Borrower’s failure to deliver Equivalent Securities - GMSLA Provision
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2010 Global Master Securities Lending Agreement
Clause 9.1 in a Nutshell™ Use at your own risk, campers!
Full text of Clause 9.1
Related agreements and comparisons
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Content and comparisons
Other than embedded clause cross-references, Clause 9.1 of the 2010 GMSLA is identical to clause 9.1 of the 2018 Pledge GMSLA. Which is nice.
Summary
If the Lender decides to terminate, you are into the realm of the fabled and famous mini close-out, wherein the Lender exercises rights to terminate and value the Loan by itself as if it were an Event of Default, whilst not actually being an Event of Default.
So why isn’t a failure to return Securities or Collateral an Event of Default?
This reflects the reality that settlement failures in the equities markets are common and, seeing as the whole point of a stock loan is to provide the borrower with a security it can sell short, the Borrower is likely to be relying on someone else settling the security into it before it can return the security to the Lender — as such the Borrower’s failure is not necessarily evidence that your Borrower is about to auger into the side of a hill.[1]
The Lender has a self-help mechanism it can use to close out its market risk: a buy-in.
General discussion
What is a failure to pay or deliver then?
Noting the exception for redelivery of Equivalent Securities or Collateral,[2] the failure to pay or deliver Events of Default under the 2010 GMSLA are:
- Cash Collateral failures: Any failure to pay or repay cash Collateral when required — the theory being that you can’t blame an upstream counterparty for your failure to deliver cash[3];
- Non-cash Collateral delivery failures: Any failure to deliver non-cash Collateral (either at inception of by way of further Collateral). Here the Borrower has discretion[4] on what Collateral it delivers, so again doesn't have the excuse that it has suffered an upstream failure. Where it is a Collateral return, the Lender has less discretion, so is more prone to upstream settlement failures. Note that non-delivery of Securities at the commencement of a Loan is not a failure to pay, also for “potential upstream failure” reasons: it just means the Loan doesn’t happen.
- Mini closeout failures: Any failure to pay following exercise of a mini closeout under Paragraph 9. That is, not a failure to redeliver Equivalent Collateral or Securities themselves, but a failure to settle any mini close-out or buy-in following the mini closeout.
See also
- Mini close-out
- Failure to pay under the 2010 GMSLA
References
- ↑ The same is generally true of Collateral returns (though not Collateral deliveries - see paragraph 9.2.
- ↑ See 9.1(b) and 9.2(b).
- ↑ For a jauntily metaphysical examination of the nature of hard cold folding green stuff — why it is, by nature, profoundly different to any other financial instrument, see our article on cash.
- ↑ From those assets that meet the eligibility criteria in the Schedule; moral of story: don’t allow yourself to be too tightly constrained on eligibility criteria.