Market Value - 2000 GMSLA Provision
2000 Global Master Securities Lending Agreement
Clause Market Value in a Nutshell™
Use at your own risk, campers!
Full text of Clause Market Value
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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).
A curate’s egg: in some ways superior to the succeeding language; in others worse.
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. 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.
- As it did in the dog days of February 2022, for example.