FpML Issues Tracker

898: Zero or negative interest rates – Impact on schema or business rules

December 15, 2008




Interest Rate Derivatives




Given the current market conditions, we expect to hit zero or negative interest rate situations. Just wanted to give a heads up to make sure that we look for places where this could cause an issue - so far I have only seen ird-25 rule, which currently applies to fixedRateSchedule ( when there are no steps, initialValue should be non-zero). Could you please do a double-check to ensure that we are safe? thx -s


  • matthewdr

    12/15/08 4:40 pm

    The definition in the schema of initialRate is:

    The initial rate or amount, as the case may be. An initial rate of 5% would be represented as 0.05.

    An initial rate of 0 if there are no Steps would not make sense, so the rule seems sensible.

    Even in the case of a negative start rate, if it stepped up to 0% then there would be no issue as the guard on not(exists(steps)) would not be satisfied.

    The impact of negative interest rates was discussed at the Coord today. This specific issues was not discussed and I would appreciate verification by Harry.

  • h_mcallister

    01/07/09 9:10 pm

    The treatment of negative interest rates and calculation of the resulting floating amount payment is specified in Section 6.4 of the ISDA 2006 Definitions.

    Briefly, the default behaviour is to apply the “Negative Interest Rate Method”, whereby in the case of a negative applied rate, the roles of Payer and Receiver are reversed with respect to the absolute value of the payment.

    Where the “Zero Interest Rate Method” applies, the floating amount payment is floored at zero, so in the case of a negative rate no payment occurs (I understand that is is common practice to specify “Zero Interest Rate Method” in the Master Confirmation Agreement).

    These behaviours are expressed in FpML as FloatingRateCalculation/ negativeInterestRateTreatment, which takes values of NegativeInterestRateTreatmentEnum (NegativeInterestRateMethod, ZeroInterestRateMethod).

    I would expect most settlement systems will be configured to refer to internal reference data about the applicable master agreement provisions, rather than the content of individual trade messages.

  • Leave an update

    You must be logged in to post an update.