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GMSLA Anatomy™
In a Nutshell™ Clause 11.3:
11.3 The Default Market Value of a Letter of Credit will be zero. For any Equivalent Securities or any other Equivalent Non-Cash Collateral it will be determined under paragraphs 11.4 to 11.6 below, where:
- Appropriate Market is the most appropriate market for any securities determined by the Non-Defaulting Party;
- Default Valuation Time means the Close of Business in the Appropriate Market on the fifth dealing day after the Event of Default (or where Automatic Early Termination applies, the day the Non Defaulting Party became aware of it);
- Deliverable Securities means Equivalent Securities or Equivalent Non-Cash Collateral to be delivered by the Defaulting Party;
- Net Value of any securities means the Non-Defaulting Party’s reasonable opinion of their fair Market Value less (where Lender is the Defaulting Party) or plus (where Borrower is the Defaulting Party), all reasonable costs of any transaction needed under paragraph 11.4 or 11.5 (Transaction Costs); and
- Receivable Securities means Equivalent Securities or Equivalent Non-Cash Collateral to be delivered to the Defaulting Party.
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2010 GMSLA full text of Clause 11.3:
11.3 For the purposes of this Agreement, the Default Market Value of any Equivalent Collateral in the form of a Letter of Credit shall be zero and of any Equivalent Securities or any other Equivalent Non-Cash Collateral shall be determined in accordance with paragraphs 11.4 to 11.6 below, and for this purpose:
- (a) the Appropriate Market means, in relation to securities of any description, the market which is the most appropriate market for securities of that description, as determined by the Non Defaulting Party;
- (b) the Default Valuation Time means, in relation to an Event of Default, the close of business in the Appropriate Market on the fifth dealing day after the day on which that Event of Default occurs or, where that Event of Default is the occurrence of an Act of Insolvency in respect of which under paragraph 10.1(d) no notice is required from the Non Defaulting Party in order for such event to constitute an Event of Default, the close of business on the fifth dealing day after the day on which the Non Defaulting Party first became aware of the occurrence of such Event of Default;
- (c) Deliverable Securities means Equivalent Securities or Equivalent Non-Cash Collateral to be delivered by the Defaulting Party;
- (d) Net Value means at any time, in relation to any Deliverable Securities or Receivable Securities, the amount which, in the reasonable opinion of the Non Defaulting Party, represents their fair market value, having regard to such pricing sources and methods (which may include, without limitation, available prices for securities with similar maturities, terms and credit characteristics as the relevant Equivalent Securities or Equivalent Collateral) as the Non Defaulting Party considers appropriate, less, in the case of Receivable Securities, or plus, in the case of Deliverable Securities, all Transaction Costs incurred or reasonably anticipated in connection with the purchase or sale of such securities;
- (e) Receivable Securities means Equivalent Securities or Equivalent Non-Cash Collateral to be delivered to the Defaulting Party; and
- (f) Transaction Costs in relation to any transaction contemplated in paragraph 11.4 or 11.5 means the reasonable costs, commissions (including internal commissions), fees and expenses (including any mark up or mark down or premium paid for guaranteed delivery) incurred or reasonably anticipated in connection with the purchase of Deliverable Securities or sale of Receivable Securities, calculated on the assumption that the aggregate thereof is the least that could reasonably be expected to be paid in order to carry out the transaction.
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See also the Determination of Default Market Value (clause 11.4).
The JC’s handy guide to closing out a 2010 GMSLA
If even the nutshell version is too tedious:
- There’s an Event of Default: Note that (unlike the ISDA Master Agreement) an event only becomes an Event of Default once the Non-Defaulting Party has given notice of it with no need for the Non-Defaulting Party to give a further notice: it has already given one (or not had to, if it’s an event triggering Automatic Early Termination). Thus, at once:
- Acceleration: All payment and delivery obligations are accelerated, becoming due as of the date of the Event of Default, which is therefore the effective Termination Date, although not the date on which the close-out is settled (bear with me).
- Default Market Value: Non-Defaulting Party determines the Default Market Value for all non-cash obligations.
- When: Even though this references the Termination Date the NDP determines it as of the Default Valuation Time: at the close, five dealing days after the date of default (or, for an AET, when the NDP became aware of the default).
- What:
- Where the NDP has actually bought or sold securities or collateral, it can use the net sale proceeds to calculate the Default Market Value for those assets.
- Where it has not, it takes at least two dealer quotes — offer side for securities it is owed; bid side for those it owes — averages them, and adjusts them for unpaid coupons and transaction costs.
- If it can't do either, it can take its own commercially reasonable estimate of their fair market value, accounting for transaction costs.
- Still no DMV? Then a Net Value at a later time. If the Non-Defaulting Party can’t even bring itself to make up a Default Market Value for the Default Valuation Time — perhaps its legal eagles are chicken lickens and won’t let it — it has to calculate the Net Value at a commercially reasonable time after that.
- Expenses: the Defaulting Party wears these too, and they accrue at overnight LIBOR (yes, or it’s successor).
- Set-off; And the NDP can apply a set off.