Derivatives Industry Covering the Bases in Case Rates Go below Zero in Japan

Article excerpt

The possibility that some swaps contracts in Japan could produce negative interest rates has prompted the derivatives industry to rewrite its basic contracts.

The International Swaps and Derivatives Association last week issued guidelines to its members on how to amend their swaps contracts for the possibility of negative interest rates in Japan and elsewhere. The trade group's master agreements cover most over- the-counter derivatives contracts.

At issue are the terms of settlement when interest rate calculations in a swap transaction produce a negative number for one of the counterparties.

The new guidelines present two approaches.

Under the first approach, the company responsible for paying the amount that results in a negative rate would pay nothing. Instead, that company's counterparty would pay not only the amount it would have had to pay anyway, but also the amount of the negative interest rate.

The second method sets a floor for the interest rates at zero percent. …