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===Gross Jurisdictions=== | ===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 “{{gmslaprov|Loan}}” ( | 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}}. | ||
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> | |||
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> | |||
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}}. | |||
<br> | |||
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> | |||
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> | 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> | ||
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. | |||
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). | |||
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. | |||
===Loan Definition=== | |||
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. | |||
===Collateralisation=== | |||
{{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. | |||
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. | |||
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. | |||
====Loan Termination==== | ====Loan Termination==== | ||
*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]]. | *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]]. |