Template:M summ GMSLA Income

Kinda wide, no?

Not so much.

• “Interest, dividends...”: Even this is not as wide as it looks at first glance. This does not suggest there might be interest payments on equities, but rather reflects that the {{{{{1}}}|Securities}} travelling back and forth under a stock loan might be debt securities: “Interest” refers to {{{{{1}}}|income}} payments on debt securities that you might use as {{{{{1}}}|Collateral}}; “dividends” as income payments of equity {{{{{1}}}|securities}}. To paraphrase: “interest payments on bonds, dividends on shares, and any similar distributions”.
• “with respect to” is not the greatest choice of words: it is a mealy-mouthed prepositional phrase when one begs for a firm preposition. What it means — what it can only mean is “under”. In the context of securities lending this must mean payments made under the terms of the instruments themselves. That is, payments made by the issuer, and to shareholders qua shareholders as a pure function of their ownership of the {{{{{1}}}|securities}}. Such payments are restricted to dividends and dividend-like payments: rewards to the shareholder for the prudent management and healthy profitability of the company in general.
• “any {{{{{1}}}|Securities}}”: It is implicit also that the distributions contemplated by paragraph {{{{{1}}}|6.2}} should be available pari passu to all shareholders of the same class that is subject to the stock loan. This we can derive from the expression “…with respect to any {{{{{1}}}|Securities}}” . The distribution must be with respect to any {{{{{1}}}|Securities}}, not just some of them. The contract cannot function otherwise, for it would be impossible to determine which distribution would be required to be manufactured under the stock loan. The {{{{{1}}}|Securities}} actually delivered to the {{{{{1}}}|Borrower}} are no more determinative than any others, for, the basic premise of a stock loan is to facilitate a short sale: it should be in no-one’s contemplation that the {{{{{1}}}|Borrower}} would hold any borrowed {{{{{1}}}|Securities}} in inventory.
• “…other {{{{{1}}}|distribution}}s of any kind whatsoever”: Under general rules of contractual interpretation under English law, wherever general words follow specific words, the general words should be read to include only objects similar in nature to those specific words. So, read “other distributions of any kind whatsoever” as being subject to preceding words “dividends, interest” to mean, effectively, “any dividend-like (for shares) or interest-like (for bonds) distributions of any kind whatsoever”. This interpretation is supported by the text of the {{{{{1}}}|UK Tax Addendum}}, which relates exclusively to dividend withholding, refers to any payment made under Clause {{{{{1}}}|6.2}}, not just dividend-like ones.

Principal repayments

Does Income include principal repayments? Economically, it must: if your {{{{{1}}}|Loaned Securities}} (or {{{{{1}}}|Collateral}}) are senior unsecured debt securities, they will at some point redeem themselves. At that point:

• {{{{{1}}}|Loaned Securities}}:where {{{{{1}}}|Loaned Securities}} redeem, the {{{{{1}}}|Borrower}} must manufacture the principal redemption payment to {{{{{1}}}|Lender}}, the value of the {{{{{1}}}|Loaned Securities}} goes to zero, {{{{{1}}}|Lender}} returns {{{{{1}}}|Collateral}} to {{{{{1}}}|Borrower}} and Loan is effectively cancelled.
• {{{{{1}}}|Collateral}}: the {{{{{1}}}|Lender}} is paid its redemption value in full and the debt security disappears. This would be quite the windfall for the {{{{{1}}}|Lender}} if it could just keep the redemption proceeds and didn’t have to manufacture them back to the {{{{{1}}}|Borrower}}, since the value of the {{{{{1}}}|Collateral}}, as {{{{{1}}}|Collateral}}, has just dropped to zero.

Income versus Corporate actions

So the question is how this dovetails into the manufactured income provisions where the Income in question is in some way contingent on a corporate action, vote, or shareholding status.

For if you lent the security to me — title transfer — and I sold it short (as one does under a stock lending arrangement) and then a corporate action arose which entitled each shareholder who makes a certain election to receive a certain distribution, must I manufacture that distribution to you, even if I didn't make that election or, for that matter, even hold the share to be able to make that election?