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GMSLA Anatomy™
In a Nutshell™ Clause 5.5:
5.5 Required Collateral Value (Single Loans): Where 5.5 applies, the Posted Collateral on any Loan must bear the same proportion to the Market Value of the Loaned Securities as it bore at the beginning of the Loan. Therefore:
- (a) Required Collateral Value: the Market Value of the Posted Collateral (including income etc.) must always equal the Required Collateral Value;
- (b) Returns: whenever the Market Value of the Posted Collateral for any Loan exceeds the Required Collateral Value Lender must return enough Equivalent Collateral to Borrower to eliminate the excess; and
- (c) Further deliveries: whenever the Market Value of the Posted Collateral falls below the Required Collateral Value Borrower must provide further Collateral to Lender on demand to eliminate the deficiency.
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2010 GMSLA full text of Clause 5.5:
5.5 Marking to Market of Collateral during the currency of a Loan on a Loan by Loan basis
If paragraph Schedule 1.3 of the Schedule indicates this paragraph 5.5 shall apply in lieu of paragraph 5.4, the Posted Collateral in respect of any Loan shall bear from day to day and at any time the same proportion to the Market Value of Securities equivalent to the Loaned Securities as the Posted Collateral bore at the commencement of such Loan. Accordingly:
- (a) the Market Value of the Posted Collateral to be delivered or deposited while the Loan continues shall be equal to the Required Collateral Value;
- (b) if at any time on any Business Day the Market Value of the Posted Collateral in respect of any Loan together with:
- (i) all amounts due and payable by the Lender in respect of that Loan but which are unpaid; and
- (ii) if agreed between the parties and if the Income Record Date has occurred in respect of any Non-Cash Collateral, the amount or Market Value of Income payable in respect of such Non-Cash Collateral
- exceeds
- the Required Collateral Value in respect of such Loan together with:
- (i) all amounts due and payable by the Borrower in respect of that Loan; and
- (ii) if agreed between the parties and if the Income Record Date has occurred in respect of Securities equivalent to any Loaned Securities, the amount or Market Value of Income payable in respect of such Equivalent Securities, Lender shall (on demand) repay and/or deliver, as the case may be, to Borrower such Equivalent Collateral as will eliminate the excess; and
- (c) if at any time on any Business Day the Market Value of the Posted Collateral together with:
- (i) all amounts due any payable by the Lender in respect of that Loan; and
- (ii) if agreed between the parties and if the Income Record Date has occurred in respect of any Non-Cash Collateral, the amount or Market Value of Income payable in respect of such Non-Cash Collateral
- falls below
- the Required Collateral Value together with:
- (i) all amounts due and payable by the Borrower in respect of that Loan; and
- (ii) if agreed between the parties and if the Income Record Date has occurred in respect of Securities equivalent to any Loaned Securities, the amount or Market Value of Income payable in respect of such Equivalent Securities, Borrower shall (on demand) provide such further Collateral to Lender as will eliminate the deficiency.
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It will be a rum GMSLA indeed in which this provision applies. It will generally fall upon deaf ears, by dint of paragraph 5.4 (aggregate margining), which will apply instead unless you specifically override it, and it is hard to conceive of situations in which you would do that.
Anyway, since you asked, it goes like this:
5.5 in a Nutshell™ (GMSLA edition)
5.5 Required Collateral Value (Single Loans): Where 5.5 applies, the Posted Collateral on any Loan must bear the same proportion to the Market Value of the Loaned Securities as it bore at the beginning of the Loan. Therefore:
- (a) Required Collateral Value: the Market Value of the Posted Collateral (including income etc.) must always equal the Required Collateral Value;
- (b) Returns: whenever the Market Value of the Posted Collateral for any Loan exceeds the Required Collateral Value Lender must return enough Equivalent Collateral to Borrower to eliminate the excess; and
- (c) Further deliveries: whenever the Market Value of the Posted Collateral falls below the Required Collateral Value Borrower must provide further Collateral to Lender on demand to eliminate the deficiency.
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See also 5.4, Collateralisation on aggregate, which will generally (for which read “inevitably”) be the preferred alternative for most financial institutions.