The State of the Netherlands v Deutsche Bank AG

A standard-form ISDA Credit Support Annex does not, without clear wording, impose an obligation on the party providing cash collateral to pay or account for negative interest. The interest provisions contemplate payment by the party holding the collateral to the party that provided it. A definition capable of producing a negative figure is only a starting point and must be read with the agreement as a whole. Later ISDA guidance cannot alter the meaning of an agreement made before that guidance existed, particularly where the guidance contemplated contractual amendment.

The State of the Netherlands and Deutsche Bank AG were parties to an ISDA Master Agreement and Credit Support Annex governed by English law. The Bank was required to provide cash collateral, while the State was required to pay interest on that collateral at EONIA minus 0.04 per cent.

Because the agreed rate was negative for substantial periods, the State claimed that the agreement required the Bank to account for negative interest, either by payment or through adjustments to the Credit Support Balance. The central issue was whether the contractual wording imposed such an obligation.

1. Claim dismissed. The standard-form ISDA Credit Support Annex did not impose an obligation on the Transferor to account for negative interest on cash collateral.
2. Contractual interpretation required attention to both language and commercial consequences: Wood v Capita Insurance Services Ltd [2017] UKSC 24; Lomas v JFB Firth Rixson Inc [2010] EWHC 3372 (Ch). Standard-form ISDA documentation should, so far as possible, be construed consistently with clarity, certainty and predictability.
3. Although the definition of “Interest Amount” could linguistically produce a negative figure, the agreement had to be considered as a whole. Paragraph 5(c)(ii) required the Transferee, here the State, to transfer interest to the Transferor, here the Bank. It did not require the party providing collateral to pay interest to the party holding it.
4. The parties had not used paragraph 11(f)(iii) to specify a different arrangement. The express zero-rate provision for cash transferred to the wrong account also pointed against an intention that negative interest should be payable. The final sentence of the definition of “Credit Support Balance” was adequately explained by unpaid interest which the Transferee was otherwise obliged to transfer. It did not create an unstated obligation concerning negative interest.
5. The proposed alternative accounting machinery had no credible commercial rationale in the contractual scheme. The 2013 ISDA Statement of Best Practice and 2014 Negative Interest Protocol were unavailable when the agreement was made and could not form part of its context. The Protocol in any event contemplated amendment of the agreement. The ISDA User’s Guide was capable of assisting interpretation and reinforced the focus on what the Transferee was to do in return for holding cash collateral.

not stated in the judgment.