Determination of Default Market Value - GMSLA Provision

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2010 Global Master Securities Lending Agreement
A Jolly Contrarian owner’s manual

Clause 11.4 in a Nutshell
Use at your own risk, campers!

11.4 Transactions and quotes: If, between the Termination Date and the Default Valuation Time:

(a) Actual sale or purchase: the Non-Defaulting Party has bought or sold securities equivalent to those it owes or is owed by the Defaulting Party it may treat the Default Market Value as the net sale proceeds or aggregate purchase cost of the relevant securities. Were the securities sold or purchased are not in identical in amount to the Equivalent Securities, Non-Defaulting Party may in good faith pro rate those values to determine the necessary Default Market Value.
(b) Market quotes: the Non-Defaulting Party has received offer quotations for securities it is owed by the Defaulting Party; or bid quotations for securities it owes the Defaulting Party from at least two regular participants in the Appropriate Market in what it determines to be a commercially reasonable size, it may treat as the Default Market Value the arithmetic mean of the quoted prices as reasonably adjusted to account for for accrued but unpaid interest and Transaction Costs.

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Clause 11.4 in full

11.4 If between the Termination Date and the Default Valuation Time:
11.4(a) the Non Defaulting Party has sold, in the case of Receivable Securities, or purchased, in the case of Deliverable Securities, securities which form part of the same issue and are of an identical type and description as those Equivalent Securities or that Equivalent Collateral, (and regardless as to whether or not such sales or purchases have settled) the Non Defaulting Party may elect to treat as the Default Market Value:
(i) in the case of Receivable Securities, the net proceeds of such sale after deducting all Transaction Costs; provided that, where the securities sold are not identical in amount to the Equivalent Securities or Equivalent Collateral, the Non Defaulting Party may, acting in good faith, either
(A) elect to treat such net proceeds of sale divided by the amount of securities sold and multiplied by the amount of the Equivalent Securities or Equivalent Collateral as the Default Market Value or
(B) elect to treat such net proceeds of sale of the Equivalent Securities or Equivalent Collateral actually sold as the Default Market Value of that proportion of the Equivalent Securities or Equivalent Collateral,
and, in the case of (B), the Default Market Value of the balance of the Equivalent Securities or Equivalent Collateral shall be determined separately in accordance with the provisions of this paragraph 11.4; or
(ii) in the case of Deliverable Securities, the aggregate cost of such purchase, including all Transaction Costs; provided that, where the securities purchased are not identical in amount to the Equivalent Securities or Equivalent Collateral, the Non Defaulting Party may, acting in good faith, either
(A) elect to treat such aggregate cost divided by the amount of securities purchased and multiplied by the amount of the Equivalent Securities or Equivalent Collateralas the Default Market Value or
(B) elect to treat the aggregate cost of purchasing the Equivalent Securities or Equivalent Collateralactually purchased as the Default Market Value of that proportion of the Equivalent Securities or Equivalent Collateral,
and, in the case of (B), the Default Market Value of the balance of the Equivalent Securities or Equivalent Collateralshall be determined separately in accordance with the provisions of this paragraph 11.4;
11.4(b) the Non Defaulting Party has received, in the case of Deliverable Securities, offer quotations or, in the case of Receivable Securities, bid quotations in respect of securities of the relevant description from two or more market makers or regular dealers in the Appropriate Market in a commercially reasonable size (as determined by the Non Defaulting Party) the Non-Defaulting Party may elect to treat as the Default Market Value of the relevant Equivalent Securities or Equivalent Collateral:
(i) the price quoted (or where more than one price is so quoted, the arithmetic mean of the prices so quoted) by each of them for, in the case of Deliverable Securities, the sale by the relevant market marker or dealer of such securities or, in the case of Receivable Securities, the purchase by the relevant market maker or dealer of such securities, provided that such price or prices quoted may be adjusted in a commercially reasonable manner by the Non Defaulting Party to reflect accrued but unpaid coupons not reflected in the price or prices quoted in respect of such Securities;
(ii) after deducting, in the case of Receivable Securities or adding in the case of Deliverable Securities the Transaction Costs which would be incurred or reasonably anticipated in connection with such transaction.

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Related agreements and comparisons

Related agreements: Click here for the same clause in the 2018 Pledge GMSLA
Comparison: Template:Gmsladiff 11.4

Resources and navigation

2010 GMSLA: Full wikitext · Nutshell wikitext | GMLSA legal code
Pledge GMSLA: Hard copy (ISLA) · Full wikitext · Nutshell wikitext |
1995 OSLA: Full wikitext · Nutshell wikitext | GMSLA Netting
Let me Google that for you: Guide to equity finance | ISLA’s guide to securities lending for regulators and policy makers
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Content and comparisons

11. Consequences of an Event of Default

11.1 Application of 11.2 to 11.7 following Event of Default
11.2 Delivery and payment obligations following Event of Default
11.3 Definition of Default Market Value
11.4 Determination of Default Market Value
11.5 Net Value determination where unable to sell Securities
11.6 Where Non-Defaulting Party has not determined Default Market Value
11.7 Other costs, expenses and interest payable in consequence of an Event of Default
11.8 Set-off

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Summary

How you value a mini close-out where a party can’t redeliver a stock (because it’s been suspended or something). It boils down to how you value either leg of the trade.

If the Non-Defaulting Party has actually sold securities equivalent to those it lent, in can treat the price it got as the Default Market Value. If it hasn’t, it must get two or more reference market maker quotations and average those.

Exercising a buy-in

Note that to determine the Default Market Value where a defaulting party is failing on a delivery of securities or collateral under a loan the non-defaulting party must sell (not buy) securities equivalent to those it is expecting back from a Non-Defaulting Party. This, we think, is to ensure that the price is “real”: the temptation otherwise would be for the Non-Defaulting Party to accept any old bid or offer, safe in the knowledge it can pass the cost on to the Defaulting Party.

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.
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See also

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References