Allocation of Agency Loans - GMSLA Provision
This bit gives the Borrower the comfort that the it will find out who the Principal Lender even is - if it doesn't then there's a bit of a practical problem knowing who to sue if yon Lender neglects to return its collateral which, in the ordinary course, it will have over-margined with a haircut of 5 percent or so. So this is a live issue, especially if, as many institutional Borrowers do, you borrow from agent lenders in BIG SIZE.
A legal conundrum that arises in the context of bulk agency orders placed by an asset manager with a broker-dealer on behalf of several clients. Typically the agent will place the order first without naming the principals, only to advise the broker to which principals it should allocate the securities later in the day.
Agents will often proudly declare that at no time, in no circumstances, can they ever be liable as a principal for transactions they instruct in this way on behalf of their clients.
This convenient outlook — I mean, they would say that, wouldn’t they? — provokes more questions that it answers: if the agent isn’t responsible for unallocated trades, then, until they’re allocated, who is? The broker doesn’t know who the principal is, so it can hardly take up matters with it directly. On the other hand, asset managers will hotly deny any kind of personal liability, appealing to their regulatory status, meagre capitalisation, or sheer importance as a valued client in intimating that this risk ought to be the broker's problem.
But denying principal responsibility, in the eyes of the common law, is a rather optimistic disposition. An agent who has not disclosed its principal must perform, unconditionally, on its principal’s behalf. This the agent might not characterise as a principal obligation, but against the rest of the world, it may as well be. The counterparty’s interest is to be paid; it does not care by whom. Nor, under the common law, can agent the shed that responsibility even by naming the principal: the counterparty now has a choice against whom to enforce —- though this the parties may vary by agreement.
So much bunk — all of these reasons. The manager, as agent, chose not to disclose its principal. By doing so it accepted unconditional responsibility for settling its client’s transactions.
Yours truly has waxed really rather lyrical about this conundrum in the modern asset management industry elsewhere — try, for example, undisclosed principal.
Possible agency scenarios
Here are the possible “undisclosed agency” scenarios at the time of contract:
- Fully disclosed agency: Principal has appointed agent, agent has disclosed agency, agent has disclosed principal.
- Undisclosed principal: Principal has appointed agent, agent has disclosed agency, agent has not disclosed principal.
- Undisclosed agency: Principal has appointed agent, agent has not disclosed agency, agent has not disclosed principal.
- Full principal: Principal has not appointed agent, agent has not disclosed agency, agent has not disclosed principal. (i.e., a fellow who claims ex post facto to have been an agent is better known as a “liar”).