ISDA has prepared this list of frequently asked questions to assist in your consideration of the ISDA 2014 Collateral Agreement Negative Interest Protocol (the Protocol).
THESE FREQUENTLY ASKED QUESTIONS DO NOT PURPORT TO BE AND SHOULD NOT BE CONSIDERED A GUIDE TO OR AN EXPLANATION OF ALL RELEVANT ISSUES OR CONSIDERATIONS IN CONNECTION WITH THE PROTOCOL. PARTIES SHOULD CONSULT WITH THEIR LEGAL ADVISERS AND ANY OTHER ADVISER THEY DEEM APPROPRIATE PRIOR TO USING OR ADHERING TO THE PROTOCOL AND/OR ENTERING INTO AN OPT-IN AGREEMENT. ISDA ASSUMES NO RESPONSIBILITY FOR ANY USE TO WHICH ANY OF ITS DOCUMENTATION OR OTHER DOCUMENTATION MAY BE PUT.
These frequently asked questions are divided into the following three sections:
· ADHERENCE PROCESS
· SPECIAL CONSIDERATIONS FOR INVESTMENT/ASSET MANAGERS
· WHAT DOES THE PROTOCOL DO
ISDA has published the Protocol to allow adhering parties to amend certain ISDA-published collateral agreements to account for negative interest amounts on cash collateral. Parties may specify an interest rate used to calculate interest on cash collateral (e.g., in Paragraph 13 of the 1994 NY Law CSA). The Protocol will modify certain collateral agreements such that if an interest amount for an interest period is negative, the party pledging cash collateral pays the absolute value of that interest amount to the other party for that interest period. An interest amount may be negative if the interest rate used to calculate interest on cash collateral is negative.
1. Is there a closing date for adherence to the Protocol?
There is currently no cut-off date for adherence, but ISDA reserves the right to designate a closing date of the Protocol by giving 30 days’ notice on this site.
2. How do I submit my Adherence Letter?
Each entity executing an Adherence Letter will access the Protocol Management section of the ISDA website at www.isda.org to enter information online that is required to generate its form of Adherence Letter. Either by directly downloading the populated Adherence Letter from the Protocol Management system or upon receipt via e-mail of the populated Adherence Letter, the entity must print, sign and upload the signed Adherence Letter as a PDF (portable document format) attachment into the Protocol Management system. Once the signed Adherence Letter has been approved and accepted by ISDA, the Protocol adherent will receive an e-mail confirmation of the Protocol adherent’s adherence to the Protocol.
ISDA keeps the executed copy of the Adherence Letter for its files and does not share the executed copy with anyone else. Please do not send your original Adherence Letter(s) by mail to ISDA.
3. Can entities that are not ISDA members sign up to the Protocol?
Yes. The Protocol is open to any entity. ISDA members and non-ISDA members alike adhere to the Protocol in the same way.
4. What is a conformed copy?
A conformed copy of the Adherence Letter means that the name of the authorized signatory (for example, Patricia Smith) is typed rather than having Patricia Smith’s actual signature on the letter. ISDA only posts on its website the conformed copy of all Adherence Letters. A conformed copy of each Adherence Letter containing, in place of each signature, the printed or typewritten name of each signatory will be published by ISDA so that it may be viewed by all Protocol Participants.
5. Who is an authorized signatory?
An authorized signatory to the Adherence Letter is an individual who has the legal authority to bind the adhering institution.
6. Can I change the text of the Adherence Letter?
No. The Adherence Letter must be in the same format as the form of letter published in the Protocol and generated by the Protocol Management webpage.
7. Are there any costs to adhere to the Protocol?
Yes. Each party adhering to the Protocol must submit a one-time fee of U.S. $500 to ISDA at or before the submission of its Adherence Letter. Adhering Parties should review the documents to be amended to identify the entity that signed the documents, and the capacity in which such entity signed the documents, to determine which entity submits the Adherence Letter. For example, if a parent company/agent has signed the agreement on behalf of all entities within the group, then only the parent company/agent needs to adhere. However, if each group entity has its own agreement in place which it has itself executed as principal, then each such entity would need to adhere.
Each individual legal entity is considered a separate Adhering Party for this purpose and would need to pay the adherence fee, except that an Investment/Asset Manager/Agent that adheres on behalf of one or more underlying funds or principals for whom it has entered into a Protocol Covered Collateral Agreement, using a single Adherence Letter, would only pay a single adherence fee for that Adherence Letter.
8. Can I revoke my participation in the Protocol?
No. Once an Adherence Letter has been accepted by ISDA, an Adhering Party is bound by all amendments with other parties that have already adhered to the Protocol or, subject to the discussion below, that adhere before a designation of the Annual Revocation Date.
An Adhering Party may, at any time during the period from October 1 to October 31 of a calendar year, deliver to ISDA a notice specifying the Annual Revocation Date as its cut-off date in respect of amendments with future Adhering Parties. The effect of such a letter will be to withdraw adherence for future Adhering Parties as of December 31 in that calendar year. Although amendments already made will not be revoked, any subsequent adherence by new Adhering Parties after the designated Annual Revocation Date will not bind the party that has submitted a Revocation Notice.
You can, however, bilaterally agree to amend your Protocol Covered Collateral Agreement with your counterparty (the other Adhering Party) and any such subsequent amendments will supersede those made by the Protocol to the extent that they are inconsistent.
SPECIAL CONSIDERATIONS FOR INVESTMENT/ASSET MANAGERS
9. What if I am an investment or asset manager, and not all of my discretionary management agreements permit me to amend my client’s agreements?
If you are an investment or asset manager and act on behalf of multiple funds (each referred to here as a “client”), you may sign the Adherence Letter using one of the options below. If the elections in section 1 of the Adherence Letter vary between your clients, you should use the first method and adhere separately for each client individually or adhere for each group of clients with identical elections named/identified in the Adherence Letter. Alternatively, if you have the required authority, you may adhere with the same elections for all clients and then bilaterally agree any relevant variations with your counterparties.
If you have authority to adhere on behalf of all of your clients but do not wish to identify them on the Adherence Letter, you may do so by selecting “Investment/Asset Manager/or other agent on behalf of a fund/multiple funds/or other principal” from the dropdown under “Adherence Type” and naming the Investment/Asset Manager/Agent. Standard language “acting on behalf of the funds, accounts or other principals listed in the relevant Agreement (or other agreement which deems an Agreement to have been created) between it (as agent) and another Adhering Party” will be provided for you.
If you do not have authority from all your clients (or do have authority from all your clients and wish to identify them), you can adhere on behalf of those clients whose permission you have by selecting “Investment/Asset Manager/or other agent on behalf of some but not all funds/or other principal it represents” and naming the Investment/Asset Manager/Agent. Standard language “acting on behalf of the funds, accounts or other principals listed in the appendix to this Adherence Letter in relation to the relevant Agreement (or other agreement which deems an Agreement to have been created) between it (as agent) on behalf of such fund, account or other principal and another Adhering Party” will be provided for you. You must then list the fund name(s) by either naming each in the field provided (“Name of Fund”) or selecting “Add more than 10 funds” and downloading a list of these funds.
The appendix to your Adherence Letter can either name the clients, or identify them with a unique identifier which will be known and recognized by all other Adhering Parties with which the relevant clients have entered into transactions. The appendix to your letter will be posted on the ISDA website with your Adherence Letter listing the clients or, if you have more than ten clients, we will add a link to a document listing these clients.
If you are using the second method above, any Protocol Covered Agreements which you enter into on behalf of clients that are not listed in your Adherence Letter(s) will not be covered by the Protocol. If you wish to implement the changes contained in the Protocol in those Protocol Covered Agreements, then you and the relevant counterparty would need to enter into a bilateral agreement to amend those Protocol Covered Agreements to include those changes.
If (a) you do not have authority from any of your clients or (b) you have authority from some clients only but you are not able to disclose such clients whether by name or a unique identifier, you cannot adhere to the Protocol on behalf of any such clients. In this case, you will need to enter into a bilateral amendment agreement with each relevant counterparty listing the clients whose Protocol Covered Agreement(s) with that counterparty will be amended by incorporating the amendments made by the Protocol.
If you wish to adhere on behalf of clients, you must ensure that you have the authority to do so from all clients on whose behalf you enter into transactions covered by the Protocol.
If you add a client to an umbrella master agreement after the date you adhere to the Protocol on behalf of your clients (whether that client was an existing client on, or a client acquired after, the Implementation Date) that client will be added to that umbrella master agreement as amended by the Protocol, unless otherwise agreed.
WHAT DOES THE PROTOCOL DO?
10. What does the Protocol do?
The Protocol provides a mechanism for parties to amend the terms of their Protocol Covered Collateral Agreements (as defined in the Protocol and further explained in Question # 17 below) such that if the Interest Amount for an Interest Period is a negative number, the Pledgor, Transferor, Chargor, Obligor or Provider, as applicable, is obligated to transfer the absolute value of that negative Interest Amount to the Secured Party, Transferee, Obligee or Taker, as applicable. The Protocol makes other conforming and related changes to Protocol Covered Collateral Agreements to achieve this result.
As not all of the ISDA Collateral Agreements use the same terminology for the parties thereto, solely for purposes of these frequently asked questions, the “Pledgor” meansthe Pledgor, Transferor, Chargor, Obligor or Provider, as applicable, and the “Secured Party” meansthe Secured Party, Transferee, Obligee or Taker, as applicable.
11. What agreements does the Protocol cover?
The Protocol covers the following agreements: a 1994 ISDA Credit Support Annex (Security Interest - New York Law), a 1995 ISDA Credit Support Annex (Transfer - English Law), a 1995 ISDA Credit Support Deed (Security Interest - English Law), a 1995 ISDA Credit Support Annex (Security Interest - Japanese Law), a 2008 ISDA Credit Support Annex (Loan/Japanese Pledge) or a 2001 ISDA Margin Provisions (in any case, an “ISDA Collateral Agreement”).
However, where an ISDA Collateral Agreement is secured or guaranteed by a third party and consent or other action by such third party is required for amendments to be made to such ISDA Collateral Agreement, such an ISDA Collateral Agreement would not be a Protocol Covered Collateral Agreement unless such consent or other action has been obtained. An Adhering Party whose obligations under such ISDA Collateral Agreement are so secured or guaranteed undertakes to each other Adhering Party with which it has entered into such ISDA Collateral Agreement that it has procured such consent or other action by the third party and will provide proof thereof upon demand by such other Adhering Party. If the third party providing such security is also an Adhering Party, the required consent is deemed to have been given. Also, as described herein, including Question 17, the Protocol will only amend an ISDA Collateral Agreement if it is otherwise a Protocol Covered Agreement.
12. If parties do not adhere to the Protocol what are the parties’ rights and obligations if the Interest Amount for an Interest Period is negative?
Parties should consult their own advisors
13. The Protocol defines specific agreements as ISDA Collateral Agreements and provides that only these agreements can be Protocol Covered Collateral Agreements. Can I use the Protocol to amend a collateral agreement with another Adhering Party that is not one of those specified ISDA publications?
The Protocol contains detailed provisions that contain six sections in the Attachment that amend each of the six ISDA Collateral Agreements separately, using provisions that are unique to the terminology, section or paragraph numbers and architecture of the particular ISDA Collateral Agreement. Therefore, the Protocol should not be used for other collateral arrangements. Parties can bilaterally amend collateral agreements that are not ISDA Collateral Agreements to address negative interest amounts, but that is beyond the scope of the Protocol or these frequently asked questions.
14. I am party to an agreement which is secured or guaranteed by a third party and I want that agreement to be amended by this Protocol. If I adhere without first getting consent from the third party, will my agreement be a Protocol Covered Collateral Agreement and so amended by the Protocol?
The agreement will not be a Protocol Covered Collateral Agreement if:
(1) any consent, approval, agreement, authorization or other action of such third party is expressly required (under the terms of such agreement or such third party credit support document), to amend or otherwise modify such agreement;
(2) such agreement or such third party credit support document includes express terms to the effect that any amendment or modification of such agreement without the consent, approval, agreement, authorization or other action of any such third party would void, impair or otherwise adversely affect existing or future obligations owed under such third party credit support document; or
(3) such agreement, if amended or modified in accordance with this Protocol without the consent, approval, agreement, authorization or other action of any such third party would void, impair or otherwise adversely affect existing or future obligations owed under such third party credit support document, unless such consent, approval, agreement, authorization or other action (a) has been obtained or (b) is deemed to have been given, under paragraph 3(d) of this Protocol, by such third party adhering to this Protocol.
15. What is the deemed consent in paragraph 3(d) of the Protocol?
If an Adhering Party is also a Third Party in relation to a Third Party Credit Support Document, that Adhering Party is deemed to have consented to the amendments in the Protocol. This is meant to facilitate the Third Party Consent requirement in instances where such consent is required by a Third Party that is also an Adhering Party under the Protocol.
16. How do I know whether or not I have the necessary Third Party consents for the Protocol?
Paragraph 3(c) provides that if Third Party consent is required each Adhering Party whose obligations under such arrangements are secured, guaranteed or by such Third Party undertakes to each other Adhering Party with which it has entered into such arrangements that it has obtained the consent (including by way of the deemed consent in paragraph 3(d) below), approval, agreement, authorization or other action of such Third Party and that it will, upon demand, deliver evidence of such consent, approval, agreement, authorization or other action to such other Adhering Party. The undertaking provision does not automatically mean that an ISDA Collateral Agreement that requires the consent of a Third Party is a Protocol Covered Collateral Agreement since the relevant Adhering Party may breach that undertaking.
17. What is a Protocol Covered Collateral Agreement?
In summary, this is an ISDA Collateral Agreement between parties that effectively adhere to the Protocol pursuant to the terms of paragraph 2 of the Protocol, but excludes (i) an ISDA Collateral Agreement that includes any Protocol Excluded Modifying Provision (see Question 20 for the definition of Protocol Excluded Modifying Provision), (ii) an ISDA Collateral Agreement that the parties agree in writing to exclude from the Protocol or (iii) an ISDA Collateral Agreement where there is a Third Party Credit Support Document and certain consents or authorizations are required but not obtained (as further described above in these frequently asked questions).
18. If two parties adhere to the Protocol but at such time such parties have not entered into an ISDA Collateral Agreement with each other, what happens if those parties later enter into an ISDA Collateral Agreement? Would that ISDA Collateral Agreement be a Protocol Covered Collateral Agreement?
The amendments in the Protocol to a Protocol Covered Collateral Agreement will be effective on the Implementation Date which is the later of (i) the Acceptance Date (the date determined by ISDA as the later of the date when two Adhering Parties adhere); and (ii) the date of the Protocol Covered Collateral Agreement. Therefore, if two parties adhere to the Protocol and ISDA accepts their Adherence letters and on a later date those parties enter into an ISDA Collateral Agreement that is a Protocol Covered Collateral Agreement (e.g., it doesn’t have a Protocol Excluded Modifying Provision), then that agreement will be a Protocol Covered Collateral Agreement amended as of the date of that ISDA Collateral Agreement.
19. If two Adhering Parties effectively adhere to the Protocol, does the Protocol amend the ISDA Collateral Agreement between them?
An ISDA Collateral Agreement between two parties may or may not be a Protocol Covered Collateral Agreement. Only an ISDA Collateral Agreement which is a Protocol Covered Collateral Agreement, as defined in the Protocol, would be amended by the Protocol.
20. What is a Protocol Excluded Modifying Provision?
It is any of (i) a Custodial Interest Provision, (ii) an Interest Amount Alternative Provision, (iii) a Negative Interest Amount Provision, (iv) a No Interest Provision, (v) a Spread Provision or (vi) a Unilateral Posting Provision, each as defined in the Protocol and as further described below.
If an ISDA Collateral Agreement contains a Protocol Excluded Modifying Provision such ISDA Collateral Agreement will not be a Protocol Covered Collateral Agreement and, accordingly, will not be amended by the Protocol (subject to a possible partial exception for a Custodial Interest Provision). However, the parties can agree by a bilateral agreement to treat an ISDA Collateral Agreement that contains one or more Protocol Excluded Modifying Provisions as a Protocol Covered Collateral Agreement so that it is subject to the amendments in the Protocol.
A Custodial Interest Provision is a provision in a certain agreement(s) that provides that the party to the ISDA Collateral Agreement doesn’t pay interest on cash collateral held by a custodian or that the custodian pays interest on cash collateral or invests cash collateral held by it. The purpose of this provision is that if the parties hold some (e.g., the Independent Amounts) or all of the collateral at a third party custodian, the Pledgor would not pay the absolute value on a negative interest amount if the cash collateral is held by a custodian. It is important to note that if some (e.g., the Independent Amounts) but not all of the cash collateral is held at a third party custodian, the portion of the cash collateral held by the custodian would not be subject to the Protocol BUT the portion of the cash collateral which is not held by the custodian would be subject to the Protocol. For example, if the Secured Party holds cash collateral that relates to the Exposure but not the Independent Amounts, the Pledgor would pay the absolute value on a negative interest amount as the cash collateral is held by the Secured Party.
A Interest Amount Alternative Provision is any provision in the Paragraph, Annex or Supplement to an ISDA Collateral Agreement that disapplies the determination of the Interest Amount by reference to one or more Interest Rate(s) specified in the relevant ISDA Collateral Agreement, including if such disapplication is specified as an “Alternative to Interest Amount. If the parties have agreed to something other than the calculation of interest on cash collateral using one or more interest rate, (e.g., by reference to another financial indicator), this is deemed to be the subject of a negotiated provision for which the Protocol would not apply.
A Negative Interest Amount Provision is any provision in the Paragraph, Annex or Supplement to an ISDA Collateral Agreement, which provides for how the Interest Amount is to be calculated, including, deeming such amount to be equal to zero or a number greater than zero, if the Interest Amount for an Interest Period is a negative number. The Protocol is meant to amend ISDA Collateral Agreements where the parties did not negotiate provisions addressing negative interest amounts. Since a Negative Interest Amount Provision reflects an agreement between the parties as to how to treat a negative interest amount, its inclusion in an ISDA Collateral Agreement results in such ISDA Collateral Agreement being excluded from the amendments in the Protocol.
A No Interest Provision is any provision in the Paragraph, Annex or Supplement to an ISDA Collateral Agreement, which provides that the Interest Rate and/or the Interest Amount shall be zero and/or that the Interest Amount is none, not applicable or is otherwise not specified or left blank so that no Interest Amount will be payable thereunder. Since the Protocol addresses a negative Interest Amount, if an ISDA Collateral Agreement does not provide for the parties to pay any Interest Amount, the Protocol would not be relevant and accordingly, such ISDA Collateral Agreement being excluded from the amendments in the Protocol.
A Spread Provision is any provision in the Paragraph, Annex or Supplement to an ISDA Collateral Agreement, which provides that Interest Rate or the Interest Amount will be determined by reference to a variable rate or rates or other mechanism which rate(s) or other mechanism, as applicable, is to be increased or decreased by a specified number or mechanism for determining a number. An example would be that the Interest Rate used for an Interest Period would be the average of the EONIA rates for each day during the related Interest Period plus or minus a certain number of basis points. Since such a provision reflects an agreement between the parties to use something other than an interest rate alone, market participants decided that negative Interest Amounts should not subject to the Protocol in this instance without further discussion between the relevant parties. Accordingly, an ISDA Collateral Agreement with such a provision would be excluded from the amendments in the Protocol.
A Unilateral Posting Provision is any provision in the Paragraph, Annex or Supplement to an ISDA Collateral Agreement, which provides that only one Party will or can be, under all circumstances and at all times, the Secured Party, regardless of the Exposure. For example, such a provision might be that the Secured Party is specified to be Party A in all circumstances or that Party A’s Threshold under the ISDA Collateral Agreement will be infinity in all circumstances. If Party A were not defined as the sole party to be the Secured Party and Party A’s Threshold were infinity if it maintained a certain credit rating but Party A’s Threshold were a number if its certain credit rating declined, this would not be a Unilateral Posting Provision since Party A could be the Pledgor if its credit rating declined (regardless of whether this ever happened).
21. If an ISDA Collateral Agreement contains a Protocol Excluded Modifying Provision does this mean that market participants should not amend their ISDA Collateral Agreements as per the terms of this Protocol?
This is a decision for the parties to an ISDA Collateral Agreement that contains a Protocol Excluded Modifying Provision. If the ISDA Collateral Agreement between two Adhering Parties contains a Protocol Excluded Modifying Provision(s), such parties can enter into a written agreement that specifies that such ISDA Collateral Agreement shall be a Protocol Covered Collateral Agreement, notwithstanding such Protocol Excluded Modifying Provision(s). Please see the form of Opt-in Agreement published by ISDA. This Opt-in Agreement or another written agreement agreed by the parties may be used by Adhering Parties who wish to treat an ISDA Collateral Agreement between them as a Protocol Covered Collateral Agreement, notwithstanding that such ISDA Collateral Agreement contains a Protocol Excluded Modifying Provision.
22. What if I wish to adhere to the Protocol in order to amend some, but not all, Protocol Covered Collateral Agreements, with Adhering Parties with whom I have ISDA Collateral Agreements that would otherwise be Protocol Covered Collateral Agreements?
Any two Adhering Parties can enter into a written agreement that specifies that an ISDA Collateral Agreement shall not be a Protocol Covered Collateral Agreement (an Agreed Excluded ISDA Collateral Agreement), notwithstanding such parties’ adherence to the Protocol. This way Adhering Parties can amend certain ISDA Collateral Agreements with other Adhering Parties but specifically exclude certain ISDA Collateral Agreements from the amendments of the Protocol.
23. Why is the Attachment separated into six sections. Couldn’t all ISDA Collateral Agreements be amended using the same provisions?
Each form of ISDA Collateral Agreement differs in respect of terminology, section or paragraph numbers and other aspects. They may also differ in legal approach (e.g., title transfer vs. security interest). Therefore, the amendments to each ISDA Collateral Agreement are provided separately for each relevant ISDA Collateral Agreement.
24. If the Interest Amount for an Interest Period is negative, when is the Pledgor obligated to pay that AV Negative Interest Amount (absolute value of a negative Interest Amount) to the Secured Party?
The Protocol provides that the same timing specified in the Protocol Covered Collateral Agreement for Interest Amount be used for an AV Negative Interest Amount. For example, if Adhering Parties specify in the Protocol Covered Collateral Agreement between them that the Interest Amount be paid on the second Local Business Day after the end of the relevant Interest Period, then if the Interest Amount for an Interest Period is negative, the Pledgor will pay the related AV Negative Interest Amount to the Secured Party on the second Local Business Day after the end of such Interest Period.
25. What happens if the Pledgor fails to pay an AV Negative Interest Amount (absolute value of a negative Interest Amount) to the Secured Party when due?
The Protocol effectively provides (although referencing different provisions and terminology for each ISDA Collateral Agreement) that if the AV Negative Interest Amount is not paid by the Pledgor when due, then, if there is sufficient cash collateral (in the same currency) held by/transferred to the Secured Party, then that cash collateral will be reduced by the AV Negative Interest Amount (or portion thereof to the extent of cash collateral available) and this satisfies the Pledgor’s obligation (or portion thereof) to pay the AV Negative Interest Amount to the Secured Party. The Pledgor is not relieved of its obligation to pay the Secured Party any untransferred AV Negative Interest Amount and failure to fulfill such obligation could result in an Event of Default (subject to any applicable grace periods).
26. Are there amendments in the Protocol other than those described in these frequently asked questions?
Adding the definition of an AV Negative Interest Amount and the obligation of the Pledgor to pay this amount to the Secured Party resulted in other changes, not all of which are described here. For example, if the definition of Valuation Agent in a Protocol Covered Collateral Agreement has not been varied from what is specified in the pre-printed form of the relevant ISDA Collateral Agreement, the Protocol modifies that definition since it doesn’t contemplate that the Pledgor may be the party that owes an Interest Amount (an AV Negative Interest Amount).
27. If parties adhere to the Protocol might the party which is obligated to pay Interest Amounts vary?
Yes. The party which is obligated to pay the Interest Amount for an Interest Period shall be determined separately based on whether that Interest Amount is positive or negative for that Interest Period. Since the Interest Amount for one or more Interest Periods may be positive and the Interest Amount for one or more Interest Periods may be negative, the party that is obligated to pay that amount may not be the same party for each Interest Period.
28. Why does the Protocol contain an amendment for one or more ISDA Collateral Agreements but not others?
Although most of the amendments are substantially the same for each ISDA Collateral Agreement, some amendments reflect a provision relating to Interest Amounts that was not in all of the ISDA Collateral Agreements. For example, Paragraph 9(a) of the 1995 English Law CSA references Default Interest on an Interest Amount and therefore, the section of the Attachment for amendments to the 1995 English Law CSA amend this to include Default Interest on the AV Negative Interest Amount. The Protocol does not amend ISDA Collateral Agreements to add provisions in one that is not in another to make them the same where they differ in respect of provisions that relate to Interest Amounts.