Set-off - GMSLA Provision

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

Clause 11.8 in a Nutshell
Use at your own risk, campers!

11.8 Set-off: Any amount payable to one Party by the other under 11.2(b) may, at the Non Defaulting Party’s option, be set off against any amount payable the other way under any other agreement between the Parties. The Non Defaulting Party may estimate any unascertained obligation but must account for any difference once finally ascertained. This paragraph does not create a security interest, or prejudice any other rights either party may have.
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Clause 11.8 in full

11.8. Set-off: Any amount payable to one Party (the Payee) by the other Party (the Payer) under paragraph 11.2(b) may, at the option of the Non Defaulting Party, be reduced by its set off against any amount payable (whether at such time or in the future or upon the occurrence of a contingency) by the Payee to the Payer (irrespective of the currency, place of payment or booking office of the obligation) under any other agreement between the Payee and the Payer or instrument or undertaking issued or executed by one Party to, or in favour of, the other Party. If an obligation is unascertained, the Non Defaulting Party may in good faith estimate that obligation and set off in respect of the estimate, subject to accounting to the other Party when the obligation is ascertained. Nothing in this paragraph shall be effective to create a charge or other security interest. This paragraph shall be without prejudice and in addition to any right of set off, combination of accounts, lien or other right to which any Party is at any time otherwise entitled (whether by operation of law, contract or otherwise).

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Related agreements and comparisons

Related agreements: Click here for the same clause in the 2018 Pledge GMSLA
Comparison: Template:Gmsladiff 11.8

Resources and navigation

2010 GMSLA: Full wikitext · Nutshell wikitext | GMLSA legal code
Pledge GMSLA: Hard copy (ISLA) · Full wikitext · Nutshell wikitext |
1995 OSLA: Full wikitext · Nutshell wikitext | GMSLA Netting
Let me Google that for you: Guide to equity finance | ISLA’s guide to securities lending for regulators and policy makers
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Content and comparisons

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

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Summary

The difference between close-out netting and set-off

  • Close-out netting, in the learned words of Allen & Overy, is a contractual process comprising early termination, valuation and determination of a net balance. This last step may involve a contractual set-off but, saucily, the considered view of ISDA’s counsel for England and Wales is that the net effect of the agreement is to arrive a a net balance without the good offices of contractual set-off[1] According to the UNIDROIT[2], close-out netting resembles the classical insolvency set-off, but is purportedly wider: general set-off requires mutual debts that are already due, while close-out netting envisages the netting of obligations that are not yet due.[3] Thus, set-off is narrower that close-out netting.
  • Set-off is a legal principle permitting (or requiring) a debtor to discharge its debt by setting off a cross-claim owed to the debtor against the debt. There are various legal bases for set-off, including, under English law, equitable set-off, set-off in judicial proceedings under the Civil Procedure Rules, statutory set-off under the Insolvency Rules 1986 upon a winding upon administration and contractual set-off.

If a master agreement allows set-off, can I net down across master agreements?

So if one of my master agreements has a broad set-off provision (as well as its close-out netting provision), and my netting opinion says the set off (of amounts due under other master agreements) would also be enforceable, can I then treat all my exposures against that counterparty, across all master agreements, as nettable down to a single obligation?

Sorry to be the bearer of the buzzkill, but no. You need a “written, bilateral netting agreement that creates a single legal obligation, covering all included bilateral master agreements and transactions” (a “cross product netting arrangement”), itself supported by a netting opinion. See Rule CRE53.61-9 of the Basel framework[4] This might be, for example, the joint-association-published Cross-Product Master Agreement - and most prime brokerage agreements do this too.

But even if you have got a master netting agreement, also check whether your own firm’s operational systems are capable of recognising cross-product netting arrangements as a practical matter. From personal experience, the JC suspects many aren’t. If the computers can’t do it, your CPMA and your netting opinions are as good as a chocolate starfish.

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General discussion

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See also

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References

  1. Sigh - except where there are unpaid amounts payable under Section 2(a)(i). You knew there’d be some kind of qualification though, didn’t you.
  2. “Principles on the operation of close-out netting provisions”
  3. The ISDA Master Agreement achieves this by accelerating them, mind.
  4. https://www.bis.org/basel_framework/chapter/CRE/53.htm