Template:M summ Pledge GMSLA 11: Difference between revisions
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So, how does default and close-out differ between title transfer and pledge versions of the GMSLA, then? Not as much as you might think. The mechanism for determining who owes what is broadly the same but, since the {{pgmslaprov|Borrower}} hasn’t parted company with the {{pgmslaprov|Collateral}} it has pledged — ''yet'' — and byt the theory of the game the pledged Collateral is sitting | [[11 - Pledge GMSLA Provision|So]], how does default and close-out differ between title transfer and pledge versions of the GMSLA, then? Not as much as you might think. The mechanism for determining who owes what is broadly the same but, since the {{pgmslaprov|Borrower}} hasn’t parted company with the {{pgmslaprov|Collateral}} it has pledged — ''yet'' — and byt the theory of the game the pledged Collateral is sitting quietly in a segregated account with a [[Triparty agent|triparty]] [[custodian]], ready to be returned or seized and liquidated, as the circumstances require, all of the {{pgmslaprov|Securities}} valuation mechanisms focus on the {{pgmslaprov|Loaned Securities}} leg of the transaction, since the Borrower won’t, if it has a scooby doo what it is doing, be holding the Loaned Securities at any time during the Loan. It will have [[Short selling|sold them short]]. | ||
===It only really comes in to play if the Borrower has defaulted=== | ===It only really comes in to play if the Borrower has defaulted=== | ||
If the ''{{pgmslaprov|Lender}}'' has defaulted, you generally wouldn’t call an {{pgmslaprov|Event of Default}} under a {{pgmsla}}. There is no need: the {{pgmslaprov|Borrower}} just returns the {{pgmslaprov|Loaned Securities}}, security is released from its pledged {{pgmslaprov|Collateral}} and we all carry on our sedated ways. I mean ''sedate'' ways. Sure, if you’re a masochist you ''could'' invoke the default process of Paragraph {{pgmslaprov|11}}, but why would you? The {{pgmslaprov|Loan}} is terminable at will; if you ''do'' want out, just terminate it and give {{pgmslaprov|Equivalent}} {{pgmslaprov|Securities}} back, and the security is released from your pledged {{pgmslaprov|Collateral}}. Far easier. | If the ''{{pgmslaprov|Lender}}'' has defaulted, you generally wouldn’t call an {{pgmslaprov|Event of Default}} under a {{pgmsla}}. There is no need: the {{pgmslaprov|Borrower}} just returns the {{pgmslaprov|Loaned Securities}}, security is released from its pledged {{pgmslaprov|Collateral}} and we all carry on our sedated ways. I mean ''sedate'' ways. Sure, if you’re a masochist you ''could'' invoke the default process of Paragraph {{pgmslaprov|11}}, but why would you? The {{pgmslaprov|Loan}} is terminable at will; if you ''do'' want out, just terminate it and give {{pgmslaprov|Equivalent}} {{pgmslaprov|Securities}} back, and the security is released from your pledged {{pgmslaprov|Collateral}}. Far easier. | ||
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Unlike under the {{gmsla}} the netting mechanic doesn’t ''do'' much. There isn’t much to net. The {{pgmslaprov|Lender}} has a large claim against the {{pgmslaprov|Borrower}}, for the {{pgmslaprov|Default Market Value}}, and it satisfies this by enforcing its security under a separate {{pgmslaprov|Security Deed}}. To reiterate what should be obvious, under a pledged collateral arrangement the credit mitigation is by way of [[Security interest|security]], not [[Close-out netting|netting]]. | Unlike under the {{gmsla}} the netting mechanic doesn’t ''do'' much. There isn’t much to net. The {{pgmslaprov|Lender}} has a large claim against the {{pgmslaprov|Borrower}}, for the {{pgmslaprov|Default Market Value}}, and it satisfies this by enforcing its security under a separate {{pgmslaprov|Security Deed}}. To reiterate what should be obvious, under a pledged collateral arrangement the credit mitigation is by way of [[Security interest|security]], not [[Close-out netting|netting]]. | ||
===So what about the {{pgmslaprov|Collateral}} then?=== | |||
Your {{pgmsla}} leaves you will a closed-out big fat portfolio of receivables owing from the {{pgmslaprov|Borrower}} to the {{pgmslaprov|Lender}}, and a big fat pool of {{pgmslaprov|Collateral}} sitting with the [[triparty agent]], in the {{pgmslaprov|Borrower}}’s name but pledged in favour of the Lender. So the heavy lifting in terms of taking the {{pgmslaprov|Collateral}} is done by the {{pgmslaprov|Security Deed}}. While, intellectually, this cleaves the normal arrangements under a title transfer {{gmsla}} into two parts, they now work the same way. While it might take a while to work out the Default Market Value, the Lender can exercise on the {{pgmslaprov|Collateral}} immediately there is an {{pgmslaprov|Event of Default}} (though note the Borrower should want some kind of grace period built into failure to pay events reacquiring a period of notice before Collateral can be exercised. It is easier to build that into the definition of non-payment-style {{pgmslaprov|Events of Default}} in Paragraph {{pgmslaprov|10}}.<ref>Hint hint — we’ve got some [[Events of Default - Pledge GMSLA Provision|suggested language]] there!</ref> | |||
Latest revision as of 14:03, 24 June 2020
So, how does default and close-out differ between title transfer and pledge versions of the GMSLA, then? Not as much as you might think. The mechanism for determining who owes what is broadly the same but, since the Borrower hasn’t parted company with the Collateral it has pledged — yet — and byt the theory of the game the pledged Collateral is sitting quietly in a segregated account with a triparty custodian, ready to be returned or seized and liquidated, as the circumstances require, all of the Securities valuation mechanisms focus on the Loaned Securities leg of the transaction, since the Borrower won’t, if it has a scooby doo what it is doing, be holding the Loaned Securities at any time during the Loan. It will have sold them short.
It only really comes in to play if the Borrower has defaulted
If the Lender has defaulted, you generally wouldn’t call an Event of Default under a 2018 Pledge GMSLA. There is no need: the Borrower just returns the Loaned Securities, security is released from its pledged Collateral and we all carry on our sedated ways. I mean sedate ways. Sure, if you’re a masochist you could invoke the default process of Paragraph 11, but why would you? The Loan is terminable at will; if you do want out, just terminate it and give Equivalent Securities back, and the security is released from your pledged Collateral. Far easier.
If the Borrower has defaulted, de l’autre main, there is the matter of getting Equivalent Securities back which (a) by our theory, the Borrower hasn’t got, and would therefore have to go out to the market and get, and (b) the Borrower couldn’t, without the permission of its insolvency administrator, give back to you even if it did have one. Therefore the netting and close out provisions are quite handy.
How the closeout works
Anyway, the process on any Event of Default — but let’s presume for the sake of simplicity it is one committed by the Borrower — is this:
- All Loans are all accelerated, and the Borrower is liable to return Equivalent Securities as at the time of default. It won’t be able to of course, for the reasons given above.
- So the Lender works out the Default Market Value of the Equivalent Securities. It does this selling Equivalent Securities, getting and averaging quotes for the sale[1] of Equivalent Securities, or, if it can’t, or the quotes seem out of whack, it can come up with its own opinion of their value, factor in any notional Transaction Costs, and use that. Expect an aggrieved Lender to confabulate some difficulty in getting good quotes and to go for using its own opinion more often than you’d necessarily expect. The Borrower’s bust, so what does he care, right?
- The Lender can also confabulate I mean reasonably calculate its legal costs of closing out, and add those to the Default Market Value
- Lastly, it can set off against amounts it owes to the Borrower but, unlike under the title transfer 2010 GMSLA, there aren’t likely to be many, seeing as the Collateral leg is not a title transfer collateral arrangement and is still technically owned by the Borrower. But not for long.
Unlike under the 2010 GMSLA the netting mechanic doesn’t do much. There isn’t much to net. The Lender has a large claim against the Borrower, for the Default Market Value, and it satisfies this by enforcing its security under a separate Security Deed. To reiterate what should be obvious, under a pledged collateral arrangement the credit mitigation is by way of security, not netting.
So what about the Collateral then?
Your 2018 Pledge GMSLA leaves you will a closed-out big fat portfolio of receivables owing from the Borrower to the Lender, and a big fat pool of Collateral sitting with the triparty agent, in the Borrower’s name but pledged in favour of the Lender. So the heavy lifting in terms of taking the Collateral is done by the Security Deed. While, intellectually, this cleaves the normal arrangements under a title transfer 2010 GMSLA into two parts, they now work the same way. While it might take a while to work out the Default Market Value, the Lender can exercise on the Collateral immediately there is an Event of Default (though note the Borrower should want some kind of grace period built into failure to pay events reacquiring a period of notice before Collateral can be exercised. It is easier to build that into the definition of non-payment-style Events of Default in Paragraph 10.[2]