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| ''See also'':
| | {{manual|MSG|2010|11.2|Clause||medium}} |
| *{{gmslaprov|Mini close-out}}
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| *[[Netting]]
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| ===Gross Jurisdictions===
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| Upon the [[insolvency]] of a Counterparty in a [[non-netting jurisdiction]], provided a {{gmslaprov|Non-Defaulting Party}} terminates each {{gmslaprov|Loan}} individually under the "[[mini-closeout]]" method before it designates an {{gmslaprov|Event of Default}} with respect to the whole {{gmslaprov|Agreement}}, the worst-case scenario is to aggregate the market value of each “{{gmslaprov|Loan}}” which is in the money to the {{gmslaprov|Non-Defaulting Party}} (i.e., its net value having taken into account {{gmslaprov|Posted Collateral}} held against that {{gmslaprov|Loan}}), without taking into account the market value of any {{gmslaprov|Loan}} which is [[out of the money]] for the {{gmslaprov|Non Defaulting Party}}.
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| The “unit of account” under the {{tag|GMSLA}} (the equivalent of a “{{isdaprov|transaction}}” under an {{isdama}}) is a “{{gmslaprov|Loan}}”, which is defined as a [[title 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}}) Unless agreed otherwise, each {{gmslaprov|Loan}} under a GMSLA is terminable by either party at any time without “cause”.<br>
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| Each outstanding {{gmslaprov|Loan}} is collateralised (by title transfer) daily, on an aggregated basis, but in a way which allows the {{gmslaprov|Parties}} to deterministically assign {{gmslaprov|Posted Collateral}} against each {{gmslaprov|Loan}}.
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| <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. For example, where the {{gmslaprov|Loaned Securities}} market value is 100% and the {{gmslaprov|Posted Collateral}} value is 105%, the {{gmslaprov|Loan}} value for the purposes of a mini-closeout would be 5%.<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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| We reach this conclusion because a {{gmslaprov|Party}} to a 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'' invoking an {{gmslaprov|Event of Default}} (although that right would also be available).
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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, as it does not specifically contemplate the termination of individual {{gmslaprov|Loans}} as a stage of the close out process, but assumes all payments and deliveries will be netted down to a single figure.
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| ===Loan Definition===
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| Under the GMSLA a “{{gmslaprov|Loan}}” is defined as the transfer of securities from {{gmslaprov|Lender}} to {{gmslaprov|Borrower}} against a transfer of collateral by {{gmslaprov|Borrower}} to {{gmslaprov|Lender}}, with a simultaneous agreement to transfer back equivalent securities against equivalent collateral in the future.
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| ===Collateralisation===
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| {{gmslaprov|Collateral}} for {{gmslaprov|Loan}} transactions is marked-to-market on a daily basis. In the market, such collateralisation operates on an “aggregated” basis across all outstanding Loans as is contemplated by Paragraph {{gmslaprov|5.4}} of the GMSLA.
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| Where aggregated collateralisation under Clause {{gmslaprov|5.4}} applies, Clause {{gmslaprov|5.6}} contemplates “net” transfers of collateral on a daily basis (as a matter of settlement convenience), and Clause {{gmslaprov|5.7}} provides that where the {{gmslaprov|Parties}} do not specifically allocate specific {{gmslaprov|Collateral}} deliveries to specific {{gmslaprov|Loans}}, any new or substituted {{gmslaprov|Collateral}} deemed to be transferred on any day will be attributed first to the earliest outstanding {{gmslaprov|Loan}} (up to the point where that Loan is fully collateralised) and then to the next earliest outstanding {{gmslaprov|Loan}}, and so on.
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| Therefore for the purposes of termination and close-out the value of {{gmslaprov|Collateral}} held against each {{gmslaprov|Loan}} at any time is able to be clearly determined.
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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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