Template:M summ GMSLA 9
Mini close-out
This is the fabled mini close-out provision of the 2010 GMSLA. Mini close-out is the method of terminating an individual Loan under a 2010 GMSLA or an 1995 OSLA where there is a settlement failure without actually closing out the whole agreement. It applies therefore to a failure to return equivalent securities or equivalent collateral — these can be a function of market dislocations, upstream counterparty failures and liquidity events affecting the asset in question, but not to the failure to deliver collateral in the first place, seeing as if one kind of collateral is not available, it is in the Borrower’s gift to deliver something else that meets eligibility criteria, so its failure to pony up collateral always looks like a credit failure and will count as an Event of Default.
Non-affected party’s option
Note that mini close-out is the non-affected party’s option: If a Borrower, on terminating a Loan, cannot then redeliver the borrowed Securities (because of an upstream failure), it cannot force a mini close-out.
Failure to return Collateral or Securities is not an Event of Default. What is then?
Noting the exception for redelivery of Equivalent Securities or Collateral,[1] the failure to pay or deliver Events of Default under the 2010 GMSLA are:
- Cash Collateral failures: Any failure to pay or repay cash Collateral when required — the theory being that you can’t blame an upstream counterparty for your failure to deliver cash[2];
- Non-cash Collateral delivery failures: Any failure to deliver non-cash Collateral (either at inception of by way of further Collateral). Here the Borrower has discretion[3] on what Collateral it delivers, so again doesn't have the excuse that it has suffered an upstream failure. Where it is a Collateral return, the Lender has less discretion, so is more prone to upstream settlement failures. Note that non-delivery of Securities at the commencement of a Loan is not a failure to pay, also for “potential upstream failure” reasons: it just means the Loan doesn’t happen.
- Mini closeout failures: Any failure to pay following exercise of a mini closeout under Paragraph 9. That is, not a failure to redeliver Equivalent Collateral or Securities themselves, but a failure to settle any mini close-out or buy-in following the mini closeout.
GMSLA Netting
Since prudential requirements to have netting opinions do not apply within single transactions, one does not need a mini close-out provision to net within transactions under a GMSLA. That happens as of right. Therefore if, as is often the case, your loan portfolio is all the “same way round” — if you are borrowing from, but never lending to, a lender in a gross jurisdiction, then netting doesn’t really do anything for you. Your problem will be your collateral haircut, for which you will be an unsecured creditor of the lender. To fix this, a pledge GMSLA is what you are looking for.
Odd spot
See the peculiar impact mini-closeout has on Default Under Specified Transaction under the ISDA Master Agreement.
- ↑ See 9.1(b) and 9.2(b).
- ↑ For a jauntily metaphysical examination of the nature of hard cold folding green stuff — why it is, by nature, profoundly different to any other financial instrument, see our article on cash.
- ↑ From those assets that meet the eligibility criteria in the Schedule; moral of story: don’t allow yourself to be too tightly constrained on eligibility criteria.