Interest Rate Risk

Interest rate risk refers to the unpredictability of interest rate movements. Materializing interest rate risk may mean that Your expenses on loan repayments will increase or the income from Your assets will decrease in uncomfortable scale.

Interest rate risk plays an especially important role in case of long term loan obligations with variable interest rates. The fluctuation of interest rates impacts long term obligations more than short term ones.

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Interest Rate Cap

  • Interest Rate Cap
    An interest rate cap is a contract between two parties, whereby the seller agrees to pay the buyer, should an interest rate index (e.g. EURIBOR) exceed a specified level (the strike) on specific fixing dates. The eventual payment made by the seller is the difference in rate between the fixed rate and strike. Hence interest rate cap is a financial instrument that allows you to fix the maximum interest payment for the future in case of an obligation with a variable interest rate. On the other hand, selling the interest rate cap allows you to set a limit to the future interest income and receive a compensation for the sale.
  • The product might be interesting to you if
    • You have an obligation with a variable interest rate (in Danske Bank or elsewhere) and you wish to insure yourself against future increase in the interest rates.
    • You have assets earning interest at a variable rate (in Danske Bank or elsewhere) that you wish to profit from additionally today. If You are ready to forego the potentially higher profits in the future you could sell interest rate cap and earn extra income.
    • You want to hedge the interest rate risk but you are reluctant to change your payment obligations to fixed rate payments on constant basis (you consider for example likely that interest rates rise only slightly or rather fall).
    • You are planning to pre-hedge the planned investments or obligations.
  • Cap-deals are flexible and the customers can set the following terms
    •  The level of interest rate, from which interest payments are to be insured.
    • The period for which the maximum level of interest rates is hedged (it does not have to match with The duration of the loan; both the start date but also the end date may lie further in the future).
    • The share of the interest rate risk that is hedged (even managing a part of the risk gives more security than no managing of risk at all).
  • Prerequisites for the transactions
    • In case of Interest rate cap purchase the means for which to pay the cap premium. In case of interest rate cap sale the required collateral in the form of deposit or some other form recognised by the bank.
    •  Interest rate derivatives limit granted by the bank (only if customer is selling interest rate cap).
    • MIFID suitability assessment.
    • Derivatives Master Agreement.

Interest Rate Swap

  • Interest Rate Swap

    An interest rate swap (IRS) is an agreement between two parties to exchange different specified interest payments (usually fixed rate payments against floating rate payments) in the same currency during the agreed contract term.

    By signing the fixed for floating interest rate swap contract, one party takes upon him the obligation to make to the other party specific fixed interest rate related payments whereas the other party takes upon him the obligation to make in return the specific variable interest rate (e.g. EURIBOR) related payments.

  • The product might be interesting to you if
    • You have an obligation with a variable interest rate (in Danske Bank or elsewhere) and you wish to insure yourself against future increase in the interest rates.
    • You have assets earning interest at a variable rate (in Danske Bank or elsewhere) and you wish to insure Yourself against the future decrease in the interest rates.
    • You are planning to pre-hedge the planned investments or obligations.
  • Swap deals are flexible and the client can set the following terms
    • The period for which the level of interest rates is hedged(does not have to comply with the duration of the underlying loan).
    • The share of the interest risk that is hedged (even managing a part of the risk gives more security than no managing of risk at all).
    • Swap-deal may include payments in different currencies (in most cases the calculations for interest amounts payable and receivable are based on a single currency).
    • Swap-deal may include the right of the client to withdraw from the deal at any moment. Such contracts are due to the extra feature usually more expensive than normal swap-contracts.
  • Typical conditions for swap-deals
    • The variable interest rate payable by the bank for the starting interest period will be determined by the rate effective two banking days before the start of the interest period.
    • Periodic settlement of accounts from the difference in the variable interest rate and the fixed interest rate during the contract period take place at the end of each interest period.
    • The minimum amount of the transaction is 200 000 EUR or its equivalent.
  • Prerequisites for the transactions
    • Collateral in the form of deposit or some other form recognised by the bank.
    • Interest rate derivatives limit granted by the bank.
    • MIFID suitability assessment.
    • Derivatives Master Agreement.
    • Deposit on a Danske Bank current account in the amount agreed on with the bank, or some other liquid collateral (or credit) that is recognised by the bank
    • Derivatives Master Agreement
Follow the instructions of regulators

Get adviced

  • EMIR

    The European Market Infrastructure Regulation (EMIR) is Regulation (EC) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories, which stipulates settlement of derivative instruments via central counterparties and the obligation to inform the trade repositories thereof and the new procedures for the management of derivative instrument contracts.

    The regulative changes resulting from EMIR have an impact on all counterparties within and outside the financial sector (except private persons) who operate on the market of derivative instruments. This is part of the global effort to increase the transparency of the market and to decrease operational and counterparty credit risks on the markets of derivative instruments.

    EMIR contains three main additional requirements compared to the previous provisions:

    • Risk management standards must be perfected. All transactions with derivative instruments must be reported to trade repositories
    • Transactions with derivative instruments which meet the established criteria must be settled via central counterparties


    Trade reporting

    All derivative trades must be reported to trade repositories from 12 February 2014. A trade repository is and entity that centrally collects details about derivative trades in a register to which financial regulators have access for supervision purposes.

    The reporting obligation covers both over-the-counter (OTC) and exchange-traded derivative instruments. It is important to note that forward currency contracts are also covered by the reporting obligation set forth in EMIR.

    The reporting obligation applies to all parties that are registered in an EU/EEA country (except private persons, central banks and some public bodies). Danske Bank also reports transactions on behalf of its clients if so agreed between the bank and the client. Danske Bank reports the transactions of its clients to DTCC GTR (the Depository Trust & Clearing Corporation – Global Trade Repository).

    If the client has requested the reporting service and consents to the terms and conditions of the service, the client authorises Danske Bank to report transactions with derivative instruments made with the bank to the trade repository on its behalf. In order to do this the client must request an LEI (Legal Entity Identifier) and inform Danske Bank about this.

  • Lei code

    LEI (Legal Entity Identifier) is used globally to identify legal entities. It is a combination of 20 numbers and letters.

    How to obtain an LEI?

    • Choose an LEI provider. See section below.
    • Register your details on the provider's website.
    • Pay the charge for registration. The charge appears on the website of each individual LEI provider.
    • The LEI provider approves your details.
    • Please provide Danske Bank with your new LEI by sending it by email marketslt@danskebank.lt.
    • Renew your LEI every year.

    Requesting a LEI is subject to a fee (approx. USD 120 or €100) and it can take up to a couple of weeks.

    Overview of LEI providers

    See a list of all LEI providers here.

    There are no authorised issuers in Lithuania at present. As such, you will need to apply via the website of an issuer stated above by setting up a user profile and submitting the required data.

     

    Frequently asked questions

    What is an LEI?

    LEI is short for Legal Entity Identifier and is a number that allows unique identification of investors across the EU. Everyone with a legal entity, such as a business with a CVR no., a sole proprietorship, an association or a foundation, must have an LEI from 2018 to be able to trade in securities or derivatives.

    Why is an LEI necessary to be able to trade?

    When it is possible to identify everyone trading in securities or derivatives in the EU, it is easier to monitor the market and prevent manipulation etc., and this makes the investment market more secure. If your business, association or foundation does not obtain an LEI by 3 January 2018 at the latest, it will no longer be possible for you to invest yourself or have Danske Bank invest on behalf of your business, association or foundation.

    What happens if I do not buy an LEI by 3 January 2018 at the latest?

    If you do not buy an LEI by 3 January 2018 at the latest, you may no longer trade in securities or derivatives.

    Where do I buy an LEI and what does it cost?

    It is easy to buy an LEI from any authorised provider, such as NordLEI at nordlei.org. An LEI costs about USD 120; EUR 100. Once you have bought the LEI, you must remember to renew it every year.

    How does Danske Bank get my LEI? 

    Please provide Danske Bank with your new LEI by sending it by email marketslt@danskebank.lt.

    I already have an LEI for my business. Do I need to do anything?

    No, you do not need to do anything. Just remember to renew your LEI every year.

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