- Data provider
Bloomberg warned some users of its terminals on Monday that they should prepare for negative interest rates in the near future, the Financial Times reported. - The note was sent to warn users to prepare any computer models used to calculate interest rate volatility for the possibility that the Federal Reserve may take interest rates below zero.
- Interest rate volatility forms part of the equation when calculating the price of
options , a form of derivative that allows investors to buy assets at set prices in future. - Most
markets use a pricing model created by academics Fischer Black and Myron Scholes, but this formula breaks down if the cash or spot price of assets plunge below zero. - Bloomberg, therefore, is urging customers to use a model composed by Louis Bachelier, which works even if prices turn negative.
Bloomberg has told users of its terminals to prepare for US interest rates plunging below zero to prevent technical glitches seen during other spectacular price moves in recent months, the Financial Times reported Tuesday.
The FT said, citing a note sent out by Bloomberg on terminals Monday, the company urged its users to review their computer models used for determining interest rate volatility.
Interest rate volatility is a vital part of the equation when calculating the price of options, which allows holders to purchase or sell financial instrument at a specific point in time.
Business Insider operates a Bloomberg terminal, but could find no evidence of having received the note on Tuesday.
The company reportedly told users to switch to a new model as a precautionary measure. It is also said to be making equivalent changes to its forex and commodities pricing models.
Instead, the Fed has kept its benchmark policy rate at close to zero since March — and indicated that's where rates will stay until the until the end of 2022 — while significantly expanding its asset purchase program.
But analysts have noted that what the Fed does will ultimately depend on the type of recovery the US has from its current economic crisis. If the economy springs back quickly,
Bloomberg reportedly said in a statement that it "continuously stress tests its systems against all kinds of scenarios, and as part of these efforts we are preparing our systems for the possibility of negative yields on US fixed income instruments."
"We have prior experience of such preparations as negative rates have already occurred in several European markets.
"As it is still up for discussion among industry participants whether calculations would incorporate negative US dollar rates or implement a floor, we are prepared to do either," added Bloomberg.
Oil price warnings
The warning by Bloomberg reflects how the pandemic has caused pricing distortions in markets.
US oil prices briefly turned negative in April, something which cost several brokers millions of dollars.
Interactive Brokers suffered a loss of over $100 million after a technical glitch meant that the broker could not display negative prices.
Ameritrade and ETrade are said to have faced similar issues.
CME Group and Intercontinental Exchange have modified the way they calculate prices for WTI options European gas benchmarks to reflect the possibility of any negative rates following oil's historical plunge below zero.
Markets tend to use a model invented by academics Fischer Black and Myron Scholes, but this formula breaks down if the cash or spot price of assets plunge below zero.
Bloomberg is the latest data provider, following CME and ICE's views in urging urge its customers to use a model composed by Louis Bachelier, which works even if prices turn negative.
The oil pricing issues prompted a rare intervention from the The US Commodity