Other costs, expenses and interest payable in consequence of an Event of Default - GMSLA Provision
2010 Global Master Securities Lending Agreement
Clause 11.7 in full
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In its headlong rush to pursue the path of least resistance, the tremendous opportunity the 2018 Pledge GMSLA presented to ISLA’s crack drafting squad™ for once and for all to rid this form of its unfortunate reference to LIBOR went missed. Pity really.
But see also Clause 15, where this throwaway reference really bites.
Special guest appearance: 2000 GMSLA
We don’t spend too much time looking at the 2000 GMSLA any more, seeing as nor does anyone else, but we were asked to look at this clause, so here it is. Clause 10.7 of the 2000 GMSLA was slightly more dependent on LIBOR than its 2010 successor as can be seen in this comparison. Changes are largely improvements: the 2010 assumes the parties will agree something else, relying on LIBOR only as a fallback (prescient in 2010!); it falls back to overnight and not one-month LIBOR (given the callable nature of stock loans that makes a lot more sense), and the 2000 version had a genuinely gruesome 44-line coda which seemed to be some sort of half-hearted attempt at linear interpolation for shorter periods which the 2010 version, by relying on the overnight rate, was able to jettison entirely with no great loss.
Trick for young players alert
This looks like the only place where LIBOR is mentioned — harmless accrual of small amounts on professional fees — but the far more important interest accrual clause is Clause 15 (Interest on Outstanding Payments) which awards interest on any missed payment under the agreement, and defers to the rate agreed here in Clause 11.7. Now why you would cross refer the main interest rate clause, Interest on Outstanding Payments, to some crappy little aside, buried deep in the enforcement clause, about interest on incurred professional fees, rather than referring the crappy little aside to the main Interest on Outstanding Payments clause we can only wonder about, if it were not to trip up people like yours truly. So be warned.
This bit is just about incurred interest on professional fees
Clause 11.7 is the Default Interest provision of the 2010 GMSLA. Note a potentially troublesome reference to LIBOR in there, seeing as LIBOR is being phased out, though it is only a fall back, and only for Default Interest on its legal fees (once a party has failed to meet its payment obligations) so, while there are more cataclysmic threats to the capital markets than this, that won’t stop financial services firms across the western world diverting key internal risk management resource towards remediating it, generating 18 months’ meaningful employment for an army of contractors of course.
- This only captures interest on professional expenses incurred in closing out a 2010 GMSLA. It corresponds to Clause 10(f) of the Global Master Repurchase Agreement, which is written in similar terms. For the more general Interest on Outstanding Payments you must see Clause 15, which is really where this clause should be, if legal design were any kind of priority for ISLA’s crack drafting squad™.
- This would not capture a “mini close-out” under 9.1(b) or 9.2(b) as a result of a settlement fail under normal market procedures. These are treated as if they were Events of Default, but they are deemed not to be Events of Default. For those you pay the innocent party’s actual interest costs, not its theoretical ones, so there is no need to refer to a benchmark. But see also Clause 15.
“Gains or losses on termination of the Loan”? No, sir.
A curious fidgety sort of amendment we have seen is to expand this provision from mere costs incurred on an event of default — and let’s face it, the GMSLA is designed as a self-help agreement so there really shouldn’t be any professional expenses involved in closing one out — to “all the Non-Defaulting Party’s reasonable costs and gains arising from the termination of the loan” as well as those likely-not-to-exist professional costs of closing out.
This is not necessary and you should stoutly resist. The deal with stock loans is you borrow, you pay fees, and you return, and mark your collateral to the value of the shares. The Lender is not on risk to your short: there are no “gains” or “losses” — these are a function of the short sale the Borrower effects in the market with the shares once it has borrowed them from you. If you want your Shares back, or one of the parties defaults, and a Loan is unexpectedly terminated early, Borrower is free to close out its short, or keep it open, at its leisure, irrespective of what happens with that original stock loan: if it is recalled, the Borrower can source shares to repay it by borrowing them somewhere else.
The costs payable on unexpected exit of a Loan— which including buying in replacement stock to satisfy obligations — is covered by 9.3, and records the fact that no consequential losses (etc.) are available.