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ISDA Publishes Negative Interest Protocol

On 12 May 2014, ISDA published the “ISDA 2014 Collateral Agreement Negative Interest Protocol” (the Protocol).  The Protocol pretty much does what it says on the tin – creating a mechanism to allow adhering parties to amend collateral agreements such that, if the Interest Amount for an Interest Period is negative, the Pledgor/Transferor of cash collateral must transfer the absolute value of that Interest Amount to the Secured Party/Transferee.  The Protocol was thought necessary by a number of market participants in order to address any possible uncertainty in light of a number of interest rates approaching zero, or even turning negative, over the last two years.

The Protocol covers the following agreement types: the 1994 ISDA Credit Support Annex (Security Interest – New York Law), the 1995 ISDA Credit Support Annex (Transfer – English Law), the 1995 ISDA Credit Support Deed (Security Interest – English Law), the 1995 ISDA Credit Support Annex (Security Interest – Japanese Law), the 2008 ISDA Credit Support Annex (Loan/Japanese Pledge) and the 2001 ISDA Margin Provisions.

The Protocol provides that, to the extent that amounts due with respect to negative interest are not paid, they may be deducted by the Secured Party/Transferee from excess cash collateral balances held in the same currency.  However, it should be noted that the Pledgor/Transferor is not relieved of its obligation to pay the Secured Party/Transferee any untransferred negative interest amounts and failure to do so could result in an Event of Default and will be subject to interest at the Default Rate.

It is worth noting that the Protocol will not be effective to amend any agreement which contains a “Protocol Excluded Modifying Provision”.  Broadly, this includes any provision:

  • Which deals with any portion of cash collateral held at a custodian;
  • Pursuant to which the parties have negotiated a specific:
    • alternative to the payment of interest;
    • negative (or zero) interest provision;
    • methodology for calculating interest rates (e.g. as the average of EONIA rates for each day during the Interest Period plus or minus a spread); or
    • unilateral collateral posting requirement.

In addition, the Protocol will not apply to any collateral agreement which is secured or guaranteed by a third party and consent or other action by such third party is required for amendments to be made to such agreement, unless such consent or other action has been obtained.  Therefore, any counterparty intending to adhere to the Protocol would be well advised, before the event, to analyse the impact that adherence will have on their portfolio of collateral agreements in order to determine the set of agreements that will be successfully amended, the areas where gaps will inevitably remain and the steps (if any) that will be taken in order to address those gaps.

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