Pledge GMSLA Anatomy
What is the Pledge GMSLA?
The elegantly titled Global Master Securities Lending Agreement (Security Interest over Collateral 2018 version) — known to the friends it has rapidly made in the industry as 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.
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.
- No concept of Equivalent Collateral, seeing as collateral is pledged and dead-ended, so you do get back what you pledged (and in fact never technically give it away) — there is none of this fuss around true sale that you have with title transfer (in that there's no recharacterisation to a secured loan: we’re saying it is a secured loan).
- Close out works quite differently.