Act of Insolvency - GMSLA Provision
2010 Global Master Securities Lending Agreement
Definition Act of Insolvency in full
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Content and comparisons
The Act of Insolvency provisions are identical in the 2018 Pledge GMSLA and the 2010 GMSLA. Also, compare this with the leave-nothing-to-the-imagination “Bankruptcy” definition in the ISDA Master Agreement. The 2010 GMSLA’s grace period is the languid 30 days, like the one in the 1992 ISDA, rather than the more stringent 15 introduced in the 2002 ISDA.
Termination upon insolvency
Credit officers will hotly deny this, but when it comes to closing out a master trading agreement there are two main triggers: failure to pay and bankruptcy/insolvency. They also tend to be the most lightly negotiated — it’s hard to argue that your counterparty shouldn’t be allowed to pull its trigger if you have gone bankrupt — but there are some nuances both to what counts as an insolvency, which may differ for different entity types (banks and insurers in particular having special local administrative regimes, or bank recovery and resolution frameworks which ameliorate the hard lines between solvency and oblivion. So expect a little jiggery pokery around the edges in defining what counts as an insolvency event. But it is not contentious stuff; just detail.
Bank recovery and resolution: Similarly, some bankruptcy regimes may impede a claimant’s normal rights under the master agreement once the game is finally up. These measures are designed to ensure an orderly resolution of the institution, protect other creditors, depositors, and investors who might hold preferred or secured claims So the insolvent entity’s contractual obligations might be suspended. A counterparty might not be allowed to close out its open transactions. This is lovely for the folk queueing ut they introduce risk to treading counterparties who have not only credit but market risk on the line. It is not a nice feeling to have your transactions suddenly frozen while the market is gyrating like a belly-dancer, and the people who you are trading with wandering around on the pavement outside their office clutching iron mountain boxes.
Effect on netting: Where these suspension rights stop you quickly closing out and netting your exposures they might mean your netting analysis fails altogether. This gives you real-world, present time problems, since you must hold capital against the gross exposure under the contract.
- Act of Insolvency under the 2018 Pledge GMSLA (spoiler: it’s the same).
- Bankruptcy under the ISDA Master Agreement