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ISDA Readies CSA Negative Interest Protocol

ISDA is in the final stages of preparing its ISDA 2014 Collateral Agreement Negative Interest Protocol (the “Protocol”) for publication.  ISDA currently expects the Protocol to be open for adherence sometime during the week commencing 17 February 2014.

The Protocol allows adhering parties to amend credit support documentation to account for negative interest amounts on cash collateral.  Broadly, the changes are that:

  • If an interest amount payable is a negative number due to the existence of negative interest rates, the out-of-the-money party (which transferred collateral) must pay the absolute value of the interest amount to the in-the-money party (the party which took receipt of the collateral);
  • The amount of negative interest payable will be calculated by the in-the-money party;
  • Any negative interest amounts not paid will be set-off against cash collateral already held by the in-the-money party (the reduction in the credit support held by the in-the-money party may result in another collateral call being made), with any excess remaining payable and subject to interest at the Default Rate;
  • If not previously amended, the definition of “Interest Period” and provisions detailing the dates on which interest is to be transferred are amended so as to align positive and negative interest calculation and payment dates.

Although accepting that the Protocol is a useful too, a number of market participants believe that existing provisions within collateral documentation are sufficiently flexible so as to facilitate the payment of negative interest rates.  Others are somewhat more cautious.  Either way, it would be advisable to revisit portfolios of collateral documentation in order to determine how current state maps to required state before adhering to the Protocol and effectively broadcasting an offer to the world to amend documentation in this way.

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