Failure to Deliver - GMSLA Provision
2010 Global Master Securities Lending Agreement
Clause 9 in a Nutshell™
Use at your own risk, campers!
Full text of Clause 9
Related agreements and comparisons
Content and comparisons
- 9.1 Borrower’s failure to deliver Equivalent Securities
- 9.2 Lender’s failure to deliver Equivalent Collateral
- 9.3 Failure by either Party to deliver
Paragraph 9 of the 2010 GMSLA is broadly the same in the 2018 Pledge GMSLA, only with no reference to failure by the Lender to return Equivalent Collateral, all for the sensible reason that, under the 2018 Pledge GMSLA construct, the Lender never gets its mitts on the Collateral in the first place, so is hardly in a position to fail to return it.
Comparable master agreements
We are given to understand that neither the Global Master Repurchase Agreement, its American cousin the Master Repurchase Agreement nor the American stock lending agreement the Master Securities Lending Agreement have comparable mini-close-out provisions, though it is understood as a matter of good form that where there has been a simple innocent settlement failure and one can safely buy in — thereby helping oneself — one would never be so vulgar or unsportspersonlike as to actually call an Event of Default. And the market seems cool with that — cognitive dissonance to the power of one — until it comes to worrying whether that will impact a cross-default under a neighbouring ISDA Master Agreement, at which point the buyside market flips out — cognitive dissonance to the power of a trillion.
This is the fabled mini close-out provision of the 2010 GMSLA. Mini close-out is the method of terminating an individual Loan under a 2010 GMSLA or an 1995 OSLA where there is a settlement failure without actually closing out the whole agreement. It applies therefore to a failure to return equivalent securities or equivalent collateral — these can be a function of market dislocations, upstream counterparty failures and liquidity events affecting the asset in question, but not to the failure to deliver collateral in the first place, seeing as if one kind of collateral is not available, it is in the Borrower’s gift to deliver something else that meets eligibility criteria, so its failure to pony up collateral always looks like a credit failure and will count as an Event of Default.
Non-affected party’s option
Note that mini close-out is the non-affected party’s option: If a Borrower, on terminating a Loan, cannot then redeliver the borrowed Securities (because of an upstream failure), it cannot force a mini close-out.
Failure to return Collateral or Securities is not an Event of Default. What is then?
Noting the exception for redelivery of Equivalent Securities or Collateral, 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;
- 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 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.
Since prudential requirements to have netting opinions do not apply within single transactions, one does not need a mini close-out provision to net within transactions under a GMSLA. That happens as of right. Therefore if, as is often the case, your loan portfolio is all the “same way round” — if you are borrowing from, but never lending to, a lender in a gross jurisdiction, then netting doesn’t really do anything for you. Your problem will be your collateral haircut, for which you will be an unsecured creditor of the lender. To fix this, a pledge GMSLA is what you are looking for.
See the peculiar impact mini-closeout has on Default Under Specified Transaction under the ISDA Master Agreement.
- Cash, and why it has a unique place in the financial services firmament
- Mini close-out
- GMSLA Netting
- Pledge GMSLA
- ↑ 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.