Market Value - 2000 GMSLA Provision

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2000 Global Master Securities Lending Agreement
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Clause Market Value in a Nutshell
Use at your own risk, campers!

Market Value” means:

(a) for the valuation of instruments other than Cash Collateral or a Letter of Credit):
(i) the market quotation for the bid price of such instruments derived from a pricing service reasonably chosen Lender; or
(ii) if none is available, the market value derived from bids by a reputable dealer for the instrument reasonably chosen by Lender,
in each case at Close of Business on the previous Business Day or, at either Party’s option where it reasonably believes there has been an exceptional movement in the price of the instrument since such time, at the latest available price; plus
(iii) accrued but unpaid Income on the instrument that is not otherwise factored into such price,
(provided that the price of instruments that are suspended shall (for the purposes of paragraph 5) be nil unless the Parties agree otherwise and (for all other purposes) shall be the price of instrument as of Close of Business on the dealing day in the relevant market preceding the suspension, or a commercially reasonable price agreed between the Parties;
(b) For a Letter of Credit its face or stated amount; and
(c) For Cash Collateral the amount of the currency concerned;

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Full text of Clause Market Value

Market Value” means:

(a) in relation to the valuation of Securities, Equivalent Securities, Collateral or Equivalent Collateral (other than Cash Collateral or a Letter of Credit):
(i) such price as is equal to the market quotation for the bid price of such Securities, Equivalent Securities, Collateral and/or Equivalent Collateral as derived from a reputable pricing information service reasonably chosen in good faith by Lender; or
(ii) if unavailable the market value thereof as derived from the prices or rates bid by a reputable dealer for the relevant instrument reasonably chosen in good faith by Lender,
in each case at Close of Business on the previous Business Day or, at the option of either Party where in its reasonable opinion there has been an exceptional movement in the price of the asset in question since such time, the latest available price; plus (in each case)
(iii) the aggregate amount of Income which has accrued but not yet been paid in respect of the Securities, Equivalent Securities, Collateral or Equivalent Collateral concerned to the extent not included in such price,
(provided that the price of Securities, Equivalent Securities, Collateral or Equivalent Collateral that are suspended shall (for the purposes of paragraph 5) be nil unless the Parties otherwise agree and (for all other purposes) shall be the price of such Securities, Equivalent Securities, Collateral or Equivalent Collateral, as the case may be, as of Close of Business on the dealing day in the relevant market last preceding the date of suspension or a commercially reasonable price agreed between the Parties;
(b) in relation to a Letter of Credit the face or stated amount of such Letter of Credit; and
(c) in relation to Cash Collateral the amount of the currency concerned;

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Related agreements and comparisons

Related agreements: Click here for the same clause in the 2010 GMSLA
Comparison: Click to compare the 2000 GMSLA and 2010 GMSLA versions of this clause.

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Content and comparisons

Interesting, and not entirely welcome, development in the technology from the 2000 GMSLA, which provided that where any instrument was suspended its value would be nil, unless otherwise agreed.

In the 2010 GMSLA we are stuck with an elaborate and largely pointless waterfall — if the instrument is suspended you aren’t gong to get a price from an information service or a market-maker, and leaving everything in the hands of Lenders who may not have a clue (in the a case of principal Lenders under agent lending arrangements) may well be inclined to purport to have no instructions from a principal who has no clue (in the case of agent lenders themselves) and in any case may be firmly axed to pretend they don’t have a clue even if they do have one, where the Loaned Security is the one that has been suspended).

The 2000 GMSLA definition of Market Value set the value of “suspended” instruments — at least for Collateral valuation purposes — at nil, which seems harsh, but really isn’t, if there is no way of trading the instrument. In that case the innocent party (i.e., the other one) will want either a ton more collateral (if it is Lender) or all of its Collateral back if it is Borrower).
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Summary

A curate’s egg: in some ways superior to the succeeding language; in others worse.

“suspended”

The word “suspended” — lower case — is not defined, and in cases of extreme market disruption — wars, international diplomatic incidents, sanctions and so forth — could be a topic of hot debate, but we think the concept should be read in a fair, large and liberal way to achieve a purposive outcome.

If you can’t get a price because the stock has gone to hell in a handbasket, then the same should apply equally if the whole world including the stock has gone to hell in a handbasket.[1] So, practically, if you cannot buy or sell the stock in the market at all, even if not formally “suspended” in the sense intended by the listing rules of the market it trades on — and it doesn’t say “suspended from its listing” or something like that, and easily it could have done — then the stock is still suspended. You can’t, broadly, trade it. This seems the right outcome.

“For the purposes of Paragraph 5” means when valuing to calculate margin calls. if the instrument — whether it be the Loaned Securities or Collateral — is in such a handbasket, you just damn the torpedoes and value it at nil. That is the risk you run in owning that instrument. A Borrower who has borrowed a stock which one cannot even fathom a value for will be anxious to get its Collateral back from a Lender who is, by definition, badly exposed to the value of that suspended stock. Banks, brokers and those on the borrowing end in triparty arrangements will have a sense of humour failure if they can’t claw back some of the collateral they have posted against borrowed securities issued by a vassal asset of a sanctioned oligarch, right?

The wording for the valuation in any other case other than Paragraph 5 of the last traded price or the price agreed by the parties leaves something to be desired in the certainty department, but since collateralising is really the main reason for needed a market value one can perhaps forgive this, until it comes to working out what to do where the Parties have failed to return Securities or Collateral under Paragraph 9.
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See also

Template:M sa 2000 GMSLA Market Value
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References

  1. As it did in the dog days of February 2022, for example.