As you probably already know, the Dutch broker DEGIRO differs from most other brokers on how it holds clients’ money. Instead of holding clients’ money in the form of liquidity in bank accounts, DEGIRO is obliged by the Dutch regulator to invest funds deposited by clients in units of qualifying Money Market Funds.
What are Money Market Funds?
MMFs are liquid debt instruments, which mostly invest in triple-A Government bonds such as Germany, France and the Netherlands. The average duration of the Government Bonds on which the MMFs invest is 60 days, therefore the credit risk is very low, making the MMFs one of the safest ways through which to hold liquidity.
In a healthy economy, one would expect this type of investment to generate a minimum return, given the low-risk component. But we are all aware of the negative interest rate policy implemented by the ECB in recent years. As a result, the returns on the above-mentioned Government Bonds are negative and, in turn, the units of the Money Market Funds also generate negative returns.
Until now, DEGIRO clients have not had to worry about such negative returns, as the broker has undertaken to compensate for these negative fluctuations on the clients’ cash balance. In other words, DEGIRO absorbed the losses realized by the MMFs units of each individual client.
An unsustainable approach
It may be because the era of negative rates seems to be lasting much longer than expected, it may be because the number of clients has reached exorbitant figures, but this compensation system is no longer sustainable for DEGIRO.
For this reason, DEGIRO has decided to continue with compensations only for the first 2,500 euros of the cash balance of each account. Above this threshold, the negative MMFs returns will be transferred to the clients.
Is it then bad news?
Not necessarily. From 15 November onwards, any investor holding an account with DEGIRO must have the foresight not to hold the liquidity he does not need in his account. For example, if you've closed a position and your cash balance has increased, transfer that amount to your registered bank account. If you wish to carry out further transactions in the following days, make a new instant deposit via SOFORT/Trustly to your DEGIRO account. Therefore, by keeping the average cash balance below 2,500 euros, the changes to the compensation system implemented by DEGIRO will have no repercussions on your operations.
In addition, to offset this decision, starting from , DEGIRO has decided to further reduce the already low trading fees. The variable part of European shares is reduced by 0.008% and futures and options contracts cost now € 0.15 less than before. On the US markets, on the other hand, it will soon be possible to trade at zero commissions, paying only a monthly fee of € 2.50.
In light of all this, DEGIRO continues to be one of the most reliable and low-cost brokers for investing in the best conditions.
