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Events of Default - GMRA Provision: Difference between revisions
Events of Default - GMRA Provision (view source)
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It's a similar story under the {{gmsla}} by the way. | It's a similar story under the {{gmsla}} by the way. | ||
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Should failure to deliver be an Event of Default under a repo? | ===Should failure to deliver be an Event of Default under a repo?=== | ||
The {{2000gmra}} provides that the parties may agree that any failure to deliver securities can be declared an {{gmraprov|Event of Default}}. If a delivery failure occurs, the day after the delivery was expected the intended recipient can terminate and cover all open positions, meaning that the party expected to deliver the securities must pay the [[bid-offer spread]] on all open positions. | The {{2000gmra}} provides that the parties may agree that any failure to deliver securities can be declared an {{gmraprov|Event of Default}}. If a delivery failure occurs, the day after the delivery was expected the intended recipient can terminate and cover all open positions, meaning that the party expected to deliver the securities must pay the [[bid-offer spread]] on all open positions. | ||
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Making them Events of Default would put participants in a perpetual state of default. | Making them Events of Default would put participants in a perpetual state of default. | ||
====The purpose of Events of Default==== | ====The purpose of {{gmraprov|Events of Default}}==== | ||
The Events of Default are protections so a non-defaulting party can immediately terminate all outstanding transactions prior to or on the commencement of insolvency proceedings and so end its exposure. They are not intended for non-insolvency situations where the agreement may have been breached but the creditworthiness of a counterparty is not in question. In those circumstances, the parties can rely on the normal contractual remedies for breach of contract. | The Events of Default are protections so a non-defaulting party can immediately terminate all outstanding transactions prior to or on the commencement of insolvency proceedings and so end its exposure. They are not intended for non-insolvency situations where the agreement may have been breached but the creditworthiness of a counterparty is not in question. In those circumstances, the parties can rely on the normal contractual remedies for breach of contract. | ||
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(ii) If the failure was by the borrower at the end of the repo, the lender would not return the cash, and each party has the same exposure that it did the previous day (other than market movements on the securities). | (ii) If the failure was by the borrower at the end of the repo, the lender would not return the cash, and each party has the same exposure that it did the previous day (other than market movements on the securities). | ||
=== | ===A sensible approach?=== | ||
*'''Initiation''': A delivery failure by a {{gmraprov|Lender}} when initiating a repo has no consequence – it is neither an Event of Default, nor a breach of contract. Section {{gmraprov|10(g)}} allows the {{gmraprov|Buyer}} to terminate the repo at any time while the delivery failure is continuing ''or'' to work with the {{gmraprov|Seller}} to initiate the repo on a later date. | |||
*'''Scheduled maturity''': A redelivery failure by a borrower at term is not an {{gmraprov|Event of Default}}. Rather, the {{gmraprov|Lender}} may [[buy in]] the securities using section {{gmraprov|10(h)}}. | |||
*{{gmraprov|'''Collateral}} delivery failure''': A failure by either party to deliver collateral when required is an Event of Default. | |||
This correctly addresses the credit concerns that a party may justifiably have under a repo relationship, while also reflecting the intentions of the transacting parties when entering into repos. | This correctly addresses the credit concerns that a party may justifiably have under a repo relationship, while also reflecting the intentions of the transacting parties when entering into repos. | ||