(October 10, 2012) — The world’s largest custodians have begun imposing charges on clients holding deposits in currencies from countries with uber-low and negative interest rates to offset losses, as investors seek safe havens for their assets.
State Street and BNY Mellon have told clients they are liable to charges on top of normal custody fees, should they post deposits in some currencies from countries whose governments have lowered interest rates to negative levels.
BNY Mellon confirmed to aiCIO that the firm would charge clients who held Danish Krone; State Street is to charge clients extra for holding the Scandinavian currency and Swiss Francs.
Royal Bank of Canada (RBC) is also imposing charges on deposits in both these currencies. A spokesman for RBC Investor Services told aiCIO: “In light of recent market conditions, we have enacted this change for Danish krone and Swiss francs, and are working closely with clients on a case-by-case basis to determine the best solutions for them. If these markets return to positive nominal rates, we would reflect this change in the interest rate applicatble to client balances.”
Denmark and Switzerland are two of the four European nations that have reduced interest rates over the last couple of months. These rates have been reduced in an attempt to keep their currencies from becoming too strong and rising in value as investors and other speculators flee the uncertain Eurozone. Investors considering them a safe place to park cash have led to them effectively paying the countries’ governments for holding their debt, rather than the other way around.
Custodians holding deposits in these currencies would in turn be hit by these costs.
A spokesman from BNY Mellon said: “As a result of the negative short-term market interest rates for the Danish Kroner, we introduced a charge for an extremely small number of clients that hold Danish Kroners in their accounts. This is being done to cover costs associated with maintaining these deposits, which includes charges being imposed by sub-custodians and market-driven investment rates. We continue to work closely with our clients to review their short-term investment options.”
Germany and Finland also have seen yields on their government debt fall into negative territory, but as both countries are within the euro deposits in their currency have not been affected.
Investors in the United Kingdom should be acutely aware that interest rates are set at historically low 0.5%, and government bond yields are already heading towards negative territory. Although Danish Krone and Swiss Francs are niche currencies, the negative interest rate phenomenon could occur in more mainstream economies.
In July, Robert Gardner, co-founder of investment consulting firm Redington – and one of aiCIO‘s top 25 Knowledge Brokers – said: “We are seeing a paradigm shift with the continued knocking down of widely-held assumptions about the economy and financial markets. There is no script to deal with these issues. Less than 12 months ago, many perceived that real yields could not go below zero. That proved to be untrue. The common perception now is that nominal yields cannot go below zero but this myth has already been busted by a number of European countries.”
State Street had not responded to requests for comment at the time of going to press.