December 2020

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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.

Negative US interest rates, as well as any actions taken to avoid them, would directly impact collateralized business activities including repo, securities lending and collateral trading. 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.

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.

Table of Contents

  • Executive Summary
  • How Real is the Possibility?
    • – Can Europe and Japan Offer Lessons for the US?
  • Spread Business and Negative Rates
    • – Securities Lending Demand
    • – Cash for Repo
  • Federal Reserve Policy Options
    • – Rate Settings
    • – Yield Curve Control
  • What to Look For
  • About the Author
  • About Finadium LLC

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