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15 Aug 2018

Commercial Court rules that negative interest is not payable under an ISDA Credit Support Annex


The State of The Netherlands v Deutsche Bank AG [2018] EWHC 1935 (Comm)


The English Commercial Court has ruled that the standard form ISDA Credit Support Annex (Bilateral Form – Transfer; 1995 version) ("CSA") does not include an obligation on a Transferor of cash collateral to account for negative interest, where the ISDA 2014 Collateral Agreement Negative Interest Protocol ("ISDA Protocol") has not been explicitly incorporated.

The claim by the State of the Netherlands

On 14 March 2001, the parties entered into a 1992 ISDA Master Agreement (Multicurrency – Cross Border), Schedule and CSA.  The parties subsequently entered into a number of derivative transactions. In a situation where the Netherlands had a net credit exposure to Deutsche Bank under these transactions, the CSA required Deutsche Bank to provide credit support to the Netherlands (note, though, that the CSA had been amended by the parties so that the Netherlands was not required to post collateral). This credit support was provided by Deutsche Bank in the form of cash collateral and the documents required the Netherlands to pay interest on that cash collateral at a rate of EONIA (Euro OverNight Index Average) minus 0.04%. However, since 13 June 2014, EONIA was mostly less than zero. The question for the Court was, therefore, whether the parties' agreement required Deutsche Bank to pay "negative interest", i.e. interest from the party who provides a principal sum (the Transferor) for a period of time, rather than the party that receives it and has the use of it for a period of time. 

The Commercial Court's decision

The Court rejected the Netherlands' arguments and found that the CSA does not contemplate a legal obligation on the part of the Transferor to account for negative interest when no such obligation had been spelled out.

In short, the reasons for this were as follows:

  • The fact that the definition of "Interest Amount" in the CSA is capable, as a matter of language, of allowing for a negative figure is only a starting point – it is necessary to look at the documentation as a whole.
  • The Judge relied heavily on section 5(c)(ii) of the CSA, which envisages payment of interest from the Transferee (here the Netherlands) but not from the Transferor (Deutsche Bank). In other words, it contemplates the transfer of interest by the person holding the collateral to the other person who posted it. If there were an obligation on the Transferor, the Judge found, it would be spelled out.
  • The Netherlands relied on the final sentence of the definition of "Credit Support Balance" ("Any Equivalent Distributions or Interest Amount (or portion of either) not transferred pursuant to Paragraph 5(c)(i) or (ii) will form part of the Credit Support Balance"). It argued that the bank was therefore obliged to "account" for negative interest rather than transfer it.The Judge found that this wording could not give rise to or reflect an obligation on the Transferor when no such obligation had been spelled out.
  • There were commercially rational reasons why the parties would have been concerned only with interest where it is positive – for example, it had the benefit of simplicity.Also, where cash collateral could be expected to generate money simply by being held, some reflection of that benefit should be received by the Transferor. But it did not follow that the parties intended that where cash collateral would lose money, that some reflection of that burden should be shouldered by the Transferor.
  • The Netherlands State also relied on the ISDA Protocol.However, that was not available to the parties when they made their agreement, so could not assist in the construction of that agreement – but anyway it did not assist the Netherlands as it envisaged an amendment to achieve its ends.


This decision is perhaps not surprising, and the Judge's conclusions are logical and sensible, but it does provide welcome clarification on an issue that has caused uncertainty in the market.  If parties intend for negative interest to be payable, they need to make express provision for this. This can be done by either adhering to the ISDA Protocol or by including a bespoke provision (for example, amending section 5(c)(ii) of the CSA).



Edward  Davis

Edward Davis

T:  +44 20 7809 2327 M:  Email Edward | Vcard Office:  London

Jeremy Livingston

Jeremy Livingston
Senior associate

T:  +44 20 7809 2086 M:  +44 7825 528 217 Email Jeremy | Vcard Office:  London