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GMSLA Anatomy™
In a Nutshell™ Clause Market Value:
Market Value means:
(a) Securities: For Securities the mid price market quotation at Close of Business on the previous Business Day
- (i) published on a reputable information service chosen by the Lender; or failing that
- (ii) derived from a mid price from a dealer chosen by the Lender
- (unless either party thinks there’s been an unusual market movement since then, in which case the latest available price) plus:
- (iii) accrued Income if not included in the quote.
Where the assets in question are not trading freely the Parties may agree their Market Value. Failing that, they can ask an mutually acceptable dealer to quote. If they can’t agree on one of those, they can seek an average of Reference Dealer quotations (with a laborious mechanism for figuring our what to include and how to average it). If all else fails the Market Value giving up altogether and falling back on the reasonable determination of the Party originally making the determination).[1]
(b) Letters of credit: for any Letter of Credit, its face value.
(c) Cash: for Cash its face value.
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2010 GMSLA 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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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?
Not often.
See also
References