Set-off - GMSLA Provision
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2010 Global Master Securities Lending Agreement
Clause 11.8 in a Nutshell™ Use at your own risk, campers!
Full text of Clause 11.8
Related agreements and comparisons
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Content and comparisons
Here is a comparison between this clause and Section 6(f) in the ISDA Master Agreement. It seems pretty clear that ICMA’s crack drafting squad™ — how would you put it — would cite ISDA’s crack drafting squad™ as one of their “influences”?
In this case, we feel a somewhat bad influence, seeing as the ISDA provision has a bit of a bish in it.
Summary
The ISDA Master Agreement famously got its set-off clause wrong, forgetting that the Early Termination Amount might not be the only amount owing the same way, to be set off against amounts owed elsewhere in the transacting universe the other way. since ISLA’s crack drafting squad™ was cribbing from its homework, we see a similar problem here, although the stock loan market is a bit more blasé about it, in that is seems not to bother with the fix most people apply to the ISDA.
General discussion
The difference between close-out netting and set-off
- Close-out netting, in the learned words of Allen & Overy, is a contractual process comprising early termination, valuation and determination of a net balance. This last step may involve a contractual set-off but, saucily, the considered view of ISDA’s counsel for England and Wales is that the net effect of the agreement is to arrive a a net balance without the good offices of contractual set-off[1] According to the UNIDROIT[2], close-out netting resembles the classical insolvency set-off, but is purportedly wider: general set-off requires mutual debts that are already due, while close-out netting envisages the netting of obligations that are not yet due.[3] Thus, set-off is narrower that close-out netting.
- Set-off is a legal principle permitting (or requiring) a debtor to discharge its debt by setting off a cross-claim owed to the debtor against the debt. There are various legal bases for set-off, including, under English law, equitable set-off, set-off in judicial proceedings under the Civil Procedure Rules, statutory set-off under the Insolvency Rules 1986 upon a winding upon administration and contractual set-off.
If a master agreement allows set-off, can I net down across master agreements?
So if one of my master agreements has a broad set-off provision (as well as its close-out netting provision), and my netting opinion says the set off (of amounts due under other master agreements) would also be enforceable, can I then treat all my exposures against that counterparty, across all master agreements, as nettable down to a single obligation?
Sorry to be the bearer of the buzzkill, but no. You need a “written, bilateral netting agreement that creates a single legal obligation, covering all included bilateral master agreements and transactions” (a “cross product netting arrangement”), itself supported by a netting opinion. See Rule CRE53.61-9 of the Basel framework[4] This might be, for example, the joint-association-published Cross-Product Master Agreement - and most prime brokerage agreements do this too.
But even if you have got a master netting agreement, also check whether your own firm’s operational systems are capable of recognising cross-product netting arrangements as a practical matter. From personal experience, the JC suspects many aren’t. If the computers can’t do it, your CPMA and your netting opinions are as good as a chocolate starfish.
See also
References
- ↑ Sigh - except where there are unpaid amounts payable under Section 2(a)(i). You knew there’d be some kind of qualification though, didn’t you.
- ↑ “Principles on the operation of close-out netting provisions”
- ↑ The ISDA Master Agreement achieves this by accelerating them, mind.
- ↑ https://www.bis.org/basel_framework/chapter/CRE/53.htm