Marking to Market of Collateral during the currency of a Loan on aggregated basis - GMSLA Provision
2010 Global Master Securities Lending Agreement
Section 5.4 in a Nutshell™
Use at your own risk, campers!
Full text of Section 5.4
Related agreements and comparisons
Content and comparisons
You sense in the 2010 GMSLA the creeping influence of ISDA’s crack drafting squad™, don’t you. The 2010 form ushered in lots of pedantic stuff about unpaid amounts, income on borrowed assets and so on that wasn’t in the 2000 GMSLA. For old school stock lenders, this all went without saying. What a world we live in.
A key provision for GMSLA Netting, you have to read this aggregate netting provision together with paragraph 5.6, summarised in our uniquely jokey and unreliable way as follows:
5.6 in a Nutshell™ (GMSLA edition)
5.6: Where Collateral values are aggregated under paragraph 5.4 and, on any day, both Parties would otherwise have to deliver Collateral to each other, the respective Market Values will be set-off and, in full settlement of both parties’ obligations, the Party having the larger delivery obligation must deliver Collateral having a Market Value equal to the difference.
This provision covers the determination of the amount of Collateral required — the Required Collateral Value — where Loan exposures are determined on an aggregated basis.
Interestingly, a failure to deliver Equivalent Collateral during the life of a Loan (as opposed to upon termination of a Loan) is not captured by the mini close-out mechanism under 9.1 and 9.2. One might mount an argument to say that it should be, but the theory is since you have, within reason, a choice of what Collateral you provide, you can hardly point to a specific settlement failure on a certain security as the reason you didn’t deliver *any* Collateral. “So deliver something else,” your Lender might reasonably remark.
The 2010 GMSLA allows you to specify that Collateral managed on an aggregate basis, under this Clause, or on a Loan-by-Loan basis under Clause 5.5. Generally speaking it is easier (and in a close out situation against a non-netting countertparty, more capital effective) to collateralise on an aggregate basis under this Clause so this will be the strong preference for most counterparties except in fairly unusual or bespoke situations.
Here’s what Freshfields’ ISLA guidance has to say (though I can save you a read: it doesn’t really shed any further light):
Paragraph 5.4 sets out the margin maintenance provisions, that is, the market value of the collateral (provided in respect of all loans) is to equal the market value of all loaned securities together with an additional amount known as the “Margin” (as specified in the Schedule in relation to each type of acceptable collateral under the Agreement as a percentage of the market value of each form of acceptable collateral). When making this calculation account is also taken of
- (i) amounts due and payable by either party under the Agreement but which are unpaid; and
- (ii) if agreed between the parties and if the income record date has occurred in respect of any non-cash collateral and loaned securities, the amount or market value of income payable in respect of such non-cash collateral or securities.
The borrower has the right to call for excess collateral provided to the lender and the lender has the right to demand further collateral if a collateral deficiency exists.