Floating Rate Notes and Stakeholder Activities During Zero and Negative Interest Rate Regimes

27 Pages Posted: 16 Feb 2019 Last revised: 25 Sep 2019

See all articles by Juergen Klaus

Juergen Klaus

Technische Universität Dresden Faculty of Business and Economics

Eriks Selga

The University of Hong Kong, Faculty of Law, Students

Tony Klein

Queen's University Belfast - Queen's Management School

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Date Written: May 30, 2019

Abstract

We analyse the impact of stakeholder interactions with the market as a consequence of the negative interest rate regime on the pricing of selected Floating-rate notes (FRNs). The range of reactivity of financial markets and issuers to uncertainty caused by an untested boilerplate term in bond contracts are thoroughly outlined. The subject clause stipulates ‘not applicable’ as the minimum rate of interest, which raises confusion regarding payment obligations between issuers and investors. This is discussed from a legal perspective. Empirically, we find that markets do---to varying degrees---price stakeholder activities like court decisions, industry association statements, and public positions of sovereigns. In turn, issuers are willing to react to legal risks quickly, if costs of inertia are low. This is reflected also in the significant changes in the FRN issuance structure in the past few years. The announcement of further lower for longer rates in the Euro Area provides evidence that the FRN market appreciates the current protection of negative coupons even under a lower Euribor.

Keywords: Sovereign Bond Markets, Floating Rate Notes, Negative Interest Rates, Legal Uncertainties

JEL Classification: K00

Suggested Citation

Klaus, Juergen and Selga, Eriks and Klein, Tony, Floating Rate Notes and Stakeholder Activities During Zero and Negative Interest Rate Regimes (May 30, 2019). University of Hong Kong Faculty of Law Research Paper No. 2019/024; QMS Research Paper 2019/03. Available at SSRN: https://ssrn.com/abstract=3334896 or http://dx.doi.org/10.2139/ssrn.3334896

Juergen Klaus (Contact Author)

Technische Universität Dresden Faculty of Business and Economics ( email )

Helmholtzstr. 10
Hülsse-Bau
Dresden, 01062
Germany

Eriks Selga

The University of Hong Kong, Faculty of Law, Students ( email )

Pokfulam Road
Hong Kong
Hong Kong

Tony Klein

Queen's University Belfast - Queen's Management School ( email )

Riddel Hall
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

HOME PAGE: http://www.tony-klein.info

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