Allocation of Agency Loans - GMSLA Provision

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In a Nutshell Clause Addendum 4:

Addendum 4. Allocation of Agency Loans

4.1 An Agent must allocate an Agency Loan to one or more Principals before the Settlement Date. Each Principal will be responsible for only that part of an Agency Loan allocated to it. The Agent must promptly disclose all allocations to the Borrower (using a name or agreed unique identifier).
4.2 Once allocated, from the effective date of an Agency Loan, a separate Loan will be deemed between Borrower and each Principal with respect to its respective portion of the Agency Loan.
4.3 If the Agent fails to allocate a loan, when assessing the Borrower’s damages (but for no other purpose) the Borrower may assume that, had the Loan had been properly allocated it would have been duly performed.

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2010 GMSLA full text of Clause Addendum 4:

Addendum 4. Allocation of Agency Loans

4.1 The Agent undertakes that if, at the time of entering into an Agency Loan, the Agent has not allocated the Loan to a Principal, it will allocate the Loan before the Settlement Date for that Agency Loan either to a single Principal or to several Principals, each of whom shall be responsible for only that part of the Agency Loan which has been allocated to it. Promptly following such allocation, the Agent shall notify Borrower of the Principal or Principals (whether by name or reference to a code or identifier which the Parties have agreed will be used to refer to a specified Principal) to which that Loan or part of that Loan has been allocated.
4.2 Upon allocation of a Loan in accordance with paragraph 4.1 above or otherwise, with effect from the date on which the Loan was entered into:
(a) where the allocation is to a single Principal, the Loan shall be deemed to have been entered into between Borrower and that Principal; and
(b) where the allocation is to two or more Principals, a separate Loan shall be deemed to have been entered into between Borrower and each such Principal with respect to the appropriate proportion of the Loan.
4.3 If the Agent shall fail to perform its obligations under paragraph 4.2 above then for the purposes of assessing any damage suffered by Borrower (but for no other purpose) it shall be assumed that, if the Loan concerned (to the extent not allocated) had been allocated in accordance with that paragraph, all the terms of the Loan would have been duly performed.

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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.

Unallocated trades

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: