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| | | {{manual|MSG|2010|11.2|Clause||medium}} |
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| ===Gross Jurisdictions===
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| Upon the [[insolvency]] of a Counterparty in a [[non-netting jurisdiction]], the worst-case scenario is to aggregate the market value of each “{{gmslaprov|Loan}}” (being a transfer of {{gmslaprov|Securities}} against a transfer of {{gmslaprov|Collateral}}, with a simultaneous agreement to transfer back {{gmslaprov|Equivalent}} {{gmslaprov|Securities}} against {{gmslaprov|Equivalent}} {{gmslaprov|Collateral}}) which is in the money to the {{gmslaprov|Non-Defaulting Party}} without taking into account the market value of any {{gmslaprov|Loan}} which is [[out of the money]] for the {{gmslaprov|Non Defaulting Party}}. <br>
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| Given that {{tag|GMSLA}}s are margined daily, we would expect the market value of any {{gmslaprov|Loan}} to be roughly equivalent to the “[[haircut]]” on the {{gmslaprov|Posted Collateral}} for that {{gmslaprov|Loan}} on any day. <br>
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| A party to a {{tag|GMSLA}} has a general right to terminate any {{gmslaprov|Loan}} at any time (thereby converting offsetting forward obligations into a single payment amount for that {{gmslaprov|Loan}}), and could therefore terminate all {{gmslaprov|Loans}} upon an insolvency without specifically invoking an {{gmslaprov|Event of Default}} (although that right would also be available). <br>
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| Note that the position upon termination of the whole agreement expressly because of an {{gmslaprov|Event of Default}} (without first having terminated each {{gmslaprov|Loan}} per the above) is not quite as clear.
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| ====Loan Termination====
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| *Under clause {{gmslaprov|8.2}} and {{gmslaprov|8.2}} of the {{tag|GMSLA}}, subject to the terms of any {{gmslaprov|Loan}}*, either party may terminate any {{gmslaprov|Loan}} at any time by calling for redelivery of {{gmslaprov|Equivalent}} {{gmslaprov|Securities}} (in the case of a {{gmslaprov|Lender}}) or giving notice of redelivery of {{gmslaprov|Equivalent}} {{gmslaprov|Securities}} (in the case of a {{gmslaprov|Borrower}}), in each case by [[title transfer]].
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| *Delivery obligations are reciprocal, such that neither {{gmslaprov|Party}} is obliged to make delivery unless it is satisfied the other party will make such delivery to it (cl {{gmslaprov|8.6}}), and an innocent party is entitled to suspend performance of its delivery obligation until satisfied the relevant delivery by its counterparty will be made.
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| *If a {{gmslaprov|Party}} fails to deliver {{gmslaprov|Equivalent}} {{gmslaprov|Securities}} or {{gmslaprov|Equivalent}} {{gmslaprov|Collateral}}, the other party may elect either to continue the {{gmslaprov|Loan}} (i.e., as suspended) or may by written notice declare that the {{gmslaprov|Loan}} is terminated immediately as if an {{gmslaprov|Event of Default}} had occurred with respect to that {{gmslaprov|Loan}} only (note such a termination would not ''actually'' be an {{gmslaprov|Event of Default}} under the {{gmslaprov|GMSLA}} so let's call this a "quasi-Event of Default") and it was the only {{gmslaprov|Loan}} outstanding. <br>
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| This is important because it establishes a “transaction termination” methodology generating a market value for each transaction analogous to Section {{isdaprov|6(e)}} of the {{isdama}}.<br>
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| '''Event of Default Close-out Methodology''': Upon determining a “quasi-Event of Default” with respect to a single {{gmslaprov|Loan}} the {{gmslaprov|Non-Defaulting Party}} will determine the {{gmslaprov|Default Market Value}} of the {{gmslaprov|Equivalent}} {{gmslaprov|Securities}} and {{gmslaprov|Equivalent}} {{gmslaprov|Collateral}} under that {{gmslaprov|Loan}}, the relevant amounts will be offset to arrive at a balance payable by one party to the other in respect of that {{gmslaprov|Loan}} on the next business day. <br>
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| Under this analysis this procedure would be followed in respect of all outstanding Loans, to arrive at a series of “termination amounts”, one payable in respect of each {{gmslaprov|Loan}}.
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| Clause {{gmslaprov|11.8}} of the {{tag|GMSLA}} purports to allow a {{gmslaprov|Non-Defaulting Party}} to set such individual termination amounts off against each other and this clause is the one that might be challenged in insolvency in a gross jurisdiction. | |
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| ====Term {{gmslaprov|Loans}}====
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| *Note term {{gmslaprov|Loans}} may need to be treated differently, as the “without notice” termination right (under {{gmslaprov|8.1}} and {{gmslaprov|8.2}}) will not necessarily apply. We recommend (i) updating template confirmation notices for term {{gmslaprov|Loans}} to be clear that notwithstanding their term they are individually terminable upon any of the events listed in {{gmslaprov|Events of Default}} (even where they have not been invoked) and (ii) updating template {{tag|GMSLA}} schedules to include this provision.
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| {{gmslaanatomy}}
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