Act of Insolvency - GMSLA Provision

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2010 Global Master Securities Lending Agreement
A Jolly Contrarian owner’s manual

Definition Act of Insolvency in a Nutshell
Use at your own risk, campers!

Act of Insolvency means for either Party:

(a) a general assignment for the benefit of, or entering into a reorganisation, arrangement, or composition with creditors; or
(b) its admission it is unable to pay its debts when due; or
(c) an administrator is appointed over a material part of its business (or it seeks one); or
(d) a bankruptcy petition is filed on it (other than in by reference to Agreement) and is not stayed or dismissed within 30 days; or
(e) its creditors meet to consider a voluntary arrangement between them;

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Definition Act of Insolvency in full

Act of Insolvency means in relation to either Party:

(a) its making a general assignment for the benefit of, or entering into a reorganisation, arrangement, or composition with creditors; or
(b) its stating in writing that it is unable to pay its debts as they become due; or
(c) its seeking, consenting to or acquiescing in the appointment of any trustee, administrator, receiver or liquidator or analogous officer of it or any material part of its property; or
(d) the presentation or filing of a petition in respect of it (other than by the other Party to this Agreement in respect of any obligation under this Agreement) in any court or before any agency alleging or for the bankruptcy, winding up or insolvency of such Party (or any analogous proceeding) or seeking any reorganisation, arrangement, composition, re adjustment, administration, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such petition not having been stayed or dismissed within 30 days of its filing (except in the case of a petition for winding-up or any analogous proceeding in respect of which no such 30 day period shall apply); or
(e) the appointment of a receiver, administrator, liquidator or trustee or analogous officer of such Party over all or any material part of such Party’s property; or
(f) the convening of any meeting of its creditors for the purpose of considering a voluntary arrangement as referred to in Section 3 of the Insolvency Act 1986 (or any analogous proceeding);

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Related agreements and comparisons

Related agreements: Click here for the same clause in the 2018 Pledge GMSLA
Comparison: Click to compare the 2010 GMSLA and 2018 Pledge GMSLA versions of this clause.

Resources and navigation

2010 GMSLA: Full wikitext · Nutshell wikitext | GMLSA legal code
Pledge GMSLA: Hard copy (ISLA) · Full wikitext · Nutshell wikitext |
1995 OSLA: Full wikitext · Nutshell wikitext | GMSLA Netting
Let me Google that for you: Guide to equity finance | ISLA’s guide to securities lending for regulators and policy makers
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2018 Pledge GMSLA 1 · 2 · 3 · 4 · 5 · 6 · 7 · 8 · 9 · 10 · 11 · 12 · 13 · 14 · 15 · 16 · 17 · 18 · 19 · 20 · 21 · 22 · 23 · 24 · 25 · 26 · 27 · 28 · Schedule · Agency Annex

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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.
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Summary

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.
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See also

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References