UK Court says no negative interest payable under standard ISDA Credit Support Annex: a view from the loan markets
A recent case in relation to the standard ISDA Credit Support Annex (CSA) has ruled that there is no obligation to pay negative interest under an English law CSA (see The State of the Netherlands v Deutsche Bank AG  EWHC 1935 (Comm)). This is something that ISDA had previously sought to resolve with the ISDA Negative Interest Rate Protocol, although adherence was patchy and it did not pick up all CSAs. While this case is specific to the court's interpretation of certain ISDA documents and materials, there is a general point to be aware of as regards financial contracts and parties' understanding of the treatment of negative interest - both in terms of legacy and future transactions. Instances of negative rates have arisen for Swiss Francs and Danish Kroner LIBOR rates in recent years.
While many loan documents will have incorporated zero-floor language in terms of benchmark rates ensuring minimum yield, care must be taken to understand how that might feed into other provisions including break costs. The zero floor should also be matched in any interest rate hedging arrangements.
Operationally speaking the effect of negative rates will also depend on how the lender funds itself. In some instances a lender may still be unable to fund a loan without paying interest in the interbank market, even in a supposedly negative rate environment. Where zero floor language is not used (or negotiated out) there are no mechanisms in current LMA documents, for example, to pay any excess to the borrower (that is, where the overall interest rate is negative) or for it to be applied in repayment of principal.
Returning to the CSA case, it will be interesting to see if there is now an appeal or further cases brought which seek to achieve a different outcome by advancing different arguments or taking the issue to a higher level of court.
If you would like to discuss this case or the implications of it, please get in touch with your usual Fieldfisher contact.