Other costs, expenses and interest payable in consequence of an Event of Default - GMSLA Provision

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

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Clause 11.7 in a Nutshell

Use at your own risk, campers!
11.7 Costs and expenses following an Event of Default: The Defaulting Party must pay the Non-Defaulting Party’s reasonable professional expenses in connection with the Event of Default plus interest at the rate agreed by the Parties or failing that, the overnight LIBOR rate as at 11.00 a.m., London time. Interest will accrue and compound daily.

Full text of Clause 11.7

11.7 Other costs, expenses and interest payable in consequence of an Event of Default: The Defaulting Party shall be liable to the Non-Defaulting Party for the amount of all reasonable legal and other professional expenses incurred by the Non Defaulting Party in connection with or as a consequence of an Event of Default, together with interest thereon at such rate as is agreed by the Parties and specified in paragraph 10 of the Schedule or, failing such agreement, the overnight London Inter Bank Offered Rate as quoted on a reputable financial information service (LIBOR) as at 11.00 a.m., London time, on the date on which it is to be determined or, in the case of an expense attributable to a particular transaction and, where the Parties have previously agreed a rate of interest for the transaction, that rate of interest if it is greater than LIBOR. Interest will accrue daily on a compound basis.

Related agreements and comparisons

Related agreements: Click here for the same clause in the 2018 Pledge GMSLA
Related agreements: Click here for the same clause in the 1995 OSLA
Comparison: Click to compare the 2010 GMSLA and 2018 Pledge GMSLA versions of this clause.

Comparison: Template:Osladiff 11.7

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Content and comparisons

In its headlong rush to pursue the path of least resistance, the tremendous opportunity the 2018 Pledge GMSLA presented to ISLA’s crack drafting squad™ for once and for all to rid this form of its unfortunate reference to LIBOR went missed. Pity really.

But see also Clause 15, where this throwaway reference really bites.

Special guest appearance: 2000 GMSLA

We don’t spend too much time looking at the 2000 GMSLA any more, seeing as nor does anyone else, but we were asked to look at this clause, so here it is. Clause 10.7 of the 2000 GMSLA was slightly more dependent on LIBOR than its 2010 successor as can be seen in this comparison. Changes are largely improvements: the 2010 assumes the parties will agree something else, relying on LIBOR only as a fallback (prescient in 2010!); it falls back to overnight and not one-month LIBOR (given the callable nature of stock loans that makes a lot more sense), and the 2000 version had a genuinely gruesome 44-line coda which seemed to be some sort of half-hearted attempt at linear interpolation for shorter periods which the 2010 version, by relying on the overnight rate, was able to jettison entirely with no great loss.



Trick for young players alert

This looks like the only place where LIBOR is mentioned — harmless accrual of small amounts on professional fees — but the far more important interest accrual clause is Clause 15 (Interest on Outstanding Payments) which awards interest on any missed payment under the agreement, and defers to the rate agreed here in Clause 11.7. Now why you would cross refer the main interest rate clause, Interest on Outstanding Payments, to some crappy little aside, buried deep in the enforcement clause, about interest on incurred professional fees, rather than referring the crappy little aside to the main Interest on Outstanding Payments clause we can only wonder about, if it were not to trip up people like yours truly. So be warned.

This bit is just about incurred interest on professional fees

Clause 11.7 is the Default Interest provision of the 2010 GMSLA. Note a potentially troublesome reference to LIBOR in there, seeing as LIBOR is being phased out, though it is only a fall back, and only for Default Interest on its legal fees (once a party has failed to meet its payment obligations) so, while there are more cataclysmic threats to the capital markets than this, that won’t stop financial services firms across the western world diverting key internal risk management resource towards remediating it, generating 18 months’ meaningful employment for an army of contractors of course.



General discussion

“Gains or losses on termination of the Loan”? No, sir.

A curious fidgety sort of amendment we have seen is to expand this provision from mere costs incurred on an event of default — and let’s face it, the GMSLA is designed as a self-help agreement so there really shouldn’t be any professional expenses involved in closing one out — to “all the Non-Defaulting Party’s reasonable costs and gains arising from the termination of the loan” as well as those likely-not-to-exist professional costs of closing out.

This is not necessary and you should stoutly resist. The deal with stock loans is you borrow, you pay fees, and you return, and mark your collateral to the value of the shares. The Lender is not on risk to your short: there are no “gains” or “losses” — these are a function of the short sale the Borrower effects in the market with the shares once it has borrowed them from you. If you want your Shares back, or one of the parties defaults, and a Loan is unexpectedly terminated early, Borrower is free to close out its short, or keep it open, at its leisure, irrespective of what happens with that original stock loan: if it is recalled, the Borrower can source shares to repay it by borrowing them somewhere else.

The costs payable on unexpected exit of a Loan— which including buying in replacement stock to satisfy obligations — is covered by 9.3, and records the fact that no consequential losses (etc.) are available.


See also