FpML Issues Tracker

899: Negative Interest Rates reverse Cashflow direction

December 15, 2008





Interest Rate Derivatives




We have an unprecedented scenario in the marketplace with US Treasury rates dropping into negative territory.

I request verification whether or not firms will have an issue.

Cashflows reverse in reality but not necessarily in IBML/FpML encoding nor in application code. Cashflow direction is primarily modeled as a unidirectional flow based upon the designation of the "payer" and the "receiver". If the rate is negative, the direction of the cashflow will reverse in practicality. It is unknown if application code for valuations, risk, cashflow/accounting are coded to address this scenario.

Can FpML assist in identifying a mechanism that models this scenario or is it left to the application to encode properly. The issue is far greater than IRD and Fixed Rate Schedule. Floating rate cashflows are the first impacted area for existing deals.

Do we need a new model to more accurately describe the interdependencies of payer and receiver based on the the true driver of the flow direction (Rate signage) taking into consideration the difference between principle and interest payments?

Might a proper 1st order predicate logic oriented rules language still struggle to validate this logic unless the rules of the flow itself are encoded in the instance. In essence, the rules must become a part of the message.

If (Rate>0) { InterestPayerPartyRef="PartyA"; InterestReceiverPartyRef="PartyB"; PrinciplePayerPartyRef="PartyA"; PrincipleReceiverPartyRef="PartyB"; } else if (Rate<0) { InterestPayerPartyRef="PartyB"; InterestReceiverPartyRef="PartyA"; PrinciplePayerPartyRef="PartyA"; PrincipleReceiverPartyRef="PartyB"; } else if (Rate=0) { InterestPayerPartyRef=NULL; InterestReceiverPartyRef=NULL; PrinciplePayerPartyRef="PartyA"; PrincipleReceiverPartyRef="PartyB"; } Regards, Derek LaSalle IBML/FpML Product Manager JP Morgan Investment Bank


  • dereklasalle

    12/15/08 11:15 pm

    If the existing model stands, apps will need to interpret negative amounts in the cash flow due to a negative interest rate.

  • dereklasalle

    12/16/08 3:31 pm

    Note: Unprecedented except in Japan

  • h_mcallister

    01/07/09 9:17 pm

    Payer and Receiver in FpML have specific meanings per the ISDA 2006 Definitions. Payment amount calculations are outside the scope of FpML, so yes, this is left to the application to encode.

    The FpML IRD model incorporates the relevant ISDA provisions (please see my response to Issue #898) so no, we don’t need a new model.

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