1
$\begingroup$

Let say a bank enters an Interest rate swap with a counter-party, and this trade is collateralised.

I have heard about a specific term in such collateral agreement, wherein it states that the interest payment on such collateral (which is received or paid) is floored at zero.

What does it mean actually. If I receive the collateral and if there is some interest payment angle to it as per the contract, then I will always pay interest, right? Similarly if bank's counter-party receives the collateral then it will pay interest to the bank, right?

So interest payment will always be positive, is not it?

So what exactly it means to the statement that Interest on the collateral is floored at zero?

Any insight will be very helpful

Thanks for your time

$\endgroup$
1
  • $\begingroup$ In EUR, EONIA and now ESTER, usually used as the collateral rate, has been negative for a while. So sometimes the CSA will floor the rate at zero to avoid paying negative rate (i.e. receiving minus the rate) $\endgroup$ – Antoine Conze Jun 10 at 10:12
4
$\begingroup$

It is true that some collateral agreements, there is a clause that says that the interest rate on cash collateral is floored at zero. It also specifies the interest rate index, which is usually Fed Funds for USD collateral and Eonia for EUR colllateral, for example. As long as this index rate stays positive, the clause has no effect. However for example Eonia is negative , so the clause does have an impact for EUR collateral.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.