Default Market Value - GMSLA Provision
2010 Global Master Securities Lending Agreement
Clause 11.3 in full
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Patient observers will note that the 2018 Pledge GMSLA version is quite a lot shorter. This is because there’s no need for AET — being a pledge construct it doesn’t rely on netting in the first place — and all that malarkey about the valuation of Equivalent Collateral is a bit otiose too. Also no faffing around with letters of credit.
The JC’s handy guide to closing out a 2010 GMSLA
If even the nutshell version is too tedious:
- There’s an Event of Default: Note that (unlike the ISDA Master Agreement) an event only becomes an Event of Default once the Non-Defaulting Party has given notice of it with no need for the Non-Defaulting Party to give a further notice: it has already given one (or not had to, if it’s an event triggering Automatic Early Termination). Thus, at once:
- Acceleration: All payment and delivery obligations are accelerated, becoming due as of the date of the Event of Default, which is therefore the effective Termination Date, although not the date on which the close-out is settled (bear with me).
- Default Market Value: Non-Defaulting Party determines the Default Market Value for all non-cash obligations.
- When: Even though this references the Termination Date the NDP determines it as of the Default Valuation Time: at the close, five dealing days after the date of default (or, for an AET, when the NDP became aware of the default).
- Where the NDP has actually bought or sold securities or collateral, it can use the net sale proceeds to calculate the Default Market Value for those assets.
- Where it has not, it takes at least two dealer quotes — offer side for securities it is owed; bid side for those it owes — averages them, and adjusts them for unpaid coupons and transaction costs.
- If it can't do either, it can take its own commercially reasonable estimate of their fair market value, accounting for transaction costs.
- Still no DMV? Then a Net Value at a later time. If the Non-Defaulting Party can’t even bring itself to make up a Default Market Value for the Default Valuation Time — perhaps its legal eagles are chicken lickens and won’t let it — it has to calculate the Net Value at a commercially reasonable time after that.
- Expenses: the Defaulting Party wears these too, and they accrue at overnight LIBOR (yes, or it’s successor).
- Set-off; And the NDP can apply a set off.