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.
Negative rates have generated issues that affect multiple stages in the processing chain.


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 EUR rates now have negative values.
Moreover, it is necessary to manage and store negative yield curve values, especially as far as short 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).

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 necessarily positive. By the same token, they should accommodate the fact that a liability can generate a positive interest value.
Derivatives transactions are imbued with similar issues. For example, it is necessary to consider that the interest on an IRS can be in the same positive – or negative – territory, which implies a number of back-office 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.


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.

  1. Instruments with linear payoffs, such as fixed or variable-rate 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 projections.
  2. Instruments with non-linear payoffs, such as caps/floors or swaptions. In these instances, the implementation is far more complex. The model applied to such transactions (which are most often valued using the Black model) subsumes that the value of the underlying asset is positive, since there can be no negative value in the log-normal law.  In other words, it has become necessary to revisit one of the most significant and widespread approaches that has been in use on the rate-derivative market for many years in valuation models. Several suggestions have been offered, including the adoption of the shift method, which consists in shifting strikes away from yield curves and calibrating volatility accordingly in order to apply the values to the Black model.


Finally, the market situation generates an indirect impact

on counterparty risk management in the TRMS. This is due to the fact that when seeking profit – or avoiding value destruction – investors tend to relinquish short-term investments and prefer longer-term maturity. Cash equivalent, short-term, very liquid investments are thus sacrificed. Such investment policies – provided they are approved by management – require painstaking monitoring of positions and counterparty risk.

Another consequence:

investors are shying away from euro-denominated investments in hopes of finding higher yield with other currencies. This approach has significant reverberations in terms of forex risk. It is therefore necessary to ensure that the TRMS can handle the risk and determine the yield of the investment based on its actual nature and on the cost of a possible swap to cover the forex impact.

To date, negative yield episodes have been rather brief. What is new, however, is that States now offer negative-rate securities. Negative interest rates are indeed an anomaly and they are a demonstration of the fact the crisis is not over. And yet, the situation is likely to last.
Adapting systems and procedures to the new paradigm must be a priority for corporate treasurers.