Template:M summ GMSLA 8
Term
Unless you’ve agreed it has some kind of term, Loans are callable at will by either party.
You do see term loans in certain cases: “pre-borrows”, where an aspiring short seller is expecting a stock to go illiquid and wants to have the security ready to sell when everyone is scrabbling around trying to find enough of the stuff to sell short, thereby avoiding buy-ins and so on — and also in agent lending world, where Borrowers will want some medium term commitment (90 days or so) for trades where they upgrade their prime brokerage and margin loan inventory into high-credit quality assets they can give back to their own treasury departments. financial reporting rules may require these trades to have a minimum remaining tenor to get appropriate RWA treatment.
“Equivalent”
What if the Securities have been cancelled, redeemed, or converted into something else? The elaborately defined adjective Equivalent does a lot of work here:
Equivalent in a Nutshell™ (GMSLA edition)
Equivalent: securities that are fungible with the securities in question, as long as:
- (a) Where the securities are partly paid or have been converted, subdivided, consolidated, made the subject of a takeover, rights of pre-emption, or include rights to receive securities, it includes securities a holder would be entitled after that event (having complied with all formalities) and provided that the party being paid the equivalent amount has given notice and paid the all sums required in time for the holder to exercise its rights.
- (b) Where the securities:
- (i) have been redeemed, it means the redemption proceeds;
- (ii) are subject to a call, it means fungible securities, provided that receiving party thas paid the holder the amounts due in respect of the call;
- (iii) are subject to a capitalisation issue, it includes securities allotted by way of bonus on the securities in question;
- (iv) are subject to any similar event, it means those securities with (or replaced by) the cash and securities received by the holder in connection with the event.
- (i) have been redeemed, it means the redemption proceeds;
But what if the issuer has gone bust? Here there may be little or no liquidity in the shares — they may well have been delisted, for example.
Look here to the mini-closeout provisions, which are designed to cope with exactly this kind of settlement failure.
And a letter of credit is
An old fashioned form of credit support. A bank writes an unconditional letter promising to pay a (usually large) sum on money on demand and without argument to a third party on behalf of a client. This gets small companies a bit of breathing space with trade creditors. Banks charge through the nose for them: they are a form of committed funding.
Lots of formal rules and legal form-obeisance. In any case, not a common way of collateralising a stock loan — done away with entirely in the 2018 Pledge GMSLA but hey — you never know.