Consequences of an Event of Default - GMSLA Provision

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2010 Global Master Securities Lending Agreement
A Jolly Contrarian owner’s manual

Clause 11 in a Nutshell
Use at your own risk, campers!

11 Consequences of an Event of Default
11.1 If an Event of Default happens to either Party:
11.2 Acceleration: The Parties’ obligations will be accelerated as at the Event of Default (the Termination Date) as follows:

(a) The Non-Defaulting Party will determine the Default Market Value of all amounts (and securities) due by each Party under paragraph 11.4 as at the Termination Date.
(b) Using those values, [the Non-Defaulting Party will determine and notify][1]what each Party owes as at the Termination Date, converting into the Base Currency at the Spot Rate where necessary, and will set those sums off against each other. The Party owing the greater amount must pay the difference on the Business Day after notification.
(c) and (d) [(d) being the vice-versa] If that balance is payable by a Party who had delivered a Letter of Credit to the other Party the other Party must draw on the Letter of Credit to settle the amount due and then deliver it for cancellation.

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.

11.4 Transactions and quotes: If, between the Termination Date and the Default Valuation Time:

(a) Actual sale or purchase: the Non-Defaulting Party has bought or sold securities equivalent to those it owes or is owed by the Defaulting Party it may treat the Default Market Value as the net sale proceeds or aggregate purchase cost of the relevant securities. Were the securities sold or purchased are not in identical in amount to the Equivalent Securities, Non-Defaulting Party may in good faith pro rate those values to determine the necessary Default Market Value.
(b) Market quotes: the Non-Defaulting Party has received offer quotations for securities it is owed by the Defaulting Party; or bid quotations for securities it owes the Defaulting Party from at least two regular participants in the Appropriate Market in what it determines to be a commercially reasonable size, it may treat as the Default Market Value the arithmetic mean of the quoted prices as reasonably adjusted to account for for accrued but unpaid interest and Transaction Costs.

11.5 Where there’s no commercially reasonable value: If, having tried in good faith, the Non-Defaulting Party has not been able to sell nor purchase Securities under paragraph 11.4(a) or obtain quotations under paragraph 11.4(b), or it considers the quotations it did obtain are not commercially reasonable, it may determine the Net Value of the Equivalent Securities or Collateral and treat that as their Default Market Value.
11.6 If the Non-Defaulting Party has not determined a Default Market Value under 11.4, it will equal the Net Value of the securities in question at the Default Valuation Time. However, if the Non-Defaulting Party determines it is not practicable to calculate a commercially reasonable Net Value at that time, the Default Market Value will be the Net Value it determines as soon as reasonably practicable after the Default Valuation Time.
11.7 Costs and expenses following an Event of Default: The Defaulting Party must pay the Non-Defaulting Party’s reasonable professional expenses in connection with the Event of Default plus interest at the rate agreed by the Parties or failing that, the overnight LIBOR rate as at 11.00 a.m., London time. Interest will accrue and compound daily.
11.8 Set-off: Any amount payable to one Party by the other under 11.2(b) may, at the Non Defaulting Party’s option, be set off against any amount payable the other way under any other agreement between the Parties. The Non Defaulting Party may estimate any unascertained obligation but must account for any difference once finally ascertained. This paragraph does not create a security interest, or prejudice any other rights either party may have.
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Clause 11 in full


11. Consequences of an Event of Default

11.1 If an Event of Default occurs in relation to either Party then paragraphs 11.2 to 11.7 below shall apply.
11.2 The Parties’ delivery and payment obligations (and any other obligations they have under this Agreement) shall be accelerated so as to require performance thereof at the time such Event of Default occurs (the date of which shall be the Termination Date) so that performance of such delivery and payment obligations shall be effected only in accordance with the following provisions.
(a) The Default Market Value of the Equivalent Securities and Equivalent Non-Cash Collateral to be delivered and the amount of any Cash Collateral (including sums accrued) to be repaid and any other cash (including interest accrued) to be paid by each Party shall be established by the Non-Defaulting Party in accordance with paragraph 11.4 and deemed as at the Termination Date.
(b) On the basis of the sums so established, an account shall be taken (as at the Termination Date) of what is due from each Party to the other under this Agreement (on the basis that each Party’s claim against the other in respect of delivery of Equivalent Securities or Equivalent Non-Cash Collateral equal to the Default Market Value thereof) and the sums due from one Party shall be set off against the sums due from the other and only the balance of the account shall be payable (by the Party having the claim valued at the lower amount pursuant to the foregoing) and such balance shall be payable on the next following Business Day after such account has been taken and such sums have been set off in accordance with this paragraph. For the purposes of this calculation, any sum not denominated in the Base Currency shall be converted into the Base Currency at the Spot Rate prevailing at such dates and times determined by the Non-Defaulting Party acting reasonably.
(c) If the balance under sub paragraph (b) above is payable by the Non-Defaulting Party and the Non-Defaulting Party had delivered to the Defaulting Party a Letter of Credit, the Defaulting Party shall draw on the Letter of Credit to the extent of the balance due and shall subsequently deliver for cancellation the Letter of Credit so provided.
(d) If the balance under sub paragraph (b) above is payable by the Defaulting Party and the Defaulting Party had delivered to the Non-Defaulting Party a Letter of Credit, the Non-Defaulting Party shall draw on the Letter of Credit to the extent of the balance due and shall subsequently deliver for cancellation the Letter of Credit so provided.
(e) In all other circumstances, where a Letter of Credit has been provided to a Party, such Party shall deliver for cancellation the Letter of Credit so provided.

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.
11.4 If between the Termination Date and the Default Valuation Time:
11.4(a) the Non Defaulting Party has sold, in the case of Receivable Securities, or purchased, in the case of Deliverable Securities, securities which form part of the same issue and are of an identical type and description as those Equivalent Securities or that Equivalent Collateral, (and regardless as to whether or not such sales or purchases have settled) the Non Defaulting Party may elect to treat as the Default Market Value:
(i) in the case of Receivable Securities, the net proceeds of such sale after deducting all Transaction Costs; provided that, where the securities sold are not identical in amount to the Equivalent Securities or Equivalent Collateral, the Non Defaulting Party may, acting in good faith, either
(A) elect to treat such net proceeds of sale divided by the amount of securities sold and multiplied by the amount of the Equivalent Securities or Equivalent Collateral as the Default Market Value or
(B) elect to treat such net proceeds of sale of the Equivalent Securities or Equivalent Collateral actually sold as the Default Market Value of that proportion of the Equivalent Securities or Equivalent Collateral,
and, in the case of (B), the Default Market Value of the balance of the Equivalent Securities or Equivalent Collateral shall be determined separately in accordance with the provisions of this paragraph 11.4; or
(ii) in the case of Deliverable Securities, the aggregate cost of such purchase, including all Transaction Costs; provided that, where the securities purchased are not identical in amount to the Equivalent Securities or Equivalent Collateral, the Non Defaulting Party may, acting in good faith, either
(A) elect to treat such aggregate cost divided by the amount of securities purchased and multiplied by the amount of the Equivalent Securities or Equivalent Collateralas the Default Market Value or
(B) elect to treat the aggregate cost of purchasing the Equivalent Securities or Equivalent Collateralactually purchased as the Default Market Value of that proportion of the Equivalent Securities or Equivalent Collateral,
and, in the case of (B), the Default Market Value of the balance of the Equivalent Securities or Equivalent Collateralshall be determined separately in accordance with the provisions of this paragraph 11.4;
11.4(b) the Non Defaulting Party has received, in the case of Deliverable Securities, offer quotations or, in the case of Receivable Securities, bid quotations in respect of securities of the relevant description from two or more market makers or regular dealers in the Appropriate Market in a commercially reasonable size (as determined by the Non Defaulting Party) the Non-Defaulting Party may elect to treat as the Default Market Value of the relevant Equivalent Securities or Equivalent Collateral:
(i) the price quoted (or where more than one price is so quoted, the arithmetic mean of the prices so quoted) by each of them for, in the case of Deliverable Securities, the sale by the relevant market marker or dealer of such securities or, in the case of Receivable Securities, the purchase by the relevant market maker or dealer of such securities, provided that such price or prices quoted may be adjusted in a commercially reasonable manner by the Non Defaulting Party to reflect accrued but unpaid coupons not reflected in the price or prices quoted in respect of such Securities;
(ii) after deducting, in the case of Receivable Securities or adding in the case of Deliverable Securities the Transaction Costs which would be incurred or reasonably anticipated in connection with such transaction.
11.5. If, acting in good faith, either
(A) the Non Defaulting Party has endeavoured but been unable to sell or purchase securities in accordance with paragraph 11.4(a) above or to obtain quotations in accordance with paragraph 11.4(b) above (or both) or
(B) the Non Defaulting Party has determined that it would not be commercially reasonable to sell or purchase securities at the prices bid or offered or to obtain such quotations, or that it would not be commercially reasonable to use any quotations which it has obtained under paragraph 11.4(b) above the Non Defaulting Party may determine the Net Value of the relevant Equivalent Securities or Equivalent Collateral (which shall be specified) and the Non Defaulting Party may elect to treat such Net Value as the Default Market Value of the relevant Equivalent Securities or Equivalent Collateral.
11.6 To the extent that the Non Defaulting Party has not determined the Default Market Value in accordance with paragraph 11.4, the Default Market Value of the relevant Equivalent Securities or Equivalent Collateral shall be an amount equal to their Net Value at the Default Valuation Time; provided that, if at the Default Valuation Time the Non Defaulting Party reasonably determines that, owing to circumstances affecting the market in the Equivalent Securities or Equivalent Collateral in question, it is not reasonably practicable for the Non Defaulting Party to determine a Net Value of such Equivalent Securities or Equivalent Collateral which is commercially reasonable (by reason of lack of tradable prices or otherwise), the Default Market Value of such Equivalent Securities or Equivalent Collateral shall be an amount equal to their Net Value as determined by the Non Defaulting Party as soon as reasonably practicable after the Default Valuation Time.

11.7 Other costs, expenses and interest payable in consequence of an Event of Default: The Defaulting Party shall be liable to the Non-Defaulting Party for the amount of all reasonable legal and other professional expenses incurred by the Non Defaulting Party in connection with or as a consequence of an Event of Default, together with interest thereon at such rate as is agreed by the Parties and specified in paragraph 10 of the Schedule or, failing such agreement, the overnight London Inter Bank Offered Rate as quoted on a reputable financial information service (LIBOR) as at 11.00 a.m., London time, on the date on which it is to be determined or, in the case of an expense attributable to a particular transaction and, where the Parties have previously agreed a rate of interest for the transaction, that rate of interest if it is greater than LIBOR. Interest will accrue daily on a compound basis.

11.8. Set-off: Any amount payable to one Party (the Payee) by the other Party (the Payer) under paragraph 11.2(b) may, at the option of the Non Defaulting Party, be reduced by its set off against any amount payable (whether at such time or in the future or upon the occurrence of a contingency) by the Payee to the Payer (irrespective of the currency, place of payment or booking office of the obligation) under any other agreement between the Payee and the Payer or instrument or undertaking issued or executed by one Party to, or in favour of, the other Party. If an obligation is unascertained, the Non Defaulting Party may in good faith estimate that obligation and set off in respect of the estimate, subject to accounting to the other Party when the obligation is ascertained. Nothing in this paragraph shall be effective to create a charge or other security interest. This paragraph shall be without prejudice and in addition to any right of set off, combination of accounts, lien or other right to which any Party is at any time otherwise entitled (whether by operation of law, contract or otherwise).

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Related agreements and comparisons

Related agreements: Click here for the same clause in the 2018 Pledge 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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2018 Pledge GMSLA 1 · 2 · 3 · 4 · 5 · 6 · 7 · 8 · 9 · 10 · 11 · 12 · 13 · 14 · 15 · 16 · 17 · 18 · 19 · 20 · 21 · 22 · 23 · 24 · 25 · 26 · 27 · 28 · Schedule · Agency Annex

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Content and comparisons

There is little difference between the 2010 GMSLA and the 2018 Pledge GMSLA versions of Consequences of an Event of Default, as you can see more easily in this comparison of the nutshell versions. (There’s a comparison of the full provisions in the usual place in the panel). One thing you will notice is how utterly dismal is the drafting of the original provision. It was no small task to create nutshell versions — you can thank me later — but they boil down to not very much.

The differences that there are are significant, since the philosophical unpinning of what is going on is profoundly different, even if the commercial outcome is the same. Think VHS and Betamax. In a nutshell, under the 2018 Pledge GMSLA:

  • Only the Borrower’s redelivery payments are accelerated, since by the theory of the game, the Lender never gets possession of the collateral and is not therefore in a position to redeliver it.
  • There’s less fog and confusion because ICMA’s crack drafting squad™ in their wisdom removed Letters of Credit as a form of eligible Collateral from the 2018 Pledge GMSLA
  • The reckoning of what is due under Paragraph 11.2(b) — setting off all sums owed by one party against all sums owed by the other — is less fraught, and will always be a net payable back to the Lender (because the Borrower never transferred title to the pledged Collateral in the first place)
  • There is no concept in the2018 Pledge GMSLA of “Deliverable Securities” or “Receivable Securities”, seeing as there will not always be a receiver and a deliverer, so they don’t come into the frame for the reckoning of the Default Market Value in the same way.

ISLA thought leadership

ISLA published a curious piece of thought leadership in September 2018 which painted a worst-case scenario timeline for closing out a 2018 Pledge GMSLA which made it look quite a bit worse than the corresponding critical path under a normal — hardly calculated to set at ease the jittery nerves of a very modern agent lenderer. The perceived difference was this:

2010 GMSLA 2018 Pledge GMSLA
Upon notice of default, Non-Defaulting Party can start immediately liquidate and has 5 days to trade and set pricing to allow for liquidity. You have to return any excess. Upon notice of default Non-Defaulting Party can theoretically start liquidating but has value the pledged Collateral to be transferred. This may take a bit longer in an illiquid market. But seems to the JC there’s no reason you can’t execute trades in the collateral without physically holding it, seeing as it settles later. Any excess goes back to the pledgor.

In either case for the Default Market Value, the main thing you’re valuing is the Loaned Securities not (primarily) the Collateral: as long as you aren’t under-collateralised, and you take steps to get a reasonable price, you can sell all the Collateral — remember, that’s how security works — the Defaulting Party is in the soup and can’t be too particular about what happens to its collateral as long as, once the debt is satisfied, it gets the remainder back. If you are under collateralised, it doesn’t make any odds whether you hold by pledge or title-transfer —either way, you are short.
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Summary


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General discussion

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See also

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References

11. Consequences of an Event of Default

11.1 Application of 11.2 to 11.7 following Event of Default
11.2 Delivery and payment obligations following Event of Default
11.3 Definition of Default Market Value
11.4 Determination of Default Market Value
11.5 Net Value determination where unable to sell Securities
11.6 Where Non-Defaulting Party has not determined Default Market Value
11.7 Other costs, expenses and interest payable in consequence of an Event of Default
11.8 Set-off

See in particular Netting under a GMSLA.

  1. Well, we assume it will be the NDP: the 2010 GMSLA rather brilliantly puts it into an unattributed passive, as if God is going to to it, or it will magically happen by itself. Go, ISLA’s crack drafting squad™.