Margin Maintenance - GMRA Provision
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2000 Global Master Repurchase Agreement
Paragraph 4 in a Nutshell™ Use at your own risk, campers!
Full text of Paragraph 4
Related agreements and comparisons
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Content and comparisons
The nature of repurchase transactions — discrete transactions for the sale and purchase of securities, separated in time but weakly linked — mean that margin works differently to an credit support under an ISDA Master Agreement or Collateral under a 2010 GMSLA.
Summary
This provision says far less of any moment than its heft would suggest it does. In a nutshell:
- You can call for Margin if you have a Net Exposure, meaning the the amount the other party owes you — accounting for unpaid income and posted margin — is more than you owe it.
- As long as you meet eligibility criteria, it is up to the person having to post margin to decide what to post except that the requester can ask for any outstanding margin it has posted back. This scenario should only happen where the Net Exposure inverts between margin calls. But anyway: if you’ve posted away, you can ask for it back. Otherwise, the other guy decides.
- Where you post cash, you do so in the Base Currency and — stating the bleeding obvious here, as any fule kno[2] — the transfer of cash creates indebtedness.
- In lieu of Margin Transfers, the parties can agree to “reprice” a Transaction — effectively restriking and settling it to market and creating a new Transaction in the same Purchased Securities at the prevailing rate — or to “adjust” it, in which case you can change up the Purchased Securities to something else altogether.
There follow some laborious provisions explaining exactly how this happens, but they do no more than tediously — and, in all likelihood, wrongly — codify the real-world common sense your operations team will undoubtedly bring to the task of figuring it out; a feat you can bet the house on that they won’t achieve by reading the nether regions of paragraph 4 of the 2010 GMRA.
General discussion
The manifold varieties of credit mitigation
ISDA Master Agreement
“Credit support” under an ISDA Master Agreement is handled away from a given Swap Transaction, under a separate credit support annex which references a counterparty’s net exposure across the whole portfolio of Transactions
- 1995 CSA: an English law credit support annex is itself a Transaction under the ISDA Master Agreement, under which the parties exchange Eligible Credit Support (in the olden days, often various kinds of high-grade bonds or cash; more recently, in VM only arrangements, cash only) with a market value designed to exactly offset the net exposure under all the other “real” Transactions.
- 1994 NY CSA: A New York law credit support annex works to all intents and purposes the same way, but it is a pledge and not a title-transfer arrangement, so therefore, at first blush, takes the form of a security interest, and is not therefore a Transaction under the ISDA Master Agreement. However, most 1994 NY CSAs allow the parties to “rehypothecate” pledged Credit Support without limit, which means they function like a title transfer collateral arrangements pretty much from the get-go.
Stock lending
Stock loan arrangements come in two varieties: American ones, and English ones. The standard English law title transfer stock lending agreement, the 2010 GMSLA, has recently spawned a pledge version designed specifically for agent lenders which is a genuine security interest model with no right of rehypothecation.
- English law 2010 GMSLA: Unlike the ISDA Master Agreement, Collateral is posted on a loan-by-loan basis, and Collateral is an integral part of the Loan transaction. That said, Collateral posting and management, day-to-day, is usually handled on a portfolio basis: you don’t make tiny little margin calls; you make one big net one, but there is no separate annex or Transaction representing Collateral flows.
- English law 2018 Pledge GMSLA: ISLA developed the 2018 Pledge GMSLA to deal with punitive capital rules which required financial institutions to risk-weight excess Collateral balances. Solution: financial institution pledges them, rather than title-transferring them. Important: there is no right to rehypothecate, because that would undermine the pledge. Thus a 2018 Pledge GMSLA is a genuine secured lending arrangement.
- New York law 2017 MSLA: Like the 1994 NY CSA, the 2017 MSLA is a pledge-with-rehypothecation arrangement: it looks like a security interest, but for practical purposes isn’t. Aside from upsetting your CASS people, it functions practically as if the person holding Collateral at any time is its absolute owner with an obligation to return something equivalent.
Repo
Unlike a stock loan, which a repo resembles in many other respects, the initial exchange is not by way of collateral, but is an outright purchase of the bond in question. Therefore required margin reflects divergences between the prevailing value of the purchased asset and the prevailing Repurchase Price (which is the original Purchase Price with an uplift by way of the repo rate).