The State of the Netherlands v Deutsche Bank AG [2019] EWCA Civ 771

11th July 2019

The Court of Appeal held that negative (as opposed to positive) interest was not payable on cash collateral posted under the 1995 Credit Support Annex (CSA) to an International Swaps and Derivatives Association (ISDA) agreement.

The State of the Netherlands had entered into an ISDA master agreement with Deutsche Bank AG. Under the standard form CSA, credit support or collateral was to be provided in certain circumstances by both parties to the transaction. However, the parties had agreed that in this case only the bank was to provide credit support to the state. The CSA further laid down that the state was to pay interest on the collateral at the Euro Over-Night Interest Average (EONIA) as calculated by the ECB minus 0.04%. When the interest rate fell below zero in 2014, the Netherlands brought proceedings claiming negative interest.

The court dismissed the appeal. If an obligation to pay negative interest had been envisaged by the draftsman, it would have been made explicit in the CSA. It was important to look at what the drafting said explicitly, rather than what it did not – paragraph 5(c)(ii) of the CSA expressly mentioned positive (but not negative) interest. In any event, nothing in the CSA read as a whole, the User’s Guide or any background materials suggested that it was contemplated that negative interest would be payable.

That said, this issue is unlikely to arise in practice often as most parties will rely on the ISDA 2014 Collateral Agreement Negative Interest Protocol to amend the CSA to provide for the payment of negative interest.

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