark known as Eonia, the euro overnight index average, is at minus 0.34 percent.

While the costs don’t so far seem to be impeding trading or collateral holdings, they’re a sign that monetary policy may be reaching its limits, as central bankers such as Draghi have reduced interest rates and bought up vast amount of assets to try to boost weak economic growth. Read more

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