Net Value determination where unable to sell Securities - GMSLA Provision
2010 Global Master Securities Lending Agreement
Clause 11.5 in a Nutshell™
Use at your own risk, campers!
Full text of Clause 11.5
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11. Consequences of an Event of Default
- 11.1 Application of 11.2 to 11.7 following Event of Default
- 11.2 Delivery and payment obligations following Event of Default
- 11.3 Definition of Default Market Value
- 11.4 Determination of Default Market Value
- 11.5 Net Value determination where unable to sell Securities
- 11.6 Where Non-Defaulting Party has not determined Default Market Value
- 11.7 Other costs, expenses and interest payable in consequence of an Event of Default
- 11.8 Set-off
If it can’t determine a Default Market Value under 11.2, 11.3 and 11.4, the Non Defaulting Party can just make one up.
Within reason, of course.
where this is a real Event of Default, it will be what it will be.
Where it is as a result of a mini close-out, there are there are two scenarios to consider:
One is a delisting, nationalisation, or some event where liquidity in the borrowed share has dried up permanently, because the share issuer is down the Swanee, sans paddle, with no real prospect of returning — in which case we would expect common sense would put the Default Market Value at somewhere near zero. The Lender will look for some excuse to make it more than absolutely zero, but will need to keep a straight face while doing so.
The other is geopolitical rinky-dinks whereby the share issuer is caught up in sanctions, embargos, and political action as a result of a situation not directly of its own making (or which is not in its gift to fix) but which does not ensure its imminent destruction, and which, if lifted, might see the return of an orderly market and juicier valuations. Here there is life in the old dog: its future, as we know, is an unknowable place, but is surely likely to be happier than the state we find it in today.
The latter scenario is the kind of thing that looked likely to happen in February 2022 with the Russia/Ukraine crisis. In this case, the Lender might see a Default Market Value as being a lot closer to par — if it is a wilful optimist, as long investors in places like Russia tend to be, even more than par, of course. This is likely to wildly disappoint the Borrower, who by disposition is short the share in question, but the Lender’s response will be, “look: if you can deliver me back the stock you borrowed, everyone is happy. Even show me a tradable price at which I can buy in that is lower than the value I’m proposing — then I’m listening. But you can’t, can you?”
A patient Lender might revert to its right to continue the Loan, pending lifting of the sanctions. This is what an agent lender is likely to do, since its principal will be unlikely to want to liquidate a holding in an asset right now when everyone thinks, when the madness blows over, it will recover.
(Remember, agent lenders are usually wealth managers, custodians and similar intermediary types who are lending out their clients’ fully paid long investments to earn a bit of extra income off them. The ultimate lenders are therefore structurally likely to be bullish, long-term investors in the securities they lend, so quite unlikely to resolve suddenly to sell positions after their value has tanked as a result of some moment of international angst).