Events of Default - GMRA Provision

GMRA Anatomy™ →Go uptown 10(a) If any of the following events (each an “Event of Default”) occurs in relation to either party (the “Defaulting Party”, the other party being the “Non-Defaulting Party”) whether acting as Seller or Buyer - 10(a)(i) Buyer fails to pay the Purchase Price upon the applicable Purchase Date or Seller fails to pay the Repurchase Price upon the applicable Repurchase Date, and the Defaulting Party serves a Default Notice on the Defaulting Party; or 10(a)(ii) if the parties have specified in Annex I hereto that this sub paragraph shall apply, Seller fails to deliver Purchased Securities on the Purchase Date or Buyer fails to deliver Equivalent Securities on the Repurchase Date, and the Defaulting Party serves a Default Notice on the Defaulting Party; or 10(a)(iii) Seller or Buyer fails to pay when due any sum payable under sub paragraph (g) or (h) below, and the Defaulting Party serves a Default Notice on the Defaulting Party; or 10(a)(iv) Seller or Buyer fails to comply with paragraph 4 and the Defaulting Party serves a Default Notice on the Defaulting Party; or 10(a)(v) Seller or Buyer fails to comply with paragraph 5 and the Defaulting Party serves a Default Notice on the Defaulting Party; or 10(a)(vi) an Act of Insolvency occurs with respect to Seller or Buyer and (except in the case of an Act of Insolvency which is the presentation of a petition for winding up or any analogous proceeding or the appointment of a liquidator or analogous officer of the Defaulting Party in which case no such notice shall be required) the Defaulting Party serves a Default Notice on the Defaulting Party; or 10(a)(vii) any representations made by Seller or Buyer are incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, and the Defaulting Party serves a Default Notice on the Defaulting Party; or 10(a)(viii) Seller or Buyer admits to the other that it is unable to, or intends not to, perform any of its obligations hereunder and/or in respect of any Transaction and the Defaulting Party serves a Default Notice on the Defaulting Party; or 10(a)(ix) Seller or Buyer is suspended or expelled from membership of or participation in any securities exchange or association or other self-regulating organisation, or suspended from dealing in securities by any government agency, or any of the assets of either Seller or Buyer or the assets of investors held by, or to the order of, Seller or Buyer are transferred or ordered to be transferred to a trustee by a regulatory authority pursuant to any securities regulating legislation and the Defaulting Party serves a Default Notice on the Defaulting Party; or 10(a)(x) Seller or Buyer fails to perform any other of its obligations hereunder and does not remedy such failure within 30 days after notice is given by the Non-Defaulting Party requiring it to do so, and the Defaulting Party serves a Default Notice on the Defaulting Party; then sub paragraphs (b) to (f) below shall apply. (view template) Resources: 2010 GMRA: Full wikitext · Nutshell wikitext Navigation 2000 GMRA Table of Contents · 1 · 2 · 3 · 4 · 5 · 6 · 7 · 8 · 9 · 10 · 11 · 12 · 13 · 14 · 15 · 16 · 17 · 18 · 19 · 20 · 21 · Schedule · Equities Annex: EA 1 · EA 2 · EA 3 · EA 4 · EA 5 · Buy/Sellback Annex · BSA 1 · BSA 2 · BSA 3 · BSA 4 · BNA 5 Index: Click ᐅ to expand: GMRA Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

The dog that didn't bark in the nighttime

Most interesting is what is not in there: There is no:

• Cross Default
• Default under Specified Transaction equivalent
• Credit Support Default equivalent
• Merger without Assumption equivalent
• Illegality equivalent
• Tax Event equivalent
• Credit Event Upon Merger equivalent
• Tax Event Upon Merger equivalent

Why not?: Unlike an ISDA Master Agreement, generally, Global Master Repurchase Agreements under a Global Master Repurchase Agreement are very short dated or even callable on notice. If your counterparty suffes any kind of credit deterioration, your option is to terminate all your repo trades under the ordinary right to do so. If they redeliver—great. If they don’t, you have them bang to rights on a failure to pay or deliver. Simples.

It's a similar story under the 2010 GMSLA by the way.

Should failure to deliver be an Event of Default under a repo?

The 2000 Global Master Repurchase Agreement provides that the parties may agree that any failure to deliver securities can be declared an 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.

This is a significant difference from its predecessor, the 1995 Global Master Repurchase Agreement, in which a failure to deliver securities to initiate a repo was not an Event of Default or a breach of agreement, and a failure to redeliver securities at the end of a repo allows the lender to buy in securities to cover the fail.

Note under both versions, a failure to deliver collateral is an Event of Default.

Delivery failures are a feature of the market

Delivery failures are frequent in the repo marketand may occur for a number of reasons:

• Operational failure, such as a mismatch of instructions or a late booking
• A third party may fail to deliver to the party expecting to deliver under the repo
• Lack of availability of the securities to deliver, say, due to the bonds going “special”
• A lender may lose the expected supply – for example a custodian may expect to lend but the owner of the securities sells before the repo settles
• Exceptionally, due to lack of funds at the deliverer

Making them Events of Default would put participants in a perpetual state of default.

The purpose of 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.

A contrast must be drawn between delivery failures of the underlying security and delivery failures concerning collateral. A party has a choice whether to deliver securities as collateral. The party can select which collateral to deliver, and so can control the process better. If a party takes that choice and fails to deliver, the expected recipient is entitled to consider that the failure may represent a credit concern. In the market generally, many participants use cash collateral to avoid the risks involved with using securities as collateral.

Why does the GMRA 2000 take a different approach to the GMRA 1995?

When the GMRA 2000 was being redrafted, a number of US banks requested that a delivery failure be an event of default. This was in part due to their experience of the repo market for US Treasuries, where delivery failures are rare. This was reflected by the US repo agreement published by The Bond Market Association, which provides that a delivery failure is an Event of Default. Many European banks were opposed to making a failure to deliver an Event of Default, due to the higher failure rates in the European markets. As a compromise, TBMA and the International Securities Market Association, the joint publishers of the GMRA 2000, provided in the GMRA 2000 a choice for the parties to make a delivery failure an Event of Default.

What is the protection for an expected recipient if a delivery failure occurs?

Deliveries in repo typically occur delivery versus payment, with the cash only moving if the security settlement details match and settle. This means that if a delivery of securities fails, the expected recipient of the securities will not deliver the cash and: (i) If the failure was by the lender at the start of the repo, no repo would be entered into, and neither party has any exposure on the failed repo. Only if the deliverer has agreed “guaranteed delivery” would a borrower consider that there was a breach of contract for a failure to deliver. The parties may seek to start the repo by attempting delivery over the next few days, or if this proves impractical the repo is never entered into. (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?

Some scholars—okay: one - and no it isn't the Jolly Contrarian although he does get the point—have intimated that the 1995 Global Master Repurchase Agreement got this right and the 2000 Global Master Repurchase Agreement got it wrong. For the following reasons:

• Initiation: A delivery failure by a Lender when initiating a repo has no consequence – it is neither an Event of Default, nor a breach of contract. Section 10(g) allows the Buyer to terminate the repo at any time while the delivery failure is continuing or to work with the Seller to initiate the repo on a later date.
• Scheduled maturity: A redelivery failure by a Borrower at term is not an Event of Default. Rather, the Lender may buy in the securities using section 10(h).
• 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.