Cross Default - GMSLA Provision
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There is no cross default in a securities financing transaction
There’s no need for cross default in any master trading agreement, actually — this is the JC’s considered view, about which you can read at length elsewhere — but the Global Master Securities Lending Agreement and Global Master Repurchase Agreement are a particularly bad candidates for cross default because their transactions are by definition short term (in the case of Global Master Repurchase Agreement) and on call (in the case of Global Master Securities Lending Agreement), so the “mischief” the cross default is designed to remedy — large credit exposure under transactions with long tenor and few regular cash-flows — does not exist.
Cross default, remember, is a banking concept, designed to protect lenders who have unsecured credit exposure to borrowers under fixed rate loans where the only material payments will be regular interest payments, which might be as infrequent as quarterly, semi-annual or even annual. If the lender knows the borrower has defaulted on material indebtedness to another lender — some random — it will not want to wait nine months to see if there is a failure to pay on its own facility before taking any defensive action. Hence, a cross default right. If she can pull you down, I can pull you down.
There’s no need to put one in. Even if you are doing term loans.
All the talk of borrowers and lenders in securities financing transactions makes a certain sort of person giddy. But remember: SFTs are not contracts of indebtedness. Lenders aren’t — legally or economically — lenders. Thus, the omission of cross default from the standard SFT agreements was not a mistake. It was deliberate.
Now, there is a certain stripe of credit officer who will not be convinced of this, and will want to put one in anyway. Does it do any harm? Well yes, actually: it creates contingent liquidity issues for your own treasury department, whom credit will routinely ignore when making their credit requests. And yes, from the perspective of production waste in the negotiation process: insisting on a cross default is, par excellence, the waste of over-processing.
Why not put one in for good measure? SFTRs are collateralised daily, so:
- Neither party has material exposure;
- There will usually be payment flows happening daily as loaned Securities and Collateral values move around with the market, creating collateral transfers; and
- Even if there aren’t, either party can recall the loans on any day
- Okay, okay, a borrower under an agent lending transaction may have a significant exposure across all lenders due to aggregated collateral haircuts, but that is by definition diversified risk, and the borrower can generally break term transactions.
- Unless they are term transactions, but even there the terms tend to be short — ninety days is a maximum — and see above re usual daily collateral flows.