Buy-In - GMSLA Provision
2010 Global Master Securities Lending Agreement
Clause Buy-In in a Nutshell™
Use at your own risk, campers!
Full text of Clause Buy-In
Related agreements and comparisons
Content and comparisons
Relevant especially for Clause 9.3 — Failure by either Party to deliver. Compare also with settlement failures under clause 10(h) of the Global Master Repurchase Agreement.
A buy in is the self-help process whereby a counterparty can settle a failing delivery itself, and charge it back to the failing counterparty.
To understand the buy in process you really want to go and have a look at clauses 9.3 and — to work out what this means when calculating your mini close-out, 11.4 of the 2010 GMSLA . All the information is there. But, in a nutshell:
9.3 Failure by either Party to deliver
Where a Party (the Transferor) fails to deliver Equivalent Securities or Collateral when due and the other Party (the Transferee) incurs interest, overdraft expenses or Buy in costs the Transferor must, within one Business Day of a demand, pay the Transferee and hold it harmless against those costs that arise directly from that failure other than (i) costs arising from the Transferee’s negligence or wilful default and (ii) any consequential losses).
Note that “Deliverable Securities” and “Receivable Securities” are judged from the perspective of the Defaulting Party being the one having to deliver or receive. This is quite confusing, especially when it comes to the whole question of determining a Default Market Value, which naturally is expressed from the perspective of the non-Defaulting Party, and indeed completely bamboozled the JC for a number of years. In any case, if — as you would expect — the Defaulting Party is failing to deliver Securities or Collateral, the Non-Defaulting Party has to go and get some securities and exercises a buy-in.
Tricks to watch out for, especially in illiquid stocks, is that the Non-Defaulting Party is not somehow influencing the price at which that innocent third party might transact (by agreeing to enter an offsetting transaction at the same time). That would be fraudulent, of course.
- 2010 GMSLA Clause 9.3: Failure by either Party to deliver
- 2010 GMSLA Clause 11.4: Determination of Default Market Value