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Negative EONIA Rates and Cash Collateral Interest

Article Quant Q&A · Author: SmallChess
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Summary

The document asks how negative EONIA rates affect derivatives pricing, whether a party posting cash collateral must pay interest, and whether negative rates invalidate models that assume rates cannot fall below zero. The answer addresses the collateral question: under negative EONIA, a cash-posting party may owe interest to the counterparty holding the collateral.

This has practical implications for collateral terms and derivative valuation, where remuneration of posted cash affects the economics of a position. The response also notes that negative rates prompted calls for greater clarity from dealers. However, it does not explain the resulting pricing adjustments, discuss collateral agreements or conventions, or resolve how interest-rate models should handle negative values, so its treatment of the broader modeling question is incomplete.

Key ideas

  • When EONIA is negative, cash collateral posters may pay interest to the receiving counterparty.
  • Collateral remuneration can affect the economics and pricing of derivatives.
  • The text says negative rates led to requests for clearer dealer guidance.
  • It does not explain pricing adjustments or address how rate models should represent negative rates.

Tags

Fixed incomeDerivatives pricingRisk management
Full text
# Negative Eonia rates


# Negative Eonia rates












I'm curious how the current negative Eonia (Euro OverNight Index Average) rates would impact derivatives pricing. Does it mean that if I post cash collateral to you, I also need to pay you interest?

More generally, does it mean that the classical interest-rate modelling assumption that interest rates can't go negative is now invalid?

## Answer by Amiro (score 1)

https://quant.stackexchange.com/a/15118

Eonia's negative implies parties posting collateral must also pay interest to their counterparties, which has led to calls for clarity from dealers.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.