Failure to Deliver - GMSLA Provision

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

Clause 9 in a Nutshell
Use at your own risk, campers!

9. Failure to Deliver
9.1 Borrower’s failure to deliver Equivalent Securities : If Borrower doesn’t deliver Equivalent Securities under para 8.3 Lender may:

(a) continue the Loan; or
(b) terminate the individual Loan per para 11.2 as if the Borrower was subject to an Event of Default but the Loan were the only outstanding Loan.

Notwithstanding the above, such a failure will not be an Event of Default.
9.2 Lender’s failure to deliver Equivalent Collateral: If Lender fails to deliver Equivalent Non Cash Collateral on termination of a Loan (See 8.4), Borrower may:

9.2(a) continue the Loan; or
9.2(b) terminate the Loan under paragraph 11.2 by written notice to Lender, as if:
(i) an Event of Default had occurred to the Lender;
(ii) the Termination Date were the date of such written notice, and
(iii) the Loan were the only Loan outstanding.

However this will not be an Event of Default.
9.3 Failure by either Party to deliver
Where a Party (the Transferor) fails to deliver Equivalent Securities or Collateral when due and the other Party (the Transferee) incurs interest, overdraft expenses or Buy in costs the Transferor must, within one Business Day of a demand, pay the Transferee and hold it harmless against those costs that arise directly from that failure other than (i) costs arising from the Transferee’s negligence or wilful default and (ii) any consequential losses).
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Clause 9 in full

9. Failure to Deliver
9.1 Borrower’s failure to deliver Equivalent Securities: If Borrower fails to deliver Equivalent Securities in accordance with paragraph 8.3 Lender may:

(a) elect to continue the Loan (which, for the avoidance of doubt, shall continue to be taken into account for the purposes of paragraph 5.4 or 5.5 as applicable); or
(b) at any time while such failure continues, by written notice to Borrower declare that that Loan (but only that Loan) shall be terminated immediately in accordance with paragraph 11.2 as if:
(i) an Event of Default had occurred in relation to the Borrower,
(ii) references to the Termination Date were to the date on which notice was given under this sub paragraph, and
(iii) the Loan were the only Loan outstanding.
For the avoidance of doubt, any such failure shall not constitute an Event of Default (including under paragraph 10.1(i)) unless the Parties otherwise agree.

9.2 Lender’s failure to deliver Equivalent Collateral: If Lender fails to deliver Equivalent Collateral comprising Non Cash Collateral in accordance with paragraph 8.4 or 8.5, Borrower may:

(a) elect to continue the Loan (which, for the avoidance of doubt, shall continue to be taken into account for the purposes of paragraph 5.4 or 5.5 as applicable); or
(b) at any time while such failure continues, by written notice to Lender declare that that Loan (but only that Loan) shall be terminated immediately in accordance with paragraph 11.2 as if
(i) an Event of Default had occurred in relation to the Lender,
(ii) references to the Termination Date were to the date on which notice was given under this sub paragraph, and
(iii) the Loan were the only Loan outstanding.

For the avoidance of doubt, any such failure shall not constitute an Event of Default (including under paragraph 10.1(i)) unless the Parties otherwise agree.
9.3 Failure by either Party to deliver: Where a Party (the Transferor) fails to deliver Equivalent Securities or Equivalent Collateral by the time required under this Agreement or within such other period as may be agreed between the Transferor and the other Party (the Transferee) and the Transferee:

(a) incurs interest, overdraft or similar costs and expenses; or
(b) incurs costs and expenses as a direct result of a Buy in exercised against it by a third party,

then the Transferor agrees to pay within one Business Day of a demand from the Transferee and hold harmless the Transferee with respect to all reasonable costs and expenses listed in sub paragraphs (a) and (b) above properly incurred which arise directly from such failure other than (i) such costs and expenses which arise from the negligence or wilful default of the Transferee and (ii) any indirect or consequential losses.
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Related agreements and comparisons

Related agreements: Click here for the same clause in the 2018 Pledge GMSLA
Comparison: Click to compare the 2010 GMSLA and 2018 Pledge GMSLA versions of this clause.

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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2010 GMSLA 1 · 2 · 3 · 4 · 5 · 6 · 7 · 8 · 9 · 10 · 11 · 12 · 13 · 14 · 15 · 16 · 17 · 18 · 19 · 20 · 21 · 22 · 23 · 24 · 25 · 26 · 27 · Schedule · Agency Annex · Addendum for Pooled Principal Agency Loans
2018 Pledge GMSLA 1 · 2 · 3 · 4 · 5 · 6 · 7 · 8 · 9 · 10 · 11 · 12 · 13 · 14 · 15 · 16 · 17 · 18 · 19 · 20 · 21 · 22 · 23 · 24 · 25 · 26 · 27 · 28 · Schedule · Agency Annex

Stock Loan owner’s manuals: GMSLA · Pledge GMSLA · OSLA

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Content and comparisons

9. Failure to Deliver

9.1 Borrower’s failure to deliver Equivalent Securities
9.2 Lender’s failure to deliver Equivalent Collateral
9.3 Failure by either Party to deliver

Paragraph 9 of the 2010 GMSLA is broadly the same in the 2018 Pledge GMSLA, only with no reference to failure by the Lender to return Equivalent Collateral, all for the sensible reason that, under the 2018 Pledge GMSLA construct, the Lender never gets its mitts on the Collateral in the first place, so is hardly in a position to fail to return it.

Comparable master agreements

We are given to understand that neither the Global Master Repurchase Agreement, its American cousin the Master Repurchase Agreement nor the American stock lending agreement the Master Securities Lending Agreement have comparable mini-close-out provisions, though it is understood as a matter of good form that where there has been a simple innocent settlement failure and one can safely buy in — thereby helping oneself — one would never be so vulgar or unsportspersonlike as to actually call an Event of Default. And the market seems cool with that — cognitive dissonance to the power of one — until it comes to worrying whether that will impact a cross-default under a neighbouring ISDA Master Agreement, at which point the buyside market flips out — cognitive dissonance to the power of a trillion.
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Summary

Mini close-out

This is the fabled mini close-out provision of the 2010 GMSLA. Mini close-out is the method of terminating an individual Loan under a 2010 GMSLA or an 1995 Overseas Securities Lender's Agreement (OSLA) where there is a settlement failure without actually closing out the whole agreement. It applies therefore to a failure to return equivalent securities or equivalent collateral — these can be a function of market dislocations, upstream counterparty failures and liquidity events affecting the asset in question, but not to the failure to deliver collateral in the first place, seeing as if one kind of collateral is not available, it is in the Borrower’s gift to deliver something else that meets eligibility criteria, so its failure to pony up collateral always looks like a credit failure and will count as an Event of Default.

Non-affected party’s option

Note that mini close-out is the non-affected party’s option: If a Borrower, on terminating a Loan, cannot then redeliver the borrowed Securities (because of an upstream failure), it cannot force a mini close-out.

Failure to return Collateral or Securities is not an Event of Default. What is then?

Noting the exception for redelivery of Equivalent Securities or Collateral[1], the failure to pay or deliver Events of Default under the 2010 GMSLA are:

GMSLA Netting

Since prudential requirements to have netting opinions do not apply within single transactions, one does not need a mini close-out provision to net within transactions under a GMSLA. That happens as of right. Therefore if, as is often the case, your loan portfolio is all the “same way round” — if you are borrowing from, but never lending to, a lender in a gross jurisdiction, then netting doesn’t really do anything for you. Your problem will be your collateral haircut, for which you will be an unsecured creditor of the lender. To fix this, a pledge GMSLA is what you are looking for.

Odd spot

See the peculiar impact mini-closeout has on Default Under Specified Transaction under the ISDA Master Agreement.
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See also

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References

  1. See 9.1(b) and 9.2(b).
  2. For a jauntily metaphysical examination of the nature of hard cold folding green stuff — why it is, by nature, profoundly different to any other financial instrument, see our article on cash.
  3. From those assets that meet the eligibility criteria in the Schedule; moral of story: don’t allow yourself to be too tightly constrained on eligibility criteria.