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

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:

5.4 in a Nutshell™ _{(GMSLA edition)}

5.4 Required Collateral Value (aggregated Loans): 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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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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In all its glory, these two provisions read as follows: Template:Gmslasnap Template:Gmslasnap

Commentary

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 the transaction under this provision (as opposed to on 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.

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.

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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