Act of Insolvency - Pledge GMSLA Provision
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2018 Global Master Securities Lending Agreement (Pledge version)
Clause Act of Insolvency in a Nutshell™ Use at your own risk, campers!
Full text of Clause Act of Insolvency
Related agreements and comparisons
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Content and comparisons
The Act of Insolvency provisions are identical in the 2018 Pledge GMSLA and the 2010 GMSLA. Also, compare this with the leave-nothing-to-the-imagination “Bankruptcy” definition in the ISDA Master Agreement. The 2010 GMSLA’s grace period is the languid 30 days, like the one in the 1992 ISDA, rather than the more stringent 15 introduced in the 2002 ISDA.
Summary
Termination upon insolvency
Credit officers will hotly deny this, but when it comes to closing out a master trading agreement there are two main triggers: failure to pay and bankruptcy/insolvency. They also tend to be the most lightly negotiated — it’s hard to argue that your counterparty shouldn’t be allowed to pull its trigger if you are insolvent.
Still, there are some nuances to what counts as insolvency. It may differ for different entity types: banks and insurers, in particular, having special local administrative regimes or recovery and resolution frameworks which ameliorate the hard lines between solvency and oblivion. So expect a little jiggery-pokery around the edges in defining what counts as an “insolvency event”. But it is not contentious stuff; just detail.
Where these suspension rights stop you quickly closing out and netting your exposures they might mean your netting analysis fails altogether. This gives you real-world, present time problems, since you must hold capital against the gross exposure under the contract.
See also
- Act of Insolvency under the 2010 GMSLA
- Bankruptcy under the ISDA Master Agreement — the king of the jungle when it comes to insolvency definitions.