Applicability - GMSLA Provision
2010 Global Master Securities Lending Agreement
Clause 1 in full
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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 to a Nominee, we think, is a flag 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, abnd who have handed over responsibility for managing their Loans to the agent lender.
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 GMSLA name) there isn’t a “loan leg” and a “collateral leg” as such: each repo/stock loan is as an outright sale against a future obligation to do the reverse. This is not how the 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 .
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.
The counterparty’s exposure 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.
Just what significance a Designated Office has to a stock borrower or lender is never made clear in the 2010 GMSLA. It gets a mention in the first line of Clause 1.1 — encouraging, you would think — but then gets no further mention until it is defined, unenlighteningly, as you can see in the panel.
What are we to make of this? “The parties, acting through their Designated Offices, may enter into transactions ...” — that is a common or garden agreement to agree, folks — so is this meant to restrict the parties’ ability to act out of other offices?
Note in the more fulsomely-articulated ISDA Master Agreement the “Multibranch Parties” concept involves the party giving representations as to recourse, and expressly prohibits parties changing their specified Offices during the life of a transaction without the other’s prior written consent.
Details fans will immediately note that, from the point of view of legal and corporate philosophy — a subject dear to every attorney’s heart — the differing offices or branches of a legal entity have no distinct legal personality, any more than does a one’s arm have different personality one’s her leg. So, being a “multibranch” party, or acting out of a designated office, makes no legal difference. If you’re bound, you’re bound.
the main risk of booking out of the wrong entity is a taxation risk.
- And where they cannot, their clients will have to forcibly restrain themselves from lamping their lawyers.
- Some would say, “tiresomely”-articulated.