The German Master Agreement for Financial Derivatives Transactions (Rahmenvertrag für Finanztermingeschäfte – the “DRV”) is published by the German Banking Association (Bankenverband) and can be considered the German law equivalent of the ISDA Master Agreement. Like the ISDA Master Agreement, standardised Annexes are used to document specific provisions, for example special early termination provisions, as well as to document the posting of collateral, which is done via the Collateral Addendum (Besicherungsanhang – the “BSA”), including the Variation Margin and Initial Margin BSA.
The BSA requires the parties to agree on a reference rate for the calculation of interest on posted collateral. Currently, the most common reference rate by far is the Euro Overnight Index Average, or EONIA. Furthermore, EONIA is used for settlement under the German Master Agreement for Securities Lending and the German Master Agreement for Repo Transactions, which also are published by the Bankenverband. EONIA is also frequently referenced by parties to these master agreements in additional bespoke provisions.
The Bankenverband therefore has prepared and arranged for the publication of a template supplemental agreement for the transition from EONIA to the Euro Short-Term Rate, or €STR (Ergänzungsvereinbarung für den Übergang von EONIA auf €STR – the “Template Agreement”). While appearing complex at first glance, it follows a modular approach and can be tailored to the parties’ needs and their specific agreements by electing among specified options. Options that are not elected by ticking the relevant box simply do not apply. In addition, section 4 of the Template Agreement provides for a fallback provision with regard to €STR as the replacement reference rate, so that the requirement for fallback language is complied with.
The Template Agreement is designed to cover the DRV (in Part A of the Template Agreement), the German Master Agreement for Securities Lending (in Part B) and the German Master Agreement for Repo Transactions (in Part C). For each of those, the parties may elect, inter alia, whether a modified €STR shall apply or if they want to use daily €STR plus a one-time compensation payment. For all variants provided for in the Template Agreement, bespoke provisions and alternative arrangements can be negotiated. Options other than the election of the reference rate itself include provisions on the timing of the switch and the exclusion of specific template provisions or agreements between the parties.
The most complex and detailed provisions are those regarding the DRV (in Part A of the Template Agreement) and this article therefore will focus on those. Part B and Part C of the Template Agreement are structured analogously, but require fewer sub-options. Part A, dealing with the DRV is split into three sections, each of which provides the options set out above.
The first section provides for EONIA-related amendments to the BSA. As explained above, this Annex regularly references EONIA. Most market participants using the DRV will have to make at least an amendment to the BSA to adopt a fallback to a new reference rate.
The second section allows parties to make amendments to some or all trade confirmations or interest swap confirmations. In the case of an ISDA style confirmation that includes an ISDA bridge and incorporates the relevant ISDA Definitions, a specific annex may be selected that permits the different options to adopt the benchmark-related provisions in the ISDA Definitions (including their supplements), to take precedent over the provisions of the Template Agreement.
The third and final section focuses on EONIA-related provisions in the master agreement itself, in particular any bespoke provisions agreed between the parties, because the main body of the master agreement does not reference EONIA.
Mayer Brown has observed, as part of its benchmark transition projects for our clients, increased activity in adopting the Template Agreement over the past few months. While the elections made within the Template Agreement differ slightly among market participants, the use of the Template Agreement has been established and accepted as market standard. In our experience, €STR plus the payment of a compensation amount, if applicable, is the favoured reference rate. Providing options for those confirmations that implement a bridge to ISDA Definitions makes the Template Agreement a good solution, even for counterparties or trades with a more international focus, and enables more users of a DRV to utilise the Template Agreement.
And what about LIBOR transition? The industry working group organized by the Bankenverband is close to finalising transition documentation. Our expectation is that this documentation will be aligned as far as possible to the recently published ISDA Fallbacks Protocol and the ISDA Supplement No. 70 to the ISDA Master Agreement. Expect additional blog coverage when this LIBOR transition documentation is published.