Market Value - GMSLA Provision
2010 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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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?
- ↑ Tiresome, I know.