Automatic Early Termination - GMSLA Provision

From The Jolly Contrarian
Jump to navigation Jump to search

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

Resources and navigation

2010 GMSLA: Full wikitext · Nutshell wikitext | GMLSA legal code | GMSLA Netting

Pledge GMSLA: Hard copy (ISLA) · Full wikitext · Nutshell wikitext |
1995 OSLA: OSLA wikitext | OSLA in a nutshell | GMSLA/PGMSLA/OSLA clause comparison table
From Our Friends On The Internet: Guide to equity finance | ISLA’s guide to securities lending for regulators and policy makers
2010 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 · Schedule · Agency Annex · Addendum for Pooled Principal Agency Loans
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

Stock Loan owner’s manuals: 2010 GMSLA · 2000 GMSLA · Pledge GMSLA · OSLA

Index: Click to expand:

Clause 10.1(d) in a Nutshell

Use at your own risk, campers!
10.1(d) Act of Insolvency: An Act of Insolvency occurring to Lender or Borrower. If Automatic Early Termination applies, if anyone presents a winding up petition or appoints a liquidator, it will be an Automatic Early Termination and the Non Defaulting Party need not serve written notice.

Full text of Clause 10.1(d)

10.1(d) an Act of Insolvency occurring with respect to Lender or Borrower, provided that, where the Parties have specified in paragraph 5 of the Schedule that Automatic Early Termination shall apply, an Act of Insolvency which is the presentation of a petition for winding up or any analogous proceeding or the appointment of a liquidator or analogous officer of the Defaulting Party shall not require the Non Defaulting Party to serve written notice on the Defaulting Party (Automatic Early Termination);

Related agreements and comparisons

Related agreements: Click here for the same clause in the 2018 Pledge GMSLA
Related agreements: Click here for the same clause in the 1995 OSLA
Comparison: Template:Gmsladiff 10.1(d)
Comparison: Template:Osladiff 10.1(d)

Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you.
Sign up for our newsletter.

Content and comparisons

The obvious comparison is with the ISDA Master Agreement’s Automatic Early Termination regime — ISDA’s crack drafting squad™ dreamed up this loopy concept in the first place — and you should go to that place for discussion.



This discussion from relating to the ISDA’s clause is largely germane:

Automatic Early Termination is an odd and misunderstood concept which exists in Section 6(a) Right to Terminate Following Event of Default of the ISDA Master Agreement. As is so much in the ISDA Master Agreement, it’s all about Netting. Where a jurisdiction suspends terms of contracts in a period of formal insolvency, the idea is to have the ISDA break before that suspension kicks in — so close-out netting works.

AET is thus only triggered by certain events under the Bankruptcy event of default — formal bankruptcy procedures — and not by economic events that tend to indicate insolvency (such as an inability to pay debts as they fall due, technical insolvency or the exercise of security. Nor does it apply to other Events of Default.

Automatic early termination (“AET”) protects in jurisdictions (e.g., Germany and Switzerland) where certain bankruptcy events would allow a liquidator to “cherry-pick” those transactions it wishes to honour (those which are in-the-money to the defaulting party) and avoid those where the defaulting party is out-of-the-money.

It is only really useful:

(1) to a regulated financial institution which
(2) would incur a capital charge if it doesn’t have a netting opinion, and
(3) where it wouldn’t get that netting opinion for a particular counterparty without AET being switched on in its ISDA Master Agreement.

There are only few counterparty types where these conditions prevail: the German and Swiss corporates mentioned above, for example. There may be others, but not many, because AET is a good-old-days, regulators-really-are-dopey-if-they-fall-for-this kind of a tactic. I mean, really? Deeming your ISDA to have magically terminated, without anyone’s knowledge or action, the instant before that termination would become problematic as a result of your insolvency? Come on. Is any sophisticated market really going to wear that? (No slight meant on Germany or Switzerland here: the “Teutonic” AET does not deliver netting where unequivocally it would otherwise be forbidden, but rather is buttress residual doubt about the effectiveness of netting during insolvency as a result of looseness in insolvency regulations that aren’t categorical that you can net. The view is generally it should be okay in insolvency, but there are just some freaky discretions which may make life awkward if used maliciously. This is not legal advice obviously.)


See also