Delivery - GMSLA Provision
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GMSLA Anatomy™
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Comparisons
Redlines
2010 ⇒ 2018: Redline of the 2010 GMSLA vs. the 2018 Pledge GMSLA: comparison (and in reverse)
Discussion
There is no representation as to the transfer of title of Collateral under the 2018 Pledge GMSLA its title not being transferred under that agreement for obvious reasons. Additionally, the 2010 GMSLA deals with non-simultaneous deliveries of Collateral in Para 4.3, and also manufacture of income on the Collateral — unnecessary in the 2018 Pledge GMSLA, since the pledgor beneficially owns income on the Collateral in any case.
Basics
Requirements to effect delivery
The beating heart of the legal basis of the 2010 GMSLA is Clause 4.2.
Even though there’s all this chat about Loans, in fact these transactions are exchanges having all the economic characteristics of loans — the Lender retains all economic risk to the asset being “lent”, and the Borrower takes none of it — but all of not the legal characteristics of loans. In legal terms, they are more like sales.
Legally speaking, how Securities and (for the regular 2010 GMSLA at any rate) Collateral move back and forth between parties to a stock loan is outright title transfer. Of course, the Borrower could return the exact asset that it has borrowed, but it is not obliged to and, in most cases, it won’t be able to: the very point of a stock loan is to “short sell” into the market the thing you have borrowed, but taken no market exposure to. As soon as you have done this it has gone for all money. You can’t get it back.
What you can do is buy an identical one (the legal term is a “fungible” asset — an identical quantity of the same series, issuer and ISIN — and in stock lending lingo this is called an “equivalent” asset.
As the article on that subject attests, as a term of legal art “equivalent” is a lot more specific than it is in ordinary parlance. It means something fungible; that is, identical in all economic respects.
Note: as regards Collateral, this is not the same, for the 2018 Pledge GMSLA.
Delivery to be simultaneous
A delightfully convoluted, and quite unnecessary, clause which states the common law position as to waiver. Of course, a party may decide not to enforce its strict rights, at its discretion, in light of the circumstances. But here you have, anyway, a contractual right to do what you transparently could have done anyway.
Delivery of income
Just what these customary and appropriate endorsements or assignments might be, and why the manufacturer has to grant them, even where the actual securities issuer didn’t, we can only speculate.
Perhaps — speculation here — it is because the Borrower is most likely to have immediately sold the Loaned Securities into the market — the major purpose of a 2010 GMSLA being short selling, after all — and so won’t get any Income under the shares, much less any “customary endorsements” relating to it, whatever in this day and age that might mean.
The same goes — with less certainty, perhaps (the Lender isn’t acquiring the Collateral with the express purpose of selling it, although it does acquire it by title transfer and absolutely is entitled to sell it) for the Lender of Collateral received by title transfer.
So it would be interesting to contrast this with the equivalent provision in the 2018 Pledge GMSLA, wouldn’t it?
Let’s therefore go and do that. Back in a minute.
Back! Sure enough, paragraph 4.3 of the 2018 Pledge GMSLA doesn’t mention Collateral, since it is never title transferred to the Lender in the first place.
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