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GMSLA Anatomy™
In a Nutshell™ Clause 9:
9. Failure to Deliver
9.1 Borrower’s failure to deliver Equivalent Securities : If Borrower doesn’t deliver Equivalent Securities under para 8.3 Lender may:
- (a) continue the Loan; or
- (b) terminate the individual Loan per para 11.2 as if the Borrower was subject to an Event of Default but the Loan were the only outstanding Loan.
Notwithstanding the above, such a failure will not be an Event of Default.
9.2 Lender’s failure to deliver Equivalent Collateral: If Lender fails to deliver Equivalent Non Cash Collateral on termination of a Loan (See 8.4), Borrower may:
- 9.2(a) continue the Loan; or
- 9.2(b) terminate the Loan under paragraph 11.2 by written notice to Lender, as if:
- (i) an Event of Default had occurred to the Lender;
- (ii) the Termination Date were the date of such written notice, and
- (iii) the Loan were the only Loan outstanding.
However this will not be an Event of Default.
9.3 Failure by either Party to deliver
Where a Party (the Transferor) fails to deliver Equivalent Securities or Collateral when due and the other Party (the Transferee) incurs interest, overdraft expenses or Buy in costs the Transferor must, within one Business Day of a demand, pay the Transferee and hold it harmless against those costs that arise directly from that failure other than (i) costs arising from the Transferee’s negligence or wilful default and (ii) any consequential losses).
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2010 GMSLA full text of Clause 9:
9. Failure to Deliver
9.1 Borrower’s failure to deliver Equivalent Securities: If Borrower fails to deliver Equivalent Securities in accordance with paragraph 8.3 Lender may:
- (a) elect to continue the Loan (which, for the avoidance of doubt, shall continue to be taken into account for the purposes of paragraph 5.4 or 5.5 as applicable); or
- (b) at any time while such failure continues, by written notice to Borrower declare that that Loan (but only that Loan) shall be terminated immediately in accordance with paragraph 11.2 as if:
- (i) an Event of Default had occurred in relation to the Borrower,
- (ii) references to the Termination Date were to the date on which notice was given under this sub paragraph, and
- (iii) the Loan were the only Loan outstanding.
- For the avoidance of doubt, any such failure shall not constitute an Event of Default (including under paragraph 10.1(i)) unless the Parties otherwise agree.
9.2 Lender’s failure to deliver Equivalent Collateral: If Lender fails to deliver Equivalent Collateral comprising Non Cash Collateral in accordance with paragraph 8.4 or 8.5, Borrower may:
- (a) elect to continue the Loan (which, for the avoidance of doubt, shall continue to be taken into account for the purposes of paragraph 5.4 or 5.5 as applicable); or
- (b) at any time while such failure continues, by written notice to Lender declare that that Loan (but only that Loan) shall be terminated immediately in accordance with paragraph 11.2 as if
- (i) an Event of Default had occurred in relation to the Lender,
- (ii) references to the Termination Date were to the date on which notice was given under this sub paragraph, and
- (iii) the Loan were the only Loan outstanding.
For the avoidance of doubt, any such failure shall not constitute an Event of Default (including under paragraph 10.1(i)) unless the Parties otherwise agree.
9.3 Failure by either Party to deliver: Where a Party (the Transferor) fails to deliver Equivalent Securities or Equivalent Collateral by the time required under this Agreement or within such other period as may be agreed between the Transferor and the other Party (the Transferee) and the Transferee:
- (a) incurs interest, overdraft or similar costs and expenses; or
- (b) incurs costs and expenses as a direct result of a Buy in exercised against it by a third party,
then the Transferor agrees to pay within one Business Day of a demand from the Transferee and hold harmless the Transferee with respect to all reasonable costs and expenses listed in sub paragraphs (a) and (b) above properly incurred which arise directly from such failure other than (i) such costs and expenses which arise from the negligence or wilful default of the Transferee and (ii) any indirect or consequential losses.
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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.
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.
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.
Odd spot: See the peculiar impact mini-closeout has on Default Under Specified Transaction under the ISDA Master Agreement.
See also