Securities lending and repo are among the markets most likely to be significantly affected by interest rates turning negative in the US, according to the Securities Industry and Financial Markets Association (SIFMA).
The trade body, in partnership with consultancy EY, has drafted a policy checklist to identify how certain capital markets products may be impacted in the event of a US negative interest rate policy.
The document includes considerations that can be used by firms seeking to mobilise negative interest readiness programmes within their institutions and reviews seven themes including US negative interest rate programme governance; financial exposure analysis; contract and counterparty customer analysis; portfolio strategies and profitability; technology and operations; finance, tax and accounting; and regulatory and policy considerations.
Under technology and operations, the paper suggests firms involved in securities financing should evaluate the scalability of existing operations and technology systems to accommodate negative repo rates for repo special issue trading to handle large volumes of negative rate repos expected in a negative environment.
Securities lending participants are particularly concerned about the possibility of negative yields on cash collateral reinvestment funds and repos and how that could impact the economics of lending securities.
This is especially true in markets with a significant cash-collateral market, such as the US.
Elsewhere, under the same category, the paper also advises market participants to coordinate with central counterparties (CCPs), members and clients to determine operational and systems readiness for processing negative rates.
CCPs and settlement systems currently may not be able to process negative coupon payments associated with bonds and securitisations and may advise issuers to set zero-coupon floors or, if deemed necessary, settle bonds and securitisations outside of the CCP in a negative rate environment.
Firms should confirm with CCPs specific instructions for new issuances in order to be eligible for CCP clearing and settlement, the paper states.
Similarly, CCPs and exchanges may require modifications in their systems and operations to process cleared and exchange-traded derivatives in a negative environment. Firms should therefore confirm with CCPs and exchanges their near- and long-term plans for NIR preparedness.
The US negative interest rates policy checklist was drafted by SIFMA’s operation and technology committee and EY, along with contributions from Bloomberg, Broadridge, the Depository Trust & Clearing Corporation, Federated Hermes, FIS, and the International Securities Derivatives Association.
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