Requirements to effect Delivery - GMSLA Provision
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GMSLA Anatomy™
passes as required by this Agreement with full title guarantee, free from all encumbrances. For dematerialised Securities, Collateral delivery and transfer of title will take place under the prevailing rules of the relevant settlement system. The Party acquiring such interests does not have to return the actual assets it recceives but must, subject to the terms of this Agreement, to deliver Equivalent assets as appropriate.
shall pass from one Party to the other subject to the terms and conditions set out in this Agreement, on delivery of the same in accordance with this Agreement with full title guarantee, free from all liens, charges and encumbrances. In the case of Securities, Collateral, Equivalent Securities or Equivalent Collateral title to which is registered in a computer based system which provides for the recording and transfer of title to the same by way of book entries, delivery and transfer of title shall take place in accordance with the rules and procedures of such system as in force from time to time. The Party acquiring such right, title and interest shall have no obligation to return or deliver any of the assets so acquired but, in so far as any Securities are borrowed by or any Collateral is delivered to such Party, such Party shall be obliged, subject to the terms of this Agreement, to deliver Equivalent Securities or Equivalent Collateral as appropriate.
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The beating heart of the legal basis of the 2010 GMSLA.
Even though there’s all this chat about Loans, in fact these transactions are exchanges having all the economic characteristics of loans — the Lender retains all economic risk to the asset being “lent”, and the Borrower takes none of it — but all of not the legal characteristics of loans. In legal terms, they are more like sales.
Legally speaking, the means by which Securities and Collateral move back and forth between parties to a stock loan is outright title transfer. Of course, the Borrower could return the exact asset that it has borrowed, but it is not obliged to and, in most cases it won’t be able to: the very point of a stock loan is to “short sell” into the market the thing you have borrowed, but taken no market exposure to. As soon as you have done this it has gone for all money. You can’t get it back.
What you can do is buy an identical one (the legal term is a “fungible” asset — an identical quantity of the same series, issuer and ISIN — and in stock lending lingo this is called an “equivalent” asset.
As the article on that subject attests, as a term of legal art “equivalent” is a lot more specific than it is in ordinary parlance. It means something fungible; that is, identical in all economic respects.