Interest rates are a primary factor in revenue generation opportunities for securities finance, repo and collateral trading, and negative interest rates present a special challenge. This report analyzes how the possibility of negative US interest rates and efforts to avoid them will impact collateralized trading businesses.
This report is an evaluation of how market participants – beneficial owners, agent lenders, dealers, bank borrowers, hedge funds and cash investors – will be impacted in the event that the Federal Reserve looks to avoid US negative interest rates or if rates in fact turn negative. While a negative rate scenario is undesirable for most actors including the Federal Reserve, it has been discussed enough to warrant further consideration.
While spread businesses would still earn positive returns on individual transactions, supply and demand trends in each market would likely change. The US experience will be different than what the world has seen in Europe and Japan and should be looked at as a unique case.
Federal Reserve policymakers have stressed publicly that they are not interested in negative rates. That said, there is a similarity to these comments and what other central bankers have said about Central Bank Digital Currencies: “no thanks, not interested”, then “we’re testing but just in case” to “maybe it’s time to launch something.” This pattern has played out recently in the UK, where the Bank of England has worked to avoid negative interest rates while initiating operational testing to make sure they can work in practice. The Federal Reserve is earlier in the discussion curve and has a few more options to consider first.
A move to actual negative rates would not be taken lightly. Even though negative US rates may never materialize, actions to avoid it could have equal or larger consequences to collateral businesses than negative rates themselves. We explore the steps the Federal Reserve could take first, each one of which would have its own impacts.
This report should be read by any market participant in financial markets that interacts with repo, securities lending or collateral trading. It is intended to assist business managers with forecasting the big what-if scenario of negative or persistently ultra-low US interest rates.
A direct link to the report for Finadium research clients is https://finadium.com/finadium-report-desc/saying-no-to-negative-us-interest-rates-policies-detours-and-securities-finance/
For non-subscribers, more information is available here.