Mini close-out - GMSLA Provision: Difference between revisions
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Mini close-out is the method of terminating an individual {{gmslaprov|Loan}} under a {{gmsla}} or an {{osla}} where there is a settlement failure without actually closing out the whole agreement. | Mini close-out is the method of terminating an individual {{gmslaprov|Loan}} under a {{gmsla}} or an {{osla}} where there is a settlement failure without actually closing out the whole agreement. It applies therefore to a failure to ''return'' {{gmslaprov|equivalent}} {{gmslaprov|securities}} or {{gmslaprov|equivalent}} {{gmslaprov|collateral}} — these can be a function of market dislocations, upstream counterparty failures and liquidity events affecting the asset in question, but not to the failure to deliver {{gmslaprov|collateral}} in the first place, seeing as if one kind of {{gmslaprov|collateral}} is not available, it is in the {{gmslaprov|Borrower}}’s gift to deliver something else that meets eligibility criteria, so its failure to pony up collateral always looks like a [[credit]] failure and will count as an {{gmslaprov|Event of Default}}. | ||
===[[GMSLA Netting]]=== | ===[[GMSLA Netting]]=== | ||
Revision as of 11:35, 28 February 2019
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GMSLA Anatomy™
Notwithstanding the above, such a failure will not be an Event of Default.
However this will not be an Event of Default.
9.2 Lender’s failure to deliver Equivalent Collateral: If Lender fails to deliver Equivalent Collateral comprising Non Cash Collateral in accordance with paragraph 8.4 or 8.5, Borrower may:
For the avoidance of doubt, any such failure shall not constitute an Event of Default (including under paragraph 10.1(i)) unless the Parties otherwise agree.
then the Transferor agrees to pay within one Business Day of a demand from the Transferee and hold harmless the Transferee with respect to all reasonable costs and expenses listed in sub paragraphs (a) and (b) above properly incurred which arise directly from such failure other than (i) such costs and expenses which arise from the negligence or wilful default of the Transferee and (ii) any indirect or consequential losses.
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Mini close-out is the method of terminating an individual Loan under a 2010 GMSLA or an 1995 OSLA where there is a settlement failure without actually closing out the whole agreement. It applies therefore to a failure to return equivalent securities or equivalent collateral — these can be a function of market dislocations, upstream counterparty failures and liquidity events affecting the asset in question, but not to the failure to deliver collateral in the first place, seeing as if one kind of collateral is not available, it is in the Borrower’s gift to deliver something else that meets eligibility criteria, so its failure to pony up collateral always looks like a credit failure and will count as an Event of Default.
GMSLA Netting
Since prudential requirements to have netting opinions do not apply within single transactions, one does not need a mini close-out provision to net within transactions under a GMSLA. That happens as of right. Therefore if, as is often the case, your loan portfolio is all the “same way round” — if you are borrowing from, but never lending to, a lender in a gross jurisdiction, then netting doesn’t really do anything for you. Your problem will be your collateral haircut, for which you will be an unsecured creditor of the lender. To fix this, a pledge GMSLA is what you are looking for.
Non-affected party’s option
Note that mini close-out is the non-affected party’s option: If a Borrower, on terminating a Loan, cannot then redeliver the borrowed Securities (because of an upstream failure), it cannot force a mini close-out.
Odd spot: See the peculiar impact mini-closeout has on Default Under Specified Transaction under the ISDA Master Agreement.