Seeking certainty in a negative interest environment

Seeking certainty in a negative interest environment

What do lawyers need to know about the International Swaps and Derivatives Association (ISDA) protocol governing collateral under negative interest environments? In a straightforward, insider’s take on what motivated the protocol and drove its creation, Nick Sawyer of ISDA explains its core values and the collateral arrangements to which it applies, while Mark Dwyer, a partner at Slaughter and May and head of the firm’s derivatives practice, offers a practitioner’s perspective.


Different approaches to how to deal with the issue of negative interest rates can leave to discrepancies between institutions in the market. Despite the amounts of money involved being comparatively small, the lack of consistency is seen as unwelcome, leaving ISDA to rectify the situation with a protocol to govern collateral under negative interest environments (see Press Release: ISDA publishes ISDA 2014 collateral agreement negative interest protocol).

What does the ISDA 2014 collateral agreement negative interest rate protocol do?

Nick Sawyer (NS): The protocol is designed to provide certainty about how the payment of interest on posted collateral is calculated in a negative interest rate environment under ISDA collateral documentation. Specifically, it makes clear that the party pledging cash collateral would pay interest to the collateral receiver in a negative interest rate environment by paying the absolute value of the applicable interest amount.

As originally drafted, ISDA collateral documentation omitted to specify how negative interest should be settled, leading to some difference of opinion in the market. The protocol allows adhering parties to modify certain collateral agreements to clarify the treatment for negative interest amounts on cash collateral. The protocol does not cover agreements that have been bilaterally negotiated to include:

  • a custodial interest provision
  • interest amount alternative provision
  • negative interest amount provision
  • no-interest provision
  • spread provision, or
  • unilateral posting provision

Mark Dwyer (MD): Parties to a derivative transaction governed by an ISDA Master Agreement and certain ISDA collateral documentation can, by signing up to the protocol, contractually agree how the payment of interest on posted cash collateral is to be calculated and paid in a negative interest rate situation. Such a situation can occur when rates are in negative territory or when interest is accruing on a spread below a low interest rate. The terms of the protocol create certainty over an issue that can sometimes be a point of ambiguity and dispute.

What collateral agreements can the protocol be applied to?

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About the author:

Meet Emma:

1.Banking and finance lawyer with experience in derivatives, debt capital markets, securitisation and structured finance in London and Paris

2.Likes ballet, playing the harp and holidays

3.Thinks the law is always changing!

Emma trained and qualified at Allen & Overy LLP and worked in their derivatives and structured finance teams in London and Paris.  She then joined the foreign exchange prime brokerage legal team at Deutsche Bank before spending 4 ½ years with Crédit Agricole CIB advising the fixed income and derivatives desk.