RBS to charge large clients for cash collateral on futures trades

The charge for cash used as initial margin for listed derivatives trades will affect around 60 clients.

RBS will begin charging large clients for posting cash collateral for their futures trades, in response to negative interest rates in the UK.

According to a source with knowledge of the matter, the charge on cash initial margin for settling and euro-listed derivatives trading will affect around 60 clients.

“Until recently RBS has applied a 0% floor to the overnight rate charged for deposits used to meet margin required by clearing houses for futures trades.  However, due to the sustained low interest rate environment, RBS will now be passing the cost of holding such deposits onto a limited number of our institutional clients using cash to meet initial margin requirements,” said an RBS spokesperson.

The move comes weeks after the Bank of England governor Mark Carney cut interest rates to 0.25%. In combination with negative rates in Europe, holding large amounts of cash on bank balance sheets is not as profitable.

The changes may prove extremely problematic for firms to comply with central clearing requirements, which state high quality collateral such as cash must be posted to central counterparties (CCPs).

Pension funds are currently facing a potential exodus from derivatives trading as they are being forced to drum up cash collateral for their derivatives trades, a task that is completely new to them.

Some banks are attempting to remove cash on their balance sheet in the wake of incoming capital rules. In the US, Citi has removed client-posted cash initial margin for cleared OTC derivatives in a bid to free up its balance sheet.

As of January 2016, Citi removed almost $4 billion in client cash collateral posted with its US OTC clearing business, and is currently trialling the scheme in Europe.