Collateral - Pledge GMSLA Provision
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2018 Global Master Securities Lending Agreement (Pledge version)
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Original text
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Comparisons
Redlines
2010 ⇒ 2018: Redline of the 2010 GMSLA vs. the 2018 Pledge GMSLA: comparison (and in reverse)
Discussion
This is one of the main points of difference between the 2010 GMSLA and the 2018 Pledge GMSLA, largely because of the way Collateral is handled.
Basics
“Equivalent”
“Equivalent” is a term of legal art, with a very precise and exact meaning, often misunderstood even by specialists, and I commend to you JC’s page on the topic. It does not mean just a similar, and it does not mean the exact self-same instrument, with the same certificate number, that you were originally given. It means an instrument having the same ISIN.
Of course, in our dematerialised digital world, there is no certificate-by-certificate distinction to be drawn any longer: securities are electronic impulses, no more separable from one another than are gas molecules in a pipe. One instrument from a given ISIN is indistinguishable from any other, so the practical purpose of defining “equivalence” is somewhat moot.
But accountants, who consider the “true sale” of something to be a meaningful concept when compiling books, records and balance sheets still insist on the distinction, so make it we still must.
In the 2010 GMSLA, “equivalent” applies to both Loaned Securities and Collateral, but only to Loaned Securities in the 2018 Pledge GMSLA. Since the Collateral in a 2018 Pledge GMSLA is pledged and cannot be rehypothecated no question arises of any equivalent: you are getting the self-same thing back.
On the merit of a well-deployed adjective
Techy drafting aside: Now here’s a funny thing. In the 2000 GMSLA, there were four defined terms relating to the Securities and Collateral that pass between the parties to a stock loan, all of them nouns: Securities, Collateral, Equivalent Securities and Equivalent Collateral.
But under the 2010 GMSLA, there are just three; two shorter nouns and an adjective: Securities, Collateral, and Equivalent.
This means you can move from the utterly tiring “Securities, Collateral, Equivalent Securities or Equivalent Collateral” which is fire-hosed throughout the 2000 GMSLA to the less offensive “Securities, Collateral or their Equivalents” in the 2010 GMSLA. Well, you could have, but the drafters didn’t.
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