Trésorier/Treasurer magazine - N°94 - Juil/Août/Sept 2016 - (Page 26)
OF NEGATIVE RATES ON TREASURY
AND RISKS MANAGEMENT SYSTEMS
In a situation where interest rates have become very low - particularly in Japan and in Europe - and where certain deposit
and market rates are negative, corporate treasurers have become increasingly aware that in certain cases the information
system they use no longer enables them to come to grips with this new market paradigm, whether at front office,
back office or accounting levels. And yet, the situation is likely to last. As a consequence, the adjustments to be made to
the various components of the Treasury and Risk Management Systems are absolutely necessary.
- JUL /
AUG / SEP 2016
Negative rates have generated issues that affect multiple stages in the processing chain.
1 - Market data
When it comes to managing the impact of negative rates in the
lifecycle of a transaction, the first area to focus on is the management and storage of market data.
First, it is necessary to have the capacity to store negative rate
values, as most short term EUR rates now have negative values.
Moreover, it is necessary to manage and store negative yield
curve values, especially as far as short term tenors are concerned. In the event of curve reconstruction upon data collection
(e.g. construction of a 0coupon curve from deposit and swap
rates), the reconstruction must properly take into consideration
negative rate values. Finally, it is necessary to store negative values for all market transaction valuation processes (see below).
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2 - Entering transactions and back-office processes
The information system must allow users to enter negative rate
values for all financing, investment and interest rate derivative transactions. Consequently, it is necessary to determine
negative interest values in back-office processes such as fixing
and maturity processes. Many Treasury and Risks Management
Systems (TRMS) thus lack the possibility to generate interest
expenses on investments and interest incomes on financings.
Furthermore, it is necessary to manage the back-office and
accounting impacts resulting from this situation.
As a result, it should be possible to handle payment instructions
according to the interest calculated, regardless of whether the
transaction is approached from the lender's or the borrower's
side: the calculation of an investment's interest should generate
a payment instruction.
The accounting impact of such a situation also matters, as the
interest resulting from an investment generates an accounting
expense. Accounting systems must therefore be designed to
challenge the fact that the interest on an asset is not necessarily
positive. By the same token, they should accommodate the fact
that a liability can generate a positive interest value.
Derivative transactions are imbued with similar issues. For
example, it is necessary to consider
Negative rates have
that the interest on an IRS can be
in the same positive - or negative
generated issues that
- territory on both legs, which
affect multiple stages in
implies a number of back-office
the processing chain.
and accounting consequences.
Finally, current account interest
scale calculations must be designed
to factor in pre- and post-margin negative interest values, once
again with due consideration for the accounting consequences,
so as not to floor the interest of the current accounts. This is
particularly important in the context of Cash Pooling.
3 - Valuation
Valuation algorithms were not initially designed to accommodate negative rates. Pricers must often be adjusted in order to
determine all the risk indicators for front- and middle-office
processes as well as the fair values that affect accounting, given
these new requirements.
a. Instruments with linear payoffs, such as fixed or floatingrate plain vanilla financing/investment transactions, non
optional rate derivatives such as interest rate swaps. Straightforward forex transactions such as forwards and swaps are
also concerned, especially when it comes to determining time
value. Although adapting the calculation rules is relatively
simple, TRMS design must factor this in, as it should be
possible to use negative rates in all the intermediary calculations such as 0coupon rates, discount factors, forward rates
(in particular when it comes to simulating the future interest
of floating-rate transactions) and the determination of payoff
b. Instruments with non-linear payoffs, such as caps/floors or
swaptions. In these instances, the implementation is far more
Table of Contents for the Digital Edition of Trésorier/Treasurer magazine - N°94 - Juil/Août/Sept 2016
Table of contents
FINANCIAL HIGHLIGHTS Luxembourg Tax News
INTERVIEW Philippe Gelis - Kantox - Fintech and the future of banks
Lost in transformation
Everything has a price – a transfer price
Treasury Survey - an unprecedented picture of treasury activities in Luxembourg
The impact of negative rates on Treasury and Risks Management Systems
Towards reporting harmonisation?
Understanding the Treasury impact of BEPS
Impacts of Single Resolution Mechanism and Bail-in for European Banks
Supply chain? Not concerned?
Collateral management and the Corporate Treasury function.
Efficiently Managing Cross-Border Payments in Turbulent Times
How Mid-Market Companies Can Efficiently Manage Enterprise-wide FX Risk as they Grow
Investing surplus cash in repos
A wind of technology changes in the treasury management world
Invoicing can be fun….?
Comment améliorer la performance des fonds de pension européens
15 MINUTES WITH O2Finance
THE FINANCIAL RISK OBSERVATORY
LIFE BEYOND NUMBERS
Trésorier/Treasurer magazine - N°94 - Juil/Août/Sept 2016