Marking to Market of Collateral during the currency of a Loan on aggregated basis - GMSLA Provision

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2010 Global Master Securities Lending Agreement
A Jolly Contrarian owner’s manual

Section 5.4 in a Nutshell
Use at your own risk, campers!

5.4 Unless Single Loan margining under 5.5 applies:
(a) Required Collateral Value: The aggregate Market Value of Collateral delivered to Lender (Posted Collateral) for all outstanding Loans must equal the aggregate Market Value of the Loaned Securities plus the Margin (Required Collateral Value).
(b) Excess Collateral: if the aggregate Market Value of the Posted Collateral (plus unpaid income etc) exceeds the aggregate of the Required Collateral Value the Lender must deliver to Borrower enough Equivalent Collateral to eliminate the excess;
(c) Collateral Deficiency: if the aggregate Market Value of the Posted Collateral (plus unpaid income etc) falls below the aggregate Required Collateral Value the Borrower must provide further Collateral to Lender to eliminate the deficiency.
(d) Shorts and Longs: where a Party acts as both Lender and Borrower, paragraphs 5.4(b) and 5.4(c) apply separately to Loans where it is a Lender and Loans where it is a Borrower.

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Section 5.4 in full

5.4 Marking to Market of Collateral during the currency of a Loan on aggregated basis
Unless paragraph 1.3 of the Schedule indicates that paragraph 5.5 shall apply in lieu of this paragraph 5.4, or unless otherwise agreed between the Parties:

5.4(a) the aggregate Market Value of the Collateral delivered to or deposited with Lender (excluding any Equivalent Collateral repaid or delivered under paragraphs 5.4(b) or 5.5(b) (as the case may be)) (Posted Collateral) in respect of all Loans outstanding under this Agreement shall equal the aggregate of the Market Value of Securities equivalent to the Loaned Securities and the applicable Margin (the Required Collateral Value) in respect of such Loans;
5.4(b) if at any time on any Business Day the aggregate Market Value of the Posted Collateral in respect of all Loans outstanding under this Agreement together with:
(i) all amounts due and payable by the Lender under this 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, the amount or Market Value of Income payable in respect of such Non-Cash Collateral
exceeds the aggregate of the Required Collateral Values in respect of such Loans together with:
(i) all amounts due and payable by the Borrower under this Agreement but which are unpaid; and
(ii) if agreed between the parties and if the Income Record Date has occurred in respect of any securities equivalent to Loaned Securities, the amount or Market Value of Income payable in respect of such Equivalent Securities,
Lender shall (on demand) repay and/or deliver, as the case may be, to Borrower such Equivalent Collateral as will eliminate the excess;
5.4(c) if at any time on any Business Day the aggregate Market Value of the Posted Collateral in respect of all Loans outstanding under this Agreement together with:
(i) all amounts due and payable by the Lender under this 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, the amount or Market Value of Income payable in respect of such Non-Cash Collateral
falls below the aggregate of Required Collateral Values in respect of all such Loans together with:
(i) all amounts due and payable by the Borrower under this Agreement but which are unpaid; and
(ii) if agreed between the parties and if the Income Record Date has occurred in respect of Securities equivalent to any Loaned Securities, the amount or Market Value of Income payable in respect of such Equivalent Securities,
Borrower shall (on demand) provide such further Collateral to Lender as will eliminate the deficiency;
5.4(d) where a Party acts as both Lender and Borrower under this Agreement, the provisions of paragraphs 5.4(b) and 5.4(c) shall apply separately (and without duplication) in respect of Loans entered into by that Party as Lender and Loans entered into by that Party as Borrower.

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Related agreements and comparisons

Related agreements: Click here for the same clause in the 2018 Pledge GMSLA
Comparison: Template:Gmsladiff 5.3

Resources and navigation

2010 GMSLA: Full wikitext · Nutshell wikitext | GMLSA legal code
Pledge GMSLA: Hard copy (ISLA) · Full wikitext · Nutshell wikitext |
1995 OSLA: Full wikitext · Nutshell wikitext | GMSLA Netting
Let me Google that for you: Guide to equity finance | ISLA’s guide to securities lending for regulators and policy makers
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Content and comparisons

Template:M comp disc GMSLA 5.4
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Summary

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.

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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.
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General discussion

ISLA Guidance

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.


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See also

Template:M sa GMSLA 5.4
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References