GMSLA Netting

Gross Jurisdictions

Upon the insolvency of a Counterparty in a non-netting jurisdiction, the worst-case scenario is to aggregate the market value of each “Loan” (being a transfer of Securities against a transfer of Collateral, with a simultaneous agreement to transfer back Equivalent Securities against Equivalent Collateral) which is in the money to the Non-Defaulting Party without taking into account the market value of any Loan which is out of the money for the Non Defaulting Party.
Given that GMSLAs are margined daily, we would expect the market value of any Loan to be roughly equivalent to the “haircut” on the Posted Collateral for that Loan on any day.
A party to a GMSLA has a general right to terminate any Loan at any time (thereby converting offsetting forward obligations into a single payment amount for that Loan), and could therefore terminate all Loans upon an insolvency without specifically invoking an Event of Default (although that right would also be available).
Note that the position upon termination of the whole agreement expressly because of an Event of Default (without first having terminated each Loan per the above) is not quite as clear.

Loan Termination

• Under clause 8.2 and 8.2 of the GMSLA, subject to the terms of any Loan*, either party may terminate any Loan at any time by calling for redelivery of Equivalent Securities (in the case of a Lender) or giving notice of redelivery of Equivalent Securities (in the case of a Borrower), in each case by title transfer.
• Delivery obligations are reciprocal, such that neither Party is obliged to make delivery unless it is satisfied the other party will make such delivery to it (cl 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.
• If a Party fails to deliver Equivalent Securities or Equivalent Collateral, the other party may elect either to continue the Loan (i.e., as suspended) or may by written notice declare that the Loan is terminated immediately as if an Event of Default had occurred with respect to that Loan only (note such a termination would not actually be an Event of Default under the GMSLA so let's call this a "quasi-Event of Default") and it was the only Loan outstanding.
  

This is important because it establishes a “transaction termination” methodology generating a market value for each transaction analogous to Section 6(e) of the ISDA Master Agreement.

Event of Default Close-out Methodology: Upon determining a “quasi-Event of Default” with respect to a single Loan the Non-Defaulting Party will determine the Default Market Value of the Equivalent Securities and Equivalent Collateral under that Loan, the relevant amounts will be offset to arrive at a balance payable by one party to the other in respect of that Loan on the next business day.

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 Loan.

Clause 11.8 of the GMSLA purports to allow a 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.

Term Loans

Note term Loans may need to be treated differently, as the “without notice” termination right (under 8.1 and 8.2) will not necessarily apply. We recommend (i) updating template confirmation notices for term Loans to be clear that notwithstanding their term they are individually terminable upon any of the events listed in Events of Default (even where they have not been invoked) and (ii) updating template GMSLA schedules to include this provision.

update to anat|gmsla

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GMSLA

Pledge GMSLA

OSLA

2010 GMSLA: Full wikitext · Nutshell wikitext | GMLSA legal code | GMSLA Netting
Pledge GMSLA: Hard copy (ISLA) · Full wikitext · Nutshell wikitext |
1995 OSLA: OSLA wikitext | OSLA in a nutshell | GMSLA/PGMSLA/OSLA clause comparison table
From Our Friends On The Internet: Guide to equity finance | ISLA’s guide to securities lending for regulators and policy makers