Danish CFD trading and investment house Saxo Capital markets announced it was to introduce negative interest rates on positive free equity balances in selected currencies from the April 1st and don’ts this wasn’t an early April fools.
Negative interest rates have been a fact of life in parts of Europe for several years and in 2019 the ECB or European Central bank lowered its deposit rates to -0.50% but to date, most financial institutions have tried to shield all but their largest customers from the knock-on effects of subzero interest rates and to be fair Saxo are doing the same by only applying the charges to large free equity balances held in Euros, Swiss francs or Danish krone.
Only those customers with cash/net free equity balances above 100,000 Euros or Swiss francs or 750,000 Danish kroner will incur the Saxo Negative interest rate additional costs
Those charges occur because under negative interest rates banks are charged (and in turn charge their customers) for holding cash on deposit. Central banks have applied negative interest rates to encourage individuals and businesses to take money off deposit and to invest or spend it instead, thereby stimulating the underlying economy.
However not only will Saxo levy negative rates on effective cash balances they will also add an as-yet-unspecified mark up to their charges.
There is also an apparent lack of symmetry as well, I say that because in Denmark mortgage borrowers can be paid by their lender for taking out the loan however Saxo is not yet offering credit interest on margin loan balances.
Charging negative rates on large cash balances is one thing, however, charging a fee on net free equity appears to penalise profitable traders. After all free equity is comprised of free cash balances plus the net of any running profits or losses on a traders account and it’s going to take some time to get our heads around that concept.
Saxo Capital Markets may be the first of the Tier 2 prime brokers and major CFD or FX brokers to introduce these charges and perhaps their European heritage and client base account for that. However, I think it’s inevitable that any broker with significant deposits in currencies that are subject to negative interest rates will follow suit. Particularly if central banks move to cut deposit rates further in the wake of the Coronavirus.
How can clients of Saxo avoid these negative interest rate charges? The answer is not that easily
Saxo suggests that clients take their excess balances off of deposit and take advantage the ability to invest in their managed portfolios, any of three thousand or more ETFs or five thousand government and corporate bonds through their physical stocks and share dealing services alternatively clients can convert their cash balances into a currency that does not incur negative interest rates such as US dollars or the pound sterling.
There are a couple of points to consider when looking at negative interest rates here
What will Saxo’s cross margining policy be if you turn a large cash balance into investments in physical stocks or bonds, will those holdings be eligible as collateral against margin trading positions? And if so what haircuts or discounts to face value will be applied to those holdings if they act as collateral?
If you convert cash balances into a currency that doesn’t bear negative rates and one that is different to the base currency of your account, you are going to incur cross currency exposure or FX risk if you prefer.
That may not be too much of an issue for the wealthy and sophisticated clients that are most likely to be affected by these changes but it is worth bearing in mind particularly if the cash thresholds were to move lower at some point in the future.
There is a lot to think about and take in here and I am sure that we will revisit this subject soon.
Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.