Pledge GMSLA Anatomy

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GMSLA Anatomy

1. Applicability
2. Interpretation
3. Loans of Securities
4. Delivery
5. Collateral
6. Distributions and Corporate Actions
7. Rates Applicable to Loaned Securities
8. Delivery of Equivalent Securities
9. Failure to Deliver
10. Events of Default
11. Consequences of an Event of Default
12. Taxes
13. Lender’s Warranties
14. Borrower’s Warranties
15. Interest on Outstanding Payments
16. Termination of this Agreement
17. Single Agreement
18. Severance
19. Specific Performance
20. Notices
21. Assignment
22. Non-Waiver
23. Governing Law and Jurisdiction
24. Time
25. Recording
26. Waiver of Immunity
27. Expenses
28. Miscellaneous
Schedule
Agency Annex

Documentation: Full wikitext | Nutshell wikitext
More Information: Pledge GMSLA | GMSLA Netting | Guide to Equity Finance
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What is the Pledge GMSLA?

The pledge GMSLA is a version of the GMSLA published in November 2018 and designed exclusively for agent lending arrangements. Instead of posting collateral by title transfer, the Borrower pledges it. The Lender has a security interest over the collateral, but no right to reuse or otherwise deal with it.

What’s it for?

Reducing the borrower’s LRD charges, in a nutshell. 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?). If 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).

Major changes

See also