Delivery of Equivalent Securities - GMSLA Provision
2010 Global Master Securities Lending Agreement
Clause 8 in a Nutshell™
Use at your own risk, campers!
Full text of Clause 8
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8. Delivery of Equivalent Securities
8.1 Lender’s right to terminate a Loan
8.2 Borrower’s right to terminate a Loan
8.3 Delivery of Equivalent Securities on termination of a Loan
8.4 Delivery of Equivalent Collateral on termination of a Loan
8.5 Delivery of Letters of Credit
8.6 Delivery obligations to be reciprocal
Observers will note: in the 2018 Pledge GMSLA there is no equivalent of the 2010 GMSLA’s Paragraph 8.5 dealing with what to do with Letters of Credit, and no equivalent of the 2010 GMSLA’s Paragraph 8.6 requiring the delivery obligations to be reciprocal.
Instead, we assume to bulk out a paragraph which otherwise seems a bit textually anaemic, when drafting paragraph 8 of the 2018 Pledge GMSLA ISLA’s crack drafting squad™ went to town adding a couple of new paragraphs — 8.3 and 8.4 — that boast quite some textual complexity, twice purporting to avoid some doubt which, had these paragraphs not been added, wouldn’t be there — but boast a lot less forensic interest.
Unless you’ve agreed it has some kind of term, Loans are callable at will by either party.
You do see term loans in certain cases: “pre-borrows”, where an aspiring short seller is expecting a stock to go illiquid and wants to have the security ready to sell when everyone is scrabbling around trying to find enough of the stuff to sell short, thereby avoiding buy-ins and so on — and also in agent lending world, where Borrowers will want some medium term commitment (90 days or so) for trades where they upgrade their prime brokerage and margin loan inventory into high-credit quality assets they can give back to their own treasury departments. financial reporting rules may require these trades to have a minimum remaining tenor to get appropriate RWA treatment.
What if the Securities have been cancelled, redeemed, or converted into something else? The elaborately defined adjective Equivalent does a lot of work here.
But what if the issuer has gone bust? Here there may be little or no liquidity in the shares — they may well have been delisted, for example.
Look here to the mini-closeout provisions, which are designed to cope with exactly this kind of settlement failure.
And a letter of credit is
An old fashioned form of credit support. A bank writes an unconditional letter promising to pay a (usually large) sum on money on demand and without argument to a third party on behalf of a client. This gets small companies a bit of breathing space with trade creditors. Banks charge through the nose for them: they are a form of committed funding.
Lots of formal rules and legal form-obeisance. In any case, not a common way of collateralising a stock loan — done away with entirely in the 2018 Pledge GMSLA but hey — you never know.
Reciprocal obligations — the stock lender’s Section 2(a)(iii)?
This provision allows a Counterparty to suspend payments or deliveries pending satisfactory arrangements where it is concerned as to the creditworthiness of its counterparty. It is a half-arsed version of the ISDA Master Agreement’s feted Section 2(a)(iii).
Otherwise a creditworthy Borrower would be obliged to redeliver Equivalent Securities to a bankrupt Lender even though it did not expect to receive its Equivalent Collateral back, which would prejudice its ability to effect a mini close-out and set off its obligation to deliver Equivalent Securities against that Collateral return.
It's kind of weird, loosey goosey language:
- “If I think you're bust and I don't want to pay, I don't have to, unless I couldn't pay or didn't want to pay, in which case I have to pay.”
Consult the circular logicians to pick your way out of that one.
- Letter of credit
- Market Value
- ISDA’s famed Section 2(a)(iii)