Events of Default - GMRA Provision

GMRA Anatomy™ →Go uptown In a Nutshell™ Clause 10: 10. Events of Default 10(a) If any of the following “Events of Default” occurs to either party (the Defaulting Party), and the other (the “Non-Defaulting Party”) serves a Default Notice then paragraphs 10(b) to 10(f) below will apply: 10(a)(i) as Buyer it fails to pay the Purchase Price upon the Purchase Date or as Seller it fails to pay the Repurchase Price upon the Repurchase Date; or 10(a)(ii) if this sub paragraph applies, as Seller fails to deliver Purchased Securities on the Purchase Date or as Buyer it fails to deliver Equivalent Securities on the Repurchase Date; or 10(a)(iii) it fails to pay any sum when due under 10(g) or 10(h); or 10(a)(iv) it fails to comply with paragraph 4; or 10(a)(v) it fails to comply with paragraph 5; or 10(a)(vi) it suffers an Act of Insolvency (though upon the presentation of a winding up petition or the appointment of a liquidator no Default Notice will be required); or 10(a)(vii) any representations it made are materially incorrect when made; or 10(a)(viii) it admits it is cannot to, or will not, perform any of its obligations; or 10(a)(ix) it is suspended or expelled from any securities exchange or self-regulating organisation, or from dealing in securities, or its assets are transferred to a trustee under securities regulating legislation; or 10(a)(x) it 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. 10(b) The Repurchase Date for each Transaction will occur immediately, all Cash Margin will be repayable with accrued interest immediately and all Equivalent Margin Securities will be immediately deliverable (so that, where this sub paragraph applies, the parties’ respective delivery and payment obligations must be made in accordance with the provisions of sub paragraph 10(c) below). 10(c) Determinations: The non-Defaulting Party will determine: (i) Values: the Default Market Values of Equivalent Securities and Equivalent Margin Securities, and the Cash Margin and accrued interest to be transferred and the Repurchase Prices to be paid by each party for all Transactions as at the Repurchase Date; and (ii) Net amount due: as at the Repurchase Date, what each party owes the other using those Default Market Values and converting amounts where necessary into the Base Currency at the prevailing Spot Rate and only the balance of the account (having applied any necessary set off) will be payable on the next Business Day. Template:Nutshell GMRA 10(d) Template:Nutshell GMRA 10(e) 10(f) The Defaulting Party must pay the non-Defaulting Party its reasonable professional expenses incurred in connection with an Event of Default plus interest calculated at LIBOR or, if the expense relates to a particular Transaction, the higher of LIBOR and the Pricing Rate for that Transaction. Template:Nutshell GMRA 10(g) 10(h) If Buyer fails to deliver Equivalent Securities on the Repurchase Date Seller may (i) Refund: require Buyer immediately to refund the Repurchase Price, if already paid; (ii) Post margin: require Buyer to collateralise any outstanding Transaction Exposure with Cash Margin; (iii) Mini close-out: by written notice immediately terminate only the affected Transaction under paragraph 10(c), treating “the Repurchase Date” as the date of the notice, and disregarding references to transfer of Cash Margin and delivery of Equivalent Margin Securities. Template:Nutshell GMRA 10(i) Template:Nutshell GMRA 10(j) Template:Nutshell GMRA 10(k) Template:Nutshell GMRA 10(l) view template Global Master Repurchase Agreement full text of Clause 10: 10. Events of Default 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. 10(b) The Repurchase Date for each Transaction hereunder shall be deemed immediately to occur and, subject to the following provisions, all Cash Margin (including interest accrued) shall be immediately repayable and Equivalent Margin Securities shall be immediately deliverable (and so that, where this sub paragraph applies, performance of the respective obligations of the parties with respect to the delivery of Securities, the payment of the Repurchase Prices for any Equivalent Securities and the repayment of any Cash Margin shall be effected only in accordance with the provisions of sub paragraph 10(c) below). 10(c) (i) The Default Market Values of the Equivalent Securities and any Equivalent Margin Securities to be transferred, the amount of any Cash Margin (including the amount of interest accrued) to be transferred and the Repurchase Prices to be paid by each party shall be established by the non-Defaulting Party for all Transactions as at the Repurchase Date; and (ii) on the basis of the sums so established, an account shall be taken (as at the Repurchase Date) of what is due from each party to the other under this Agreement (on the basis that each party's claim against the other in respect of the transfer to it of Equivalent Securities or Equivalent Margin Securities under this Agreement equals the Default Market Value therefor) and the sums due from one party shall be set off against the sums due from the other and only the balance of the account shall be payable (by the party having the claim valued at the lower amount pursuant to the foregoing) and such balance shall be due and payable on the next following Business Day. For the purposes of this calculation, all sums not denominated in the Base Currency shall be converted into the Base Currency on the relevant date at the Spot Rate prevailing at the relevant time. 10(d) For the purposes of this Agreement, the “Default Market Value” of any Equivalent Securities or Equivalent Margin Securities shall be determined in accordance with sub paragraph {{gmraprov|(e) below, and for this purpose (i) the “Appropriate Market” means, in relation to Securities of any description, the market which is the most Appropriate Market for Securities of that description, as determined by the non Defaulting Party; (ii) the “Default Valuation Time” means, in relation to an Event of Default, the close of business in the Appropriate Market on the fifth dealing day after the day on which that Event of Default occurs or, where that Event of Default is the occurrence of an Act of Insolvency in respect of which under paragraph 10(a) no notice is required from the non-Defaulting Party in order for such event to constitute an Event of Default, the close of business on the fifth dealing day after the day on which the non-Defaulting Party first became aware of the occurrence of such Event of Default; (iii) “Deliverable Securities” means Equivalent Securities or Equivalent Margin Securities to be delivered by the Defaulting Party; (iv) “Net Value” means at any time, in relation to any Deliverable Securities or Receivable Securities, the amount which, in the reasonable opinion of the non Defaulting Party, represents their fair market value, having regard to such pricing sources and methods (which may include, without limitation, available prices for Securities with similar maturities, terms and credit characteristics as the relevant Equivalent Securities or Equivalent Margin Securities) as the non-Defaulting Party considers appropriate, less, in the case of Receivable Securities, or plus, on the case of Deliverable Securities, all Transaction Costs which would be incurred in connection with the purchase or sale of such Securities; (v) “Receivable Securities” means Equivalent Securities or Equivalent Margin Securities to be delivered to the Defaulting Party; and (vi) “Transaction Costs” in relation to any Transaction contemplated in paragraph 10(d) or 10(e) means the reasonable costs, commission, fees and expenses (including any mark up or mark down) that would be incurred in connection with the purchase of Deliverable Securities or sale of Receivable Securities, calculated on the assumption that the aggregate thereof is the least that could reasonably be expected to be paid in order to carry out the Transaction; 10(e) (i) If between the occurrence of the relevant Event of Default and the Default Valuation Time the non-Defaulting Party gives to the Defaulting Party a written notice (a “Default Valuation Notice”) which (A) states that, since the occurrence of the relevant Event of Default, the non-Defaulting Party has sold, in the case of Receivable Securities, or purchased, in the case of Deliverable Securities, Securities which form part of the same issue and are of an identical type and description as those Equivalent Securities or Equivalent Margin Securities, and that the non-Defaulting Party elects to treat as the Default Market Value (aa) in the case of Receivable Securities, the net proceeds of such sale after deducting all reasonable costs, fees and expenses incurred in connection therewith (provided that, where the Securities sold are not identical in amount to the Equivalent Securities or Equivalent Margin Securities, the non-Defaulting Party may either (x) elect to treat such net proceeds of sale divided by the amount of Securities sold and multiplied by the amount of the Equivalent Securities or Equivalent Margin Securities as the Default Market Value or (y) elect to treat such net proceeds of sale of the Equivalent Securities or Equivalent Margin Securities actually sold as the Default Market Value of that proportion of the Equivalent Securities or Equivalent Margin Securities, and, in the case of (y), the Default Market Value of the balance of the Equivalent Securities or Equivalent Margin Securities shall be determined separately in accordance with the provisions of this paragraph 10(e)}} and accordingly may be the subject of a separate notice (or notices) under this paragraph 10(e)(i)}}; or (bb) in the case of Deliverable Securities, the aggregate cost of such purchase, including all reasonable costs, fees and expenses incurred in connection therewith (provided that, where the Securities purchased are not identical in amount to the Equivalent Securities or Equivalent Margin Securities, the non-Defaulting Party may either (x) elect to treat such aggregate cost divided by the amount of Securities sold and multiplied by the amount of the Equivalent Securities or Equivalent Margin Securities as the Default Market Value or (y) elect to treat the aggregate cost of purchasing the Equivalent Securities or Equivalent Margin Securities actually purchased as the Default Market Value of that proportion of the Equivalent Securities or Equivalent Margin Securities, and, in the case of (y), the Default Market Value of the balance of the Equivalent Securities or Equivalent Margin Securities shall be determined separately in accordance with the provisions of this paragraph 10(e)}} and accordingly may be the subject of a separate notice (or notices) under this paragraph 10(e)(i)}} (B) states - that the non-Defaulting Party has received, in the case of Deliverable Securities, offer quotations or, in the case of ReceivableSecurities, bid quotations in respect of Securities of the relevant description from two or more market makers or regular dealers in the Appropriate Market in a commercially reasonable size (as determined by the non Defaulting Party) and specifies – (aa) the price or prices quoted by each of them for, in the case of Deliverable Securities, the sale by the relevant market marker or dealer of such Securities or, in the case of Receivable Securities, the purchase by the relevant market maker or dealer of such Securities; (bb) the Transaction Costs which would be incurred in connection with such a Transaction; and (cc) that the non-Defaulting Party elects to treat the price so quoted (or, where more than one price is so quoted, the arithmetic mean of the prices so quoted), after deducting, in the case of Receivable Securities, or adding, in the case of Deliverable Securities, such Transaction Costs, as the Default Market Value of the relevant Equivalent Securities or Equivalent Margin Securities; (C) states (aa) that either (x) acting in good faith, the non-Defaulting Party has endeavoured but been unable to sell or purchase Securities in accordance with sub paragraph 10(e)(i)(A) above or to obtain quotations in accordance with sub paragraph 10(e)(i)(B) above (or both) or (y) the non-Defaulting Party has determined that it would not be commercially reasonable to obtain such quotations, or that it would ' not be commercially reasonable to use any quotations which it has obtained under sub paragraph {{gmraprov|10(e)(i)(B) above; and (bb) that the non-Defaulting Party has determined the Net Value of the relevant Equivalent Securities or Equivalent Margin Securities (which shall be specified) and that the non-Defaulting Party elects to treat such Net Value as the Default Market Value of the relevant Equivalent Securities or Equivalent Margin Securities, then the Default Market Value of the relevant Equivalent Securities or Equivalent Margin Securities shall be an amount equal to the Default Market Value specified in accordance with (A), (B)(cc) or, as the case may be, (C)(bb) above. (ii) If by the Default Valuation Time the non-Defaulting Party has not given a Default Valuation Notice, the Default Market Value of the relevant Equivalent Securities or Equivalent Margin Securities shall be an amount equal to their Net Value at the Default Valuation Time; provided that, if at the Default Valuation Time the non-Defaulting Party reasonably determines that, owing to circumstances affecting the market in the Equivalent Securities or Equivalent Margin Securities in question, it is not possible for the non-Defaulting Party to determine a Net Value of such Equivalent Securities or Equivalent Margin Securities which is commercially reasonable, the Default Market Value of such Equivalent Securities or Equivalent Margin Securities shall be an amount equal to their Net Value as determined by the non-Defaulting Party as soon as reasonably practicable after the Default Valuation Time. 10(f) The Defaulting Party shall be liable to the non-Defaulting Party for the amount of all reasonable legal and other professional expenses incurred by the non-Defaulting Party in connection with or as a consequence of an Event of Default, together with interest thereon at LIBOR or, in the case of an expense attributable to a particular Transaction, the Pricing Rate for the relevant Transaction if that Pricing Rate is greater than LIBOR. 10(g) If Seller fails to deliver Purchased Securities to Buyer on the applicable Purchase Date Buyer may (i) if it has paid the Purchase Price to Seller, require Seller immediately to repay the sum so paid; (ii) if Buyer has a Transaction Exposure to Seller in respect of the relevant Transaction, require Seller from time to time to pay Cash Margin at least equal to such Transaction Exposure; (iii) at any time while such failure continues, terminate the Transaction by giving written notice to Seller. On such termination the obligations of Seller and Buyer with respect to delivery of Purchased Securities and Equivalent Securities shall terminate and Seller shall pay to Buyer an amount equal to the excess of the Repurchase Price at the date of Termination over the Purchase Price. 10(h) If Buyer fails to deliver Equivalent Securities to Seller on the applicable Repurchase Date Seller may (i) if it has paid the Repurchase Price to Buyer, require Buyer immediately to repay the sum so paid; (ii) if Seller has a Transaction Exposure to Buyer in respect of the relevant Transaction, require Buyer from time to time to pay Cash Margin at least equal to such Transaction Exposure; (iii) at any time while such failure continues, by written notice to Buyer declare that that Transaction (but only that Transaction) shall be terminated immediately in accordance with sub paragraph 10(c) above (disregarding for this purpose references in that sub paragraph to transfer of Cash Margin and delivery of Equivalent Margin Securities and as if references to the Repurchase Date were to the date on which notice was given under this sub¬paragraph). 10(i) The provisions of this Agreement constitute a complete statement of the remedies available to each party in respect of any Event of Default. 10(j) Subject to paragraph 10(k), neither party may claim any sum by way of consequential loss or damage in the event of a failure by the other party to perform any of its obligations under this Agreement. 10(k) (i) Subject to sub paragraph {{gmraprov|(ii) below, if as a result of a Transaction terminating before its agreed Repurchase Date under paragraphs 10(b), 10(g)(iii) or10(h)(iii), the non Defaulting Party, in the case of paragraph 10(b), Buyer, in the case of paragraph 10(g)(iii), or Seller, in the case of paragraph 10(h)(iii), (in each case the “first party”) incurs any loss or expense in entering into replacement Transactions, the other party shall be required to pay to the first party the amount determined by the first party in good faith to be equal to the loss or expense incurred in connection with such replacement Transactions (including all fees, costs and other expenses) less the amount of any profit or gain made by that party in connection with such replacement Transactions; provided that if that calculation results in a negative number, an amount equal to that number shall be payable by the first party to the other party. (ii) If the first party reasonably decides, instead of entering into such replacement Transactions, to replace or unwind any hedging Transactions which the first party entered into in connection with the Transaction so terminating, or to enter into any replacement hedging Transactions, the other party shall be required to pay to the first party the amount determined by the first party in good faith to be equal to the loss or expense incurred in connection with entering into such replacement or unwinding (including all fees, costs and other expenses) less the amount of any profit or gain made by that party in connection with such replacement or unwinding; provided that if that calculation results in a negative number, an amount equal to that number shall be payable by the first party to the other party. 10(l) Each party shall immediately notify the other if an Event of Default, or an event which, upon the serving of a Default Notice, would be an Event of Default, occurs in relation to it. 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. 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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.