2010 Global Master Securities Lending Agreement
A Jolly Contrarian owner’s manual
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Clause Market Value in a Nutshell™
Use at your own risk, campers!
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 mid 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 mid price or rate 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 as specified in the Schedule, unless agreed otherwise 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 or that cannot legally be transferred or that are transferred or required to be transferred to a government, trustee or third party (whether by reason of nationalisation, expropriation or otherwise) shall for all purposes be a commercially reasonable price agreed between the Parties, or absent agreement, be a price provided by a third party dealer agreed between the Parties, or if the Parties do not agree a third party dealer then a price based on quotations provided by the Reference Dealers. If more than three quotations are provided, the Market Value will be the arithmetic mean of the prices, without regard to the quotations having the highest and lowest prices. If three quotations are provided, the Market Value will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest or lowest price, then one of such quotations shall be disregarded. If fewer than three quotations are provided, the Market Value of the relevant Securities, Equivalent Securities, Collateral or Equivalent Collateral shall be determined by the Party making the determination of Market Value acting reasonably;
- (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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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).
The starting point is that the Lender determines all market values. This stands to reason: the collateral should be fairly liquid and its value is of no particular moment in the context of the trade — if it drops you just get more of it. Whereas the loaned Securities very much are the focus of all the attention. The Borrower is incentivised to mark them down in value: it is shorting them, after all. But the Lender must have regard to mid-market published closing prices which somewhat curtails scope for mendacity, at least while the market is orderly and the stock trading. Of course, where you are shorting, you are kind of hoping the market won’t be orderly, and the stock might corkscrew into the side of a hill. In which case, after a meandering menu of fallbacks, dealer polls and so on, it regresses to what the Lender thinks it is. Ultimately the Borrower’s remedy in that case is to find the stock elsewhere and give it back.
Don’t forget that when that Market Value is to be applied to Collateral, you need to include also the Margin — the expression in the 2010 GMSLA for the haircut applied to a given piece of collateral for its inherent illiquidity and the variability of price it might represent.
How often to valuation disputes lead to a dealer poll among Reference Dealers, you might ask?