If you already have a DEGIRO account, you will have already heard about Money Market Funds (MMFs) and how they are used by DEGIRO to manage the liquidity of its clients.
DEGIRO, in fact, was born as a Dutch online broker. In the Netherlands, the regulator does not allow investment firms (including DEGIRO) to hold clients’ money in the form of liquidity. As a result, clients’ funds were converted into MMF units, namely recognized funds that invest mainly in triple-A government bonds such as Germany, France and the Netherlands.
The acquisition by Flatex
Nevertheless, DEGIRO has recently been acquired by the German bank Flatex. One of the main benefits of this merger is that DEGIRO was able to leverage Flatex banking license to offer its clients a more convenient and cost-effective liquidity management.
As a matter of fact, starting from July 2020, DEGIRO has started to assign clients a German IBAN to be used to deposit and withdraw money from the DEGIRO account. With this change, client funds begin to be guarded by Flatex Bank.
For DEGIRO clients, this change has two advantages.
The first advantage is that each client is protected by the German Deposit Guarantee Scheme. This fund ensures each client up to a maximum amount of € 100.000 (for DEGIRO joint accounts, the insurance doubles to € 200.000). Previously, DEGIRO adhered to the Dutch Investor Protection Scheme, which guaranteed each client up to €20.000.
From a legislative point of view, DEGIRO can no longer be considered a Dutch online broker: rather, it can be considered a German bank due to the acquisition of Flatex. Obviously, from an operational point of view, DEGIRO will continue to offer the online brokerage services that have made it stand out in recent years.
The negative interest compensation policy
However, the assignment of a Flatex cash account to clients confirmed one aspect (perhaps the most abominable) observed with MMFs: the negative interests accrued on the deposited funds.
In fact, investing in MMFs generated negative returns (due to the negative interest rate scenario we are in). The negative interests accrued on MMFs stood at around 0.70% per annum.
Funds held on the Flatex cash account also generate a negative interest of 0.50%. Thus, even if only slightly, the negative interest on the Flatex account is lower than that generated by MMFs.
Even with this new approach, DEGIRO adopts a compensation policy on these negative returns: in fact, it undertakes to offset the first € 2.500 held on the cash balance of the DEGIRO account. Above this threshold, negative interests are charged to the client.
Active users (i.e. those who generate more than € 350 in commissions in 60 days) benefit from the compensation policy for the first € 100.000 held on the Flatex cash account.
In general, for those who hold a DEGIRO account, it would be a good practice to keep the liquidity on the account to a minimum. Whenever we need funds to carry out transactions, we can make a bank transfer from our counterpart account to the DEGIRO account. Similarly, when we liquidate a position on the platform, it would be better to transfer the liquidity to the counterpart bank account.
In this way, we would avoid the debit of negative interests if the cash balance exceeds € 2,500.
