The pledge GMSLA is a version of the GMSLA developed in late 2017 early 2018 where instead of transferring collateral by title transfer, you pledge it. Unlike the US standard stock lending agreement, the MSLA, you don’t rehypothecate the collateral transferred to you, because that would defeat the purpose of pledging it in the first place[1]
What’s it for?
When you borrow securities under a stock lending agreement, you tend to over-collateralise—perhaps you give 105 in value of collateral for 100 of securities borrowed. This leaves you in the unusual position of being, net, a creditor to your lender: your lender has an obligation to title transfer the collateral back to you. If it is bust it cannot, and even after you apply close out netting, you're in the hole to the tune of 5.
With me?
Now, if your lender is of dubious repute, from a credit perspective, you might have to hold capital against that credit exposure. Okay, it's only 5, but when you're a bank you do this in big size and it can add up. If, somehow, you can isolate the lender's credit exposure it is worth doing.
In most cases, you can't: most lenders will want to use your collateral in their own operations (to defray the lending costs of lending the securities to you, right?). If they do this then the collateral is gone, and you have no choice but to be a creditor.
Agent lenders are one class of lender who isn't so bothered about reusing the collateral, because it didn’t lend to you in the first place, but lent its client’s securities to you, and these clients aren't so bothered about reuse.
Likely uses for the Pledge GMSLA
A GMSLA would be useful and interesting in the following circumstances:
- Where the Borrower is a financial institution that would incur a capital/balance sheet charge under Basel rules for the return of excess collateral it has provided by title transfer
- Where the Lender does not wish to reuse the collateral, being happy for it to be "dead-ended" in a collateral management system.
In other words this is likely to be restricted to agent lenders and quasi-agent lenders (fiduciaries, espievies, repackaging vehicles).
Close-out
Close out works quite differently.
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11.1 If an Event of Default happens to either Party:
11.2 Acceleration: The Parties’ obligations will be accelerated as at the Event of Default (the Termination Date) as follows:
- (a) The Non-Defaulting Party will determine the Default Market Value of all amounts (and securities) due by each Party under paragraph 11.4 as at the Termination Date.
- (b) Using those values, [the Non-Defaulting Party will determine and notify][2]what each Party owes as at the Termination Date, converting into the Base Currency at the Spot Rate where necessary, and will set those sums off against each other. The Party owing the greater amount must pay the difference on the Business Day after notification.
- (c) and (d) [(d) being the vice-versa] If that balance is payable by a Party who had delivered a Letter of Credit to the other Party the other Party must draw on the Letter of Credit to settle the amount due and then deliver it for cancellation.
11.3 The Default Market Value of a Letter of Credit will be zero. For any Equivalent Securities or any other Equivalent Non-Cash Collateral it will be determined under paragraphs 11.4 to 11.6 below, where:
- Appropriate Market is the most appropriate market for any securities determined by the Non-Defaulting Party;
- Default Valuation Time means the Close of Business in the Appropriate Market on the fifth dealing day after the Event of Default (or where Automatic Early Termination applies, the day the Non Defaulting Party became aware of it);
- Deliverable Securities means Equivalent Securities or Equivalent Non-Cash Collateral to be delivered by the Defaulting Party;
- Net Value of any securities means the Non-Defaulting Party’s reasonable opinion of their fair Market Value less (where Lender is the Defaulting Party) or plus (where Borrower is the Defaulting Party), all reasonable costs of any transaction needed under paragraph 11.4 or 11.5 (Transaction Costs); and
- Receivable Securities means Equivalent Securities or Equivalent Non-Cash Collateral to be delivered to the Defaulting Party.
11.4 Transactions and quotes: If, between the Termination Date and the Default Valuation Time:
- (a) Actual sale or purchase: the Non-Defaulting Party has sold securities equivalent to those it owes the Defaulting Party or bought in securities equivalent to those the Defaulting Party owes it, the Non-Defaulting Party may treat the Default Market Value as the net proceeds that sale or purchase. Where it sells or Buys In a different amount of Equivalent Securities, Non-Defaulting Party may in good faith pro rate those values to determine the Default Market Value.
- (b) Market quotes: the Non-Defaulting Party has received offer quotations for securities it is owed by the Defaulting Party; or bid quotations for securities it owes the Defaulting Party from at least two regular participants in the Appropriate Market in what it determines to be a commercially reasonable size, it may treat as the Default Market Value the arithmetic mean of the quoted prices as reasonably adjusted to account for for accrued but unpaid interest and Transaction Costs.
11.5 Where there’s no commercially reasonable value: If, having tried in good faith, the Non-Defaulting Party has not been able to sell nor purchase Securities under paragraph 11.4(a) or obtain quotations under paragraph 11.4(b), or it considers the quotations it did obtain are not commercially reasonable, it may determine the Net Value of the Equivalent Securities or Collateral and treat that as their Default Market Value.
11.6 If the Non-Defaulting Party has not determined a Default Market Value under 11.4, it will equal the Net Value of the securities in question at the Default Valuation Time. However, if the Non-Defaulting Party determines it is not practicable to calculate a commercially reasonable Net Value at that time, the Default Market Value will be the Net Value it determines as soon as reasonably practicable after the Default Valuation Time.
11.7 Costs and expenses following an Event of Default: The Defaulting Party must pay the Non-Defaulting Party’s reasonable professional expenses in connection with the Event of Default plus interest at the rate agreed by the Parties or failing that, the overnight LIBOR rate as at 11.00 a.m., London time. Interest will accrue and compound daily.
11.8 Set-off: Any amount payable to one Party by the other under 11.2(b) may, at the Non Defaulting Party’s option, be set off against any amount payable the other way under any other agreement between the Parties. The Non Defaulting Party may estimate any unascertained obligation but must account for any difference once finally ascertained. This paragraph does not create a security interest, or prejudice any other rights either party may have.
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Template:Nutshell GMSLA 2017 11.1
Template:Nutshell GMSLA 2017 11.2
Template:Nutshell GMSLA 2017 11.3
Template:Nutshell GMSLA 2017 11.4
Template:Nutshell GMSLA 2017 11.5
Template:Nutshell GMSLA 2017 11.6
Template:Nutshell GMSLA 2017 11.7
Template:Nutshell GMSLA 2017 11.8
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References
- ↑ An objection that is equally true of a US style pledge, but doesn't seem to have stopped the market insisting on one anyway.
- ↑ Well, we assume it will be the NDP: the 2010 GMSLA rather brilliantly puts it into an unattributed passive, as if God is going to to it, or it will magically happen by itself. Go, ISLA’s crack drafting squad™.