Template:M summ Pledge GMSLA 11

So, how does default and close-out differ between title transfer and pledge versions of the GMSLA, then? Not as much as you might think. The mechanism for determining who owes what is broadly the same but, since the Borrower hasn’t parted company with the Collateral it has pledged — yet — and byt the theory of the game the pledged Collateral is sitting quietlky in a segregated account with a triparty custodian, ready to be returned or seized and liquidated, as the circumstances require, all of the Securities valuation mechanisms focus on the Loaned Securities leg of the transaction, since the Borrower won’t, if it has a scooby doo what it is doing, be holding the Loaned Securities at any time during the Loan. It will have sold them short.

If the Lender has defaulted, you generally wouldn’t call an Event of Default. There is no need: the Borrower just returns the Loaned Securities, security is released from its pledged Collateral and we all carry on our sedated ways. I mean sedate ways. Sure, if you’re a masochist you could invoke the default process of Paragraph 11, but why would you? The Loan is terminable at will; if you do want out, just terminate it and give Equivalent Securities back. Far easier.

If the Borrower has defaulted, de l’autre main, there is the matter of getting an Equivalent Security back which (a) by our theory, the Borrower hasn’t got, and would therefore have to go out to the market and get, and (b) the Borrower couldn’t, without the permission of its insolvency administrator, give back to you even if it did have one. Therefore the netting and close out provisions are quite handy.

Anyway, the process on any Event of Default — but let’s presume for the sake of simplicity it is one committed by the Borrower — is this:

• All Loans are all accelerated, and the Borrower is liable to return Equivalent Securities as at the time of default. It won’t be able to of course, for the reasons given above.
• So the Lender works out the Default Market Value of the Equivalent Securities. It does this selling Equivalent Securities, getting and averaging quotes for the sale of Equivalent Securities, or, if it can’t, or the quotes seem out of whack, it can come up with its own opinion of their value, factor in any notional Transaction Costs, and use that.