Acceleration - GMSLA Provision
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GMSLA Anatomy™
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Crosscheck: 11.2 in a Nutshell™
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Comparisons
Redlines
2010 ⇒ 2018: Redline of the 2010 GMSLA vs. the 2018 Pledge GMSLA: comparison (and in reverse)
Discussion
The 2010 GMSLA has three trailing paragraphs about how to play Letters of Credit. Seeing as Letters of Credit are not a viable form of Collateral in an agent lending arrangement, they are not replicated in the 2018 Pledge GMSLA.
Other changes to Paragraph 11.2 reflect the pledged nature of the collateral: As the Lender retains title and the custodian control of the Collateral at all times, a failure to return it is not an Event of Default.
Basics
Close-out method
Closing out a 2010 GMSLA is done following designation by a Non-Defaulting Party of an Event of Default under Para 11.2 as follows.
A “Loan” is the transfer of securities from Lender to Borrower against a transfer of collateral by Borrower to Lender, with a simultaneous agreement to transfer back equivalent securities against equivalent collateral in the future.
Collateral is marked-to-market daily, almost always on the “aggregated” basis across all outstanding Loans as is contemplated by Para 5.4. Here, Para 5.6 contemplates daily “net” transfers of Collateral (as a matter of settlement convenience), and Para5.7 provides that where the Parties do not specifically allocate specific Collateral deliveries to specific Loans, any Collateral transferred on any day will be attributed first to the earliest outstanding Loan (up to the point where that Loan is fully collateralised) and then to the next earliest outstanding Loan, and so on.
Therefore the close-out the value of the Collateral held at any time against each Loan can be clearly determined.
Loan Termination
Under Para 8.2 and 8.2, either party may terminate any Loan at any time by calling for, or giving notice of, the redelivery of Equivalent Securities by title transfer.
Delivery obligations are reciprocal, such that neither Party must deliver unless it is satisfied the other party will also deliver (Para 8.6). An innocent party may suspend its delivery obligation until satisfied that its counterparty will deliver.
If a Party fails to deliver Equivalent Securities (or, for the 2010 GMSLA, Equivalent Collateral), the other party can choose to continue the Loan or terminate it immediately as if an Event of Default had occurred for that Loan only (but it would not actually be an Event of Default under the GMSLA so let’s call this a “quasi-Event of Default”) and it was the only Loan outstanding.
This is important because it establishes a “transaction termination” methodology generating a market value for each transaction analogous to Section 6(e) of the ISDA Master Agreement.
Event of Default Close-out Methodology
Upon determining a “quasi-Event of Default” for a single Loan the Non-Defaulting Party will determine the Default Market Value of the Equivalent Securities and Equivalent Collateral under that Loan, the relevant amounts will be offset to arrive at a balance payable by one party to the other in respect of that Loan on the next business day.
This procedure would be followed in respect of all outstanding Loans, to arrive at a series of “termination amounts”, one payable in respect of each Loan.
Para 11.8 allows a Non-Defaulting Party to set such individual termination amounts off against each other. This is the provision that might be challenged in a non-net insolvency.
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