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2000 Global Master Repurchase Agreement
A Jolly Contrarian owner’s manual™
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Paragraph 4 in a Nutshell™
Use at your own risk, campers!
4. Margin Maintenance
4(a) Margin Transfers: Whenever a party has a Net Exposure to the other party it may by notice require the other party to make a Margin Transfer in an aggregate amount equal to that Net Exposure.
4(b) Net Exposure notices: A Net Exposure notice may be given orally or in writing. [1]
4(c) Net Exposure calculation: A party’s Net Exposure to the other party is the excess of:
- (A) the total of its Transaction Exposures plus any Income Payments the other party owes minus the Net Margin provided to it by the other party, over
- (B) the total of the other party's Transaction Exposures plus any Income Payments it owes the other party minus any Net Margin it provided to the other party;
converting amounts into the Base Currency at the prevailing Spot Rate where necessary.
4(d) Margin composition: The party transferring Margin may decide what to deliver except that, where it holds Net Margin, the party requesting a Margin Transfer may require it to return equivalent Net Margin first.
4(e) Base Currency: Cash Margin must be in the Base Currency unless otherwise agreed.
4(f) Indebtedness: A payment of Cash Margin creates indebtedness from the recipient to the payer. It will bear interest as specified in Annex I.
4(g) Margin Transfers: Where either party has to make a Margin Transfer, it must transfer Cash Margin or Margin Securities within the period specified in Annex I or, if not specified, within the customary settlement period for the Margin in question.
4(h) Alternatives to Margin Transfer: The parties may agree to disregard sub-paragraphs 4(a) to 4(g) and instead provide margin separately for any Transaction. If so:
- (i) that Transaction won’t count when calculatingNet Exposures;
- (ii) the parties will agree separate margin terms for that Transaction; and
- (iii) sub-paragraphs 4(a) to 4(g) won’t apply to that Transaction.
4(i) Alternatives to Margin Transfers: Instead of requiring Margin Transfers, the parties may agree to manage their Net Exposures by repricing Transactions under paragraph 4(j), adjusting them under paragraph 4(k), or a bit of both.
4(j) Repricing: Where the parties agree to reprice a Transaction (the “Original Transaction”):
- (i) the Repurchase Date under the Original Transaction will be adjusted to the repricing date (the “Repricing Date”);
- (ii) the parties will strike a new Transaction (the “Repriced Transaction”) as set out below;
- (iii) the Purchased Securities will be equivalent to those under the Original Transaction;
- (iv) the Purchase Date will be the Repricing Date;
- (v) the Purchase Price will be the amount which, when multiplied by the Margin Ratio for the Original Transaction, would equal the Market Value of such Securities on the Repricing Date;
- (vi) all other terms of the Repriced Transaction will be identical to the Original Transaction;
- (vii) the parties’ respective delivery and obligations on commencement of the Repriced Transaction will be set off against their respective obligations on termination of the Original Transaction and a net cash sum shall be paid by one party to the other within the period set out in paragraph 4(g).
4(k) Adjusting Transactions: The parties may agree to adjust a Transaction (the “Original Transaction”) as of any date (the “Adjustment Date”) by terminating the “Original Transaction” and entering into a “Replacement Transaction” as follows:
- (i) the Original Transaction will terminate on the Adjustment Date as agreed between the parties in advance;
- (ii) the parties will also agree in advance the Purchased Securities, being Securities having an aggregate Market Value as at the Adjustment Date substantially equal to the Repurchase Price under the Original Transaction multiplied by its Margin Ratio;
- (iii) the Purchase Date for the Replacement Transaction will be the Adjustment Date;
- (iv) the parties will also agree in advance the other terms of the Replacement Transaction; and
- (v) the parties will settle their respective payment and delivery obligations under the Original Transaction and the Replacement Transaction on the Adjustment Date under paragraph 6 within the period set out in paragraph 4(g).
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Full text of Paragraph 4
4. Margin Maintenance
4(a) If at any time either party has a Net Exposure in respect of the other party it may by notice to the other party require the other party to make a Margin Transfer to it of an aggregate amount or value at least equal to that Net Exposure.
4(b) A notice under sub paragraph 4(a) above may be given orally or in writing.
4(c) For the purposes of this Agreement a party has a Net Exposure in respect of the other party if the aggregate of all the first party's Transaction Exposures plus any amount payable to the first party under paragraph 5 but unpaid less the amount of any Net Margin provided to the first party exceeds the aggregate of all the other party's Transaction Exposures plus any amount payable to the other party under paragraph 5 but unpaid less the amount of any Net Margin provided to the other party; and the amount of the Net Exposure is the amount of the excess. For this purpose any amounts not denominated in the Base Currency shall be converted into the Base Currency at the Spot Rate prevailing at the relevant time.
4(d) To the extent that a party calling for a Margin Transfer has previously paid Cash Margin which has not been repaid or delivered Margin Securities in respect of which Equivalent Margin Securities have not been delivered to it, that party shall be entitled to require that such Margin Transfer be satisfied first by the repayment of such Cash Margin or the delivery of Equivalent Margin Securities but, subject to this, the composition of a Margin Transfer shall be at the option of the party making such Margin Transfer.
4(e) Any Cash Margin transferred shall be in the Base Currency or such other currency as the parties may agree.
4(f) A payment of Cash Margin shall give rise to a debt owing from the party receiving such payment to the party making such payment. Such debt shall bear interest at such rate, payable at such times, as may be specified in Annex I hereto in respect of the relevant currency or otherwise agreed between the parties, and shall be repayable subject to the terms of this Agreement.
4(g) Where Seller or Buyer becomes obliged under sub paragraph 4(a) above to make a Margin Transfer, it shall transfer Cash Margin or Margin Securities or Equivalent Margin Securities within the minimum period specified in Annex I hereto or, if no period is there specified, such minimum period as is customarily required for the settlement or delivery of money, Margin Securities or Equivalent Margin Securities of the relevant kind.
4(h) The parties may agree that, with respect to any Transaction, the provisions of sub¬paragraphs 4(a) to 4(g) above shall not apply but instead that margin may be provided separately in respect of that Transaction in which case
- (i) that Transaction shall not be taken into account when calculating whether either party has a Net Exposure;
- (ii) margin shall be provided in respect of that Transaction in such manner as the parties may agree; and
- (iii) margin provided in respect of that Transaction shall not be taken into account for the purposes of sub paragraphs 4(a) to 4(g) above.
4(i) The parties may agree that any Net Exposure which may arise shall be eliminated not by Margin Transfers under the preceding provisions of this paragraph but by the repricing of Transactions under sub paragraph 4(j) below, the adjustment of Transactions under sub paragraph 4(k) below or a combination of both these methods.
4(j) Where the parties agree that a Transaction is to be repriced under this sub paragraph, such repricing shall be effected as follows
- (i) the Repurchase Date under the relevant Transaction (the “Original Transaction”) shall be deemed to occur on the date on which the repricing is to be effected (the “Repricing Date”);
- (ii) the parties shall be deemed to have entered into a new Transaction (the “Repriced Transaction”) on the terms set out in (iii) to (vi) below;
- (iii) the Purchased Securities under the Repriced Transaction shall be Securities equivalent to the Purchased Securities under the Original Transaction;
- (iv) the Purchase Date under the Repriced Transaction shall be the Repricing Date;
- (v) the Purchase Price under the Repriced Transaction shall be such amount as shall, when multiplied by the Margin Ratio applicable to the Original Transaction, be equal to the Market Value of such Securities on the Repricing Date;
- (vi) the Repurchase Date, the Pricing Rate, the Margin Ratio and, subject as aforesaid, the other terms of the Repriced Transaction shall be identical to those of the Original Transaction;
- (vii) the obligations of the parties with respect to the delivery of the Purchased Securities and the payment of the Purchase Price under the Repriced Transaction shall be set off against their obligations with respect to the delivery of Equivalent Securities and payment of the Repurchase Price under the Original Transaction and accordingly only a net cash sum shall be paid by one party to the other. Such net cash sum shall be paid within the period specified in sub paragraph 4(g) above.
4(k) The adjustment of a Transaction (the “Original Transaction”) under this sub paragraph shall be effected by the parties agreeing that on the date on which the adjustment is to be made (the “Adjustment Date”) the Original Transaction shall be terminated and they shall enter into a new Transaction (the “Replacement Transaction”) in accordance with the following provisions:
- (i) the Original Transaction shall be terminated on the Adjustment Date on such terms as the parties shall agree on or before the Adjustment Date;
- (ii) the Purchased Securities under the Replacement Transaction shall be such Securities as the parties shall agree on or before the Adjustment Date (being Securities the aggregate Market Value of which at the Adjustment Date is substantially equal to the Repurchase Price under the Original Transaction at the Adjustment Date multiplied by the Margin Ratio applicable to the Original Transaction);
- (iii) the Purchase Date under the Replacement Transaction shall be the Adjustment Date;
- (iv) the other terms of the Replacement Transaction shall be such as the parties shall agree on or before the Adjustment Date; and
- (v) the obligations of the parties with respect to payment and delivery of Securities on the Adjustment Date under the Original Transaction and the Replacement Transaction shall be settled in accordance with paragraph 6 within the minimum period specified in sub paragraph 4(g) above.
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Related agreements and comparisons
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Related agreements: Click here for the same clause in the 1996 MRA, when we get round to finding out the first thing about it.
Comparison: Knowing and, really, caring very little about other kinds of repo agreement, we have nothing presently to compare the Global Master Repurchase Agreement with.
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Content and comparisons
Summary
This provision says far less of any moment than its heft would suggest it does. In a nutshell:
- You can call for Margin if you have a Net Exposure, meaning the the amount the other party owes you — accounting for unpaid income and posted margin — is more than you owe it.
- As long as you meet eligibility criteria, it is up to the person having to post margin to decide what to post except that the requester can ask for any outstanding margin it has posted back. This scenario should only happen where the Net Exposure inverts between margin calls. But anyway: if you’ve posted away, you can ask for it back. Otherwise, the other guy decides.
- Where you post cash, you do so in the Base Currency and — stating the bleeding obvious here, as any fule kno[2] — the transfer of cash creates indebtedness.
- In lieu of Margin Transfers, the parties can agree to “reprice” a Transaction — effectively restriking and settling it to market and creating a new Transaction in the same Purchased Securities at the prevailing rate — or to “adjust” it, in which case you can change up the Purchased Securities to something else altogether.
There follow some laborious provisions explaining exactly how this happens, but they do no more than tediously — and, in all likelihood, wrongly — codify the real-world common sense your operations team will undoubtedly bring to the task of figuring it out; a feat you can bet the house on that they won’t achieve by reading the nether regions of paragraph 4 of the Global Master Repurchase Agreement.
General discussion
The manifold varieties of credit mitigation
“Credit support” under an ISDA Master Agreement is handled away from a given Swap Transaction, under a separate credit support annex which references a counterparty’s net exposure across the whole portfolio of Transactions
- 1995 CSA: an English law credit support annex is itself a Transaction under the ISDA Master Agreement, under which the parties exchange Eligible Credit Support (in the olden days, often various kinds of high-grade bonds or cash; more recently, in VM only arrangements, cash only) with a market value designed to exactly offset the net exposure under all the other “real” Transactions.
- 1994 NY CSA: A New York law credit support annex works to all intents and purposes the same way, but it is a pledge and not a title-transfer arrangement, so therefore, at first blush, takes the form of a security interest, and is not therefore a Transaction under the ISDA Master Agreement. However, most 1994 NY CSAs allow the parties to “rehypothecate” pledged Credit Support without limit, which means they function like a title transfer collateral arrangements pretty much from the get-go.
Stock loan arrangements come in two varieties: American ones, and English ones. The standard English law title transfer stock lending agreement, the 2010 GMSLA, has recently spawned a pledge version designed specifically for agent lenders which is a genuine security interest model with no right of rehypothecation.
- English law 2010 GMSLA: Unlike the ISDA Master Agreement, Collateral is posted on a loan-by-loan basis, and Collateral is an integral part of the Loan transaction. That said, Collateral posting and management, day-to-day, is usually handled on a portfolio basis: you don’t make tiny little margin calls; you make one big net one, but there is no separate annex or Transaction representing Collateral flows.
- English law 2018 Pledge GMSLA: ISLA developed the 2018 Pledge GMSLA to deal with punitive capital rules which required financial institutions to risk-weight excess Collateral balances. Solution: financial institution pledges them, rather than title-transferring them. Important: there is no right to rehypothecate, because that would undermine the pledge. Thus a 2018 Pledge GMSLA is a genuine secured lending arrangement.
- New York law Master Securities Lending Agreement: Like the 1994 NY CSA, the Master Securities Lending Agreement is a pledge-with-rehypothecation arrangement: it looks like a security interest, but for practical purposes isn’t. Aside from upsetting your CASS people, it functions practically as if the person holding Collateral at any time is its absolute owner with an obligation to return something equivalent.
Unlike a stock loan, which a repo resembles in many other respects, the initial exchange is not by way of collateral, but is an outright purchase of the bond in question. Therefore required margin reflects divergences between the prevailing value of the purchased asset and the prevailing Repurchase Price (which is the original Purchase Price with an uplift by way of the repo rate).
See also
References
- ↑ I’ll get my coat.
- ↑ At least, any fule who has read the JC’s impassioned rants on the subject of cash elsewhere. Right, readers?