Events of Default - Pledge GMSLA Provision

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2018 Global Master Securities Lending Agreement (Pledge Version)
A Jolly Contrarian owner’s manual

Clause 10 in a Nutshell
Use at your own risk, campers!

10 Events of Default
10.1 Any of the following occurring and continuing in relation to a Party (the Defaulting Party; the other being the Non-Defaulting Party) becomes an Event of Default when the Non-Defaulting Party serves written notice to that effect on the Defaulting Party:

10.1(a) Borrower failure to deliver Collateral: Borrower failing to deliver Collateral under paragraph 5 when required;
10.1(b) Borrower failing to manufacture payments: Borrower failing to manufacture payments under paragraph 6.1 when due and not curing the failure within three Business Days of Lender’s written notice to do so;
10.1(c) Failure to settle mini-closeout: Borrower failing to pay any sum due on mini-closeout under paragraph 9.1(b) or 9.2 when due;
10.1(d) Insolvency: either party suffering an Act of Insolvency;
10.1(e) Breach of warranty: any of the Lender’s warranties in paragraph 13 or the Borrower's in paragraphs 14(a) to 14(h) or in the Security Agreement being materially wrong when made or repeated;
10.1(f) Repudiation: either party stating that it cannot, or will not, perform any obligations under this Agreement, the Security Agreement or any Loan which failure would (upon expiry of grace periods and so on) be an Event of Default;
10.1(g) Regulator intervention: a regulator directs a material part of either party’s assets to be transferred to a trustee or receiver under any legislation;
10.1(h) Suspension of exchange membership: either party being suspended, expelled of declared in default by any Securities exchange or any regulatory authority, because it has failed to meet ratings or capital adequacy requirements;
10.1(i) Breach of Agreement: either party breaching any of its other obligations and not remedying the failure within 30 days after the Non-Defaulting Party requires it to remedy the failure in writing; or
10.1(j) Security Agreement failures: Borrower breaches, repudiates or challenges the validity of the Security Agreement, or it expires or is terminated, or any security interest granted by Borrower under it is not fully effective.

10.2 Each Party must notify the other (in writing) if it suffers an Event of Default or potential Event of Default. 10.3 Subject to paragraphs 9 and 11, neither Party may claim any consequential losses for breach of this Agreement.
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Clause 10 in full

10 Events of Default
10.1 Each of the following events occurring and continuing in relation to either Party (the Defaulting Party, the other Party being the Non-Defaulting Party) shall be an Event of Default but only where the Non-Defaulting Party serves written notice on the Defaulting Party declaring such event to be an Event of Default:

10.1(a) Borrower failing to comply with its obligations to deliver Collateral under paragraph 5 on the due date;
10.1(b) Borrower failing to comply with its obligations under paragraph 6.1 upon the due date and not remedying such failure within three Business Days after Lender serves written notice requiring it to remedy such failure;
10.1(c) Borrower failing to pay any sum due under paragraph 9.1(b) or 9.2 upon the due date;
10.1(d) an Act of Insolvency occurring with respect to Lender or Borrower;
10.1(e) any warranty made by Lender or Borrower in paragraph 13 or paragraphs 14(a) to 14(h) or in the Security Agreement being incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated;
10.1(f) Lender or Borrower admitting to the other that it is unable to, or it intends not to, perform any of its obligations under this Agreement or the Security Agreement and/or in respect of any Loan where such failure to perform would with the service of notice or lapse of time constitute an Event of Default;
10.1(g) all or any material part of the assets of Lender or Borrower being transferred or ordered to be transferred to a trustee (or a person exercising similar functions) by a regulatory authority pursuant to any legislation;
10.1(h) Lender (if applicable) or Borrower being declared in default or being suspended or expelled from membership of or participation in, any Securities exchange or suspended or prohibited from dealing in Securities by any regulatory authority, in each case on the grounds that it has failed to meet any requirements relating to financial resources or credit rating;
10.1(i) Lender or Borrower failing to perform any other of its obligations under this Agreement and not remedying such failure within 30 days after the Non-Defaulting Party serves written notice requiring it to remedy such failure; or
10.1(j) in relation to the Security Agreement,
(i) Borrower failing to perform any of its obligations under the Security Agreement,
(ii) the expiration or termination of the Security Agreement,
(iii) any security interest granted by Borrower therein, ceasing to be or otherwise not being in full force and effect or
(iv) Borrower disaffirming, disclaiming, repudiating or rejecting, in whole or in part, or challenging the validity of, such Security Agreement (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf), provided that in each such case, the Defaulting Party shall be deemed to be Borrower.

10.2 Each Party shall notify the other (in writing) if an Event of Default or an event which, with the passage of time and/or upon the serving of a written notice as referred to above, would be an Event of Default, occurs in relation to it. 10.3 Subject to paragraphs 9 and 11, neither Party may claim any sum by way of consequential loss or damage in the event of failure by the other Party to perform any of its obligations under this Agreement.
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Related agreements and comparisons

Related agreements: Click here for the same clause in the 2010 GMSLA
Comparison: Click to compare the 2010 GMSLA and 2018 Pledge GMSLA versions of this clause.

Resources and navigation

2010 GMSLA: Full wikitext · Nutshell wikitext | GMLSA legal code
Pledge GMSLA: Hard copy (ISLA) · Full wikitext · Nutshell wikitext |
1995 OSLA: Full wikitext · Nutshell wikitext | GMSLA Netting
Let me Google that for you: Guide to equity finance | ISLA’s guide to securities lending for regulators and policy makers
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Content and comparisons

In the 2018 Pledge GMSLA we wave good by to the 2010 GMSLA’s Automatic Early Termination provision — which was only really there to slake the consciences of those worried that netting might not work. In a pledged security arrangement, it is much more old-fashioned and traditional; you’re not really relying on the cute, clever-dickish type of close-out netting that is so warily eyed by ruddy-cheeked German insolvency administrators, no no need for an AET-35 unit.

To compensate, there’s a new “breach of security agreement” Event of Default at 10.1(j). Which is nice.
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Summary

To be read with the commentary paragraph 11 (Consequences of an Event of Default) and verily the accompanying Security Agreement, for the way close-out happens under a pledge structure is markedly different from the close-out netting regime of the 2010 GMSLA.

Now there’s a subtle point to look out for here about control over assets. If, as you are likely to have under a 2018 Pledge GMSLA, you have pledged your assets to an escrow agent or third party custodian, the key (for your financial reporting friends and relations) will be that you retain ownership of those assets and, more to the point, they stay outside the bankruptcy estate of your Lender. That’s the whole reason you have the 2018 Pledge GMSLA and not an ordinary title-transfer 2010 GMSLA in the first place — to avoid having to hold capital against the credit risk of your Lenders for the return of excess Collateral.

On the other hand, at the point where you, Borrower, are spiralling into a Lehman-shaped crater in the side of a hill is just the point where jumpy Sir from the Lender’s credit sanctioning team will be hyperventillating, jumping up and down on the spot and shrieking at anyone within earshot how he’d like to “put a cap in yo’ ass” and just go and take those assets away from you and start liquidating them.

There’s — at this particular moment in time, and no other — a little tension in the air. As Borrower you need to satisfy your accountants that the assets really are yours, in case the Lender unexpectedly blows up; the Lender wants quick access to them, and to put aside all ceremony, in case you do.

Should we be unthinkably deep in the tail of improbable market events such that both parties are blowing up simultaneously — the sort of event that Fisher Black would tell you ought to be unobservable in a period several times the life in the universe, but that Nassim Nicholas Taleb likes to remind us does happen once every five years or so — these two contingencies can arrive at once. On the theory, the Borrower’s interest trumps the Lender’s, since the security interest keeps the assets out of range of the Borrower’s other creditors. But that is cold comfort for most credit sanctioners, and besides, they don’t want to hang around waiting when collateral values are pogo-ing around with all the market dislocation.

Thus the dynamics dealing with who can tell the escrow agent to do what at any point in time are — sensitive, shall we say. Nowhere did ISLA’s crack drafting squad™ address this in the document. It can be dealt with by a little grace period, requiring the credit officer to wait, not for long, but for long enough to satisfy a financial reporting officer that there is enough time to settle any debts, call off the dogs and carry sedately on.

Try this:

Each Event of Default listed in Paragraph 10.1(a), (b) and (c) will become Events of Default only if, within 2 hours following the Lender’s written notice to the Borrower of the event in question, Borrower has not cures the relevant default in full. Upon the expiry of that 2 hour period without such cure, the Event of Default will occur immediately without the need for further notice from the Lender.

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See also

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References