Equivalent - GMRA Provision

2000 Global Master Repurchase Agreement
A Jolly Contrarian owner’s manual™

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Paragraph Equivalent in a Nutshell™

Use at your own risk, campers!

2(r) “Equivalent Margin Securities” means Securities equivalent to transferred Margin Securities; 2(s) “Equivalent Securities” means Securities equivalent to the Purchased Securities under a Transaction or, where they have been redeemed, a the cash value of their redemption proceeds; 2(t) Securities are “equivalent to” other Securities if they are: (i) of the same issuer; (ii) part of the same issue; and (iii) identical in type, nominal value, description and amount; provided that (A) Securities will still be equivalent if they are redenominated into euro or their nominal value changes as a result; and (B) where Securities are altered by a corporate event or their holders become entitled to receive any other property as a result, “equivalent to” will means those Securities as altered and any equivalent property due to such holders as a result; view template

Full text of Paragraph Equivalent

2(r) “Equivalent Margin Securities”, Securities equivalent to Securities previously transferred as Margin Securities; 2(s) “Equivalent Securities”, with respect to a Transaction, Securities equivalent to Purchased Securities under that Transaction. If and to the extent that such Purchased Securities have been redeemed, the expression shall mean a sum of money equivalent to the proceeds of the redemption; 2(t) Securities are “equivalent to” other Securities for the purposes of this Agreement if they are: (i) of the same issuer; (ii) part of the same issue; and (iii) of an identical type, nominal value, description and (except where otherwise stated) amount as those other Securities, provided that (A) Securities will be equivalent to other Securities notwithstanding that those Securities have been redenominated into euro or that the nominal value of those Securities has changed in connection with such redenomination; and (B) where Securities have been converted, subdivided or consolidated or have become the subject of a takeover or the holders of Securities have become entitled to receive or acquire other Securities or other property or the Securities have become subject to any similar event, the expression “equivalent to” shall mean Securities equivalent to (as defined in the provisions of this definition preceding the proviso) the original Securities together with or replaced by a sum of money or Securities or other property equivalent to (as so defined) that receivable by holders of such original Securities resulting from such event; view template

Related agreements and comparisons

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

See Equivalent Securities under the 2010 GMSLA for a comparison. It is rather similar, truth be told.

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Summary

So why do we say “equivalent” and not just “the same” or even “identical”?

Largely, to keep accountants happy. “The same” is narrower: it means exactly the same security or banknote that you were originally referring to, with not just the same ISIN but the same individual serial number. A different note from the same series, that happens to be fungible with it, even though in all material respects identical, would not do. If, for example, I give you my security to look after, you must give me that exact piece of paper back. If I title transfer my security to you, with the expectation you will title transfer the same security back, I give up all my ownership of that security. You can do with it what you will, but must at some point give me back a note that is fungible with what I gave you, but not need be exactly the physical piece of paper I gave you, and I am in exactly the same financial position.

As I say, all very moot in the age of electronic book-entry clearing.

Why do accountants care? Shouldn’t the simple fact that they do be enough? Well, it has to do with making sure the original transfer was a valid, absolute title transfer, so that the recipient can be confident it may freely deal with the security as long as it has it, and its only obligation is a debt claim back to the original transferor. This may also be important for the seller, if it is wanting the asset off its balance sheet.^[1] If I give you a security by title transfer, but you must give me back precisely the security that I gave you — the very one; not just a fungible equivalent — then this suggests that I retain some claim to or ownership right over the original security I gave you. This in turn implies you are not free to deal with it, as in some way it remains mine: I have not fully transferred title to that security to you. By agreeing you may settle our debt by returning an equivalent security, it puts beyond doubt that you are free to deal with that security as you see fit, and when it comes to reversing out the transaction you can just go and buy in a security from the market, and we avoid the sort of anxiousness that can plague accountants.

“Equivalent” isn’t just “similar”

You may come across someone (in OTC Clearing/CCP space) who wants to modify “equivalent” to mean not just fungible securities of the same Series/ISIN, but “similar ones” – same issuer, but different maturity, and under a different ISIN etc.

Resist this. It is likely to have arisen by way of misapprehension. In most master docs, “equivalent” is carefully defined to be exactly fungible ^[2]but at the gallop at which most collateral operations managers’ working days pass, they may have missed this, labouring instead under the illusion (based on its ordinary dictionary meaning) that “equivalent” allows redelivery of non-fungible securities of a “similar” type. They may even defend their misapprehension. “Yeah, they may protest, “but what if there’s some illiquidity in the market?”

But — well, you have that exact risk across your entire ISDA collateral book, so it’s a bit late. In practice, if there is a market disruption and you can’t get hold of the necessary collateral, as long as it doesn’t coincide with your own credit deterioration^[3], you should be able to hash it out.

And if you are worried about it, go for a cash-only CSA — these days most are — or don’t allow potentially illiquid assets as collateral, or just don’t reuse that asset.

Now there may be a need for the “similar securities” concept in the OTC to CCP space that we haven’t yet divined, doubtful, but let’s say — but we should call that something else – perhaps “Similar Credit Support” – to differentiate it from “Equivalent Credit Support” which is still needed in the CSA to support the title transfer analysis.