Applicability - GMSLA Provision
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GMSLA Anatomy™
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Crosscheck: 1 in a Nutshell™
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Comparisons
Sure, it is preliminary, preamble stuff, but this goes to the core of what is so structurally different — economically, they’re meant to be as near as dammit the same — about the 2018 Pledge GMSLA when compared with the 2010 GMSLA. The 2010 GMSLA is a two-way title transfer agreement, where credit risk mitigation functions by offset, leaving the person who has transferred the greater value of assets (usually, ironically, the Borrower) with residual credit exposure, for the difference, to the one who has transferred the lesser value — usually the Lender, as it will insist on being over-collateralised by way of initial margin.
The 2018 Pledge GMSLA, by contrast, is a conventional secured “Loan” where the Lender has credit exposure to the Borrower for the total value of the Loaned Securities, but this is collateralised by a pledge over Collateral to which the Borrower retains legal title.
The reference (in the pledge version only) to a Nominee, may be to recognise that the 2018 Pledge GMSLA is typically suitable only for agency lending arrangements, in which the principal Lenders to the Loans will be wealth-management clients and funds whose assets are managed by an agent lender, who in turn has put the whole business in the hands of a triparty agent, who will manage the collateral flows, pledges and all that good oil.
Though why they didn’t say “tri-party agent”, it is hard to say, since “nominee” has, in other custody contexts, a rather different meaning. And there is nothing to stop folks using a tri-party arrangement with a normal 2010 GMSLA either, for that matter, and it has routinely been done for as long as anyone can remember.
Basics
Applicability
Note the “theory” of the stock loan transaction here, notwithstanding the term “Loan”: Like a Repo a GMSLA Loan works as simultaneous agreements to exchange Securities and Collateral by outright title transfer.
At inception
Title transfer by Lender to Borrower of securities against the title transfer by Borrower to Lender of Collateral.
At termination
Title transfer by Borrower to Lender of “Equivalent” against the title transfer by Lender to Borrower of “Equivalent” Collateral at a later date.
That is to say that (despite the “securities lending” name) there isn’t a “loan leg” and a “collateral leg” as such: each transaction is an outright sale by title transfer against a future obligation to acquire, also by title transfer.
However, this is not how market practitioners generally see it and lawyers of a more officious disposition — yes, such creatures do exist —will have to forcibly restrain themselves from correcting their clients at the end of every sentence. For their part, when their lawyers cannot, market practitioners will have to forcibly restrain themselves from lamping their lawyers.
Nonetheless, if a counterparty goes insolvent during a trade, the first part of the transaction is fully settled and the administrator is left with a single forward settling transaction under which it is entitled to receive, DVP, an asset against payment of cash or delivery of an asset.
Note, of course, that the collateral leg may be different: under a standard 2010 GMSLA it too is a title transfer collateral arrangement; under the 2018 Pledge GMSLA it is a security interest collateral arrangement
One’s exposure to a stock loan is the net mark-to-market of that forward settling trade: where it is a Borrower its exposure is the haircut owed by the Lender back to it. Where it is a Lender the liability is the haircut you owe back the Borrower. More — much, much more on this topic where Pledge GMSLA is concerned.
This is helpful to the netting analysis, which therefore applies only between one stock loan transaction and another (and not within a single stock loan trade). The absence of a netting flag means you cannot offset positive MTMs where you are a Lender versus negative MTMs where you are a Borrower.
Note the effect that intraday margining has on this under Clause 5 of the 2010 GMSLA.
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