Borrower’s failure to deliver Equivalent Securities - GMSLA Provision

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

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GMSLA

Clause 9.1 in a Nutshell
Use at your own risk, campers!

9.1 Borrower’s failure to deliver Equivalent Securities : If Borrower doesn’t deliver Equivalent Securities under para 8.3 Lender may:

(a) continue the Loan; or
(b) terminate the individual Loan per para 11.2 as if the Borrower was subject to an Event of Default but the Loan were the only outstanding Loan.

Notwithstanding the above, such a failure will not be an Event of Default.
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Full text of Clause 9.1

9.1 Borrower’s failure to deliver Equivalent Securities: If Borrower fails to deliver Equivalent Securities in accordance with paragraph 8.3 Lender may:

(a) elect to continue the Loan (which, for the avoidance of doubt, shall continue to be taken into account for the purposes of paragraph 5.4 or 5.5 as applicable); or
(b) at any time while such failure continues, by written notice to Borrower declare that that Loan (but only that Loan) shall be terminated immediately in accordance with paragraph 11.2 as if:
(i) an Event of Default had occurred in relation to the Borrower,
(ii) references to the Termination Date were to the date on which notice was given under this sub paragraph, and
(iii) the Loan were the only Loan outstanding.
For the avoidance of doubt, any such failure shall not constitute an Event of Default (including under paragraph 10.1(i)) unless the Parties otherwise agree.

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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: Click to compare the 2010 GMSLA and 2018 Pledge GMSLA versions of this clause.

Comparison: Template:Osladiff 9.1

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Content and comparisons

Other than embedded clause cross-references, Clause 9.1 of the 2010 GMSLA is identical to clause 9.1 of the 2018 Pledge GMSLA. Which is nice.
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Summary

If the Lender decides to terminate, you are into the realm of the fabled and famous mini close-out, wherein the Lender exercises rights to terminate and value the Loan by itself as if it were an Event of Default, whilst not actually being an Event of Default.

So why isn’t a failure to return Securities or Collateral an Event of Default?

This reflects the reality that settlement failures in the equities markets are common and, seeing as the whole point of a stock loan is to provide the borrower with a security it can sell short, the Borrower is likely to be relying on someone else settling the security into it before it can return the security to the Lender — as such the Borrower’s failure is not necessarily evidence that your Borrower is about to auger into the side of a hill.[1]

The Lender has a self-help mechanism it can use to close out its market risk: a buy-in.
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General discussion

What is a failure to pay or deliver then?

Noting the exception for redelivery of Equivalent Securities or Collateral,[2] the failure to pay or deliver Events of Default under the 2010 GMSLA are:

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See also

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References

  1. The same is generally true of Collateral returns (though not Collateral deliveries - see paragraph 9.2.
  2. See 9.1(b) and 9.2(b).
  3. For a jauntily metaphysical examination of the nature of hard cold folding green stuff — why it is, by nature, profoundly different to any other financial instrument, see our article on cash.
  4. From those assets that meet the eligibility criteria in the Schedule; moral of story: don’t allow yourself to be too tightly constrained on eligibility criteria.