Pledge GMSLA
The pledge GMSLA is a version of the GMSLA developed in late 2017 early 2018 where instead of transferring collateral by title transfer, you pledge it. Unlike the US standard stock lending agreement, the MSLA, you don’t rehypothecate the collateral transferred to you, because that would defeat the purpose of pledging it in the first place[1]
What’s it for?
When you borrow securities under a stock lending agreement, you tend to over-collateralise—perhaps you give 105 in value of collateral for 100 of securities borrowed. This leaves you in the unusual position of being, net, a creditor to your lender: your lender has an obligation to title transfer the collateral back to you. If it is bust it cannot, and even after you apply close out netting, you're in the hole to the tune of 5.
With me?
Now, if your lender is of dubious repute, from a credit perspective, you might have to hold capital against that credit exposure. Okay, it's only 5, but when you're a bank you do this in big size and it can add up. If, somehow, you can isolate the lender's credit exposure it is worth doing.
In most cases, you can't: most lenders will want to use your collateral in their own operations (to defray the lending costs of lending the securities to you, right?). Uf they do this then the collateral is gone, and you have no choice but to be a creditor.
Agent lenders are one class of lender who isn't so bothered about reusing the collateral, because it didn’t lend to you in the first place, but lent its client’s securities to you, and these clients aren't so bothered about reuse.
Likely uses for the Pledge GMSLA
A GMSLA would be useful and interesting in the following circumstances:
- Where the Borrower is a financial institution that would incur a capital/balance sheet charge under Basel rules for the return of excess collateral it has provided by title transfer
- Where the Lender does not wish to reuse the collateral, being happy for it to be "dead-ended" in a collateral management system.
In other words this is likely to be restricted to agent lenders and quasi-agent lenders (fiduciaries, espievies, repackaging vehicles).
Close-out
Close out works quite differently.
2010 2010 GMSLA11.1 If an Event of Default happens to either Party:
11.3 The Default Market Value of a Letter of Credit will be zero. For any Equivalent Securities or any other Equivalent Non-Cash Collateral it will be determined under paragraphs 11.4 to 11.6 below, where:
11.4 Transactions and quotes: If, between the Termination Date and the Default Valuation Time:
11.5 Where there’s no commercially reasonable value: If, having tried in good faith, the Non-Defaulting Party has not been able to sell nor purchase Securities under paragraph 11.4(a) or obtain quotations under paragraph 11.4(b), or it considers the quotations it did obtain are not commercially reasonable, it may determine the Net Value of the Equivalent Securities or Collateral and treat that as their Default Market Value. |
2018 Pledge 2010 GMSLATemplate:Nutshell GMSLA 2017 11.1 Template:Nutshell GMSLA 2017 11.2 Template:Nutshell GMSLA 2017 11.3 Template:Nutshell GMSLA 2017 11.4 Template:Nutshell GMSLA 2017 11.5 Template:Nutshell GMSLA 2017 11.6 Template:Nutshell GMSLA 2017 11.7 Template:Nutshell GMSLA 2017 11.8 |
References
- ↑ An objection that is equally true of a US style pledge, but doesn't seem to have stopped the market insisting on one anyway.
- ↑ Well, we assume it will be the NDP: the 2010 GMSLA rather brilliantly puts it into an unattributed passive, as if God is going to to it, or it will magically happen by itself. Go, ISLA’s crack drafting squad™.