Template:Gmsla 11.2 summ

Close-out method

Closing out a 2010 GMSLA is done following designation by a {{{{{1}}}|Non-Defaulting Party}} of an {{{{{1}}}|Event of Default}} under Para {{{{{1}}}|11.2}} as follows.

A “{{{{{1}}}|Loan}}” is the transfer of securities from {{{{{1}}}|Lender}} to {{{{{1}}}|Borrower}} against a transfer of collateral by {{{{{1}}}|Borrower}} to {{{{{1}}}|Lender}}, with a simultaneous agreement to transfer back equivalent securities against equivalent collateral in the future.

{{{{{1}}}|Collateral}} is marked-to-market daily, almost always on the “aggregated” basis across all outstanding {{{{{1}}}|Loans}} as is contemplated by Para {{{{{1}}}|5.4}}. Here, Para {{{{{1}}}|5.6}} contemplates daily “net” transfers of {{{{{1}}}|Collateral}} (as a matter of settlement convenience), and Para{{{{{1}}}|5.7}} provides that where the {{{{{1}}}|Parties}} do not specifically allocate specific {{{{{1}}}|Collateral}} deliveries to specific {{{{{1}}}|Loans}}, any {{{{{1}}}|Collateral}} transferred on any day will be attributed first to the earliest outstanding {{{{{1}}}|Loan}} (up to the point where that Loan is fully collateralised) and then to the next earliest outstanding {{{{{1}}}|Loan}}, and so on.

Therefore the close-out the value of the {{{{{1}}}|Collateral}} held at any time against each {{{{{1}}}|Loan}} can be clearly determined.

Loan Termination

Under Para {{{{{1}}}|8.2}} and {{{{{1}}}|8.2}}, either party may terminate any {{{{{1}}}|Loan}} at any time by calling for, or giving notice of, the redelivery of {{{{{1}}}|Equivalent}} {{{{{1}}}|Securities}} by title transfer.

Delivery obligations are reciprocal, such that neither {{{{{1}}}|Party}} must deliver unless it is satisfied the other party will also deliver (Para {{{{{1}}}|8.6}}). An innocent party may suspend its delivery obligation until satisfied that its counterparty will deliver.

If a {{{{{1}}}|Party}} fails to deliver {{{{{1}}}|Equivalent}} {{{{{1}}}|Securities}} (or, for the 2010 GMSLA, {{{{{1}}}|Equivalent}} {{{{{1}}}|Collateral}}), the other party can choose to continue the {{{{{1}}}|Loan}} or terminate it immediately as if an {{{{{1}}}|Event of Default}} had occurred for that {{{{{1}}}|Loan}} only (but it would not actually be an {{{{{1}}}|Event of Default}} under the {{{{{1}}}|GMSLA}} so let’s call this a “quasi-Event of Default”) and it was the only {{{{{1}}}|Loan}} outstanding.

This is important because it establishes a “transaction termination” methodology generating a market value for each transaction analogous to Section 6(e) of the ISDA Master Agreement.

Event of Default Close-out Methodology

Upon determining a “quasi-Event of Default” for a single {{{{{1}}}|Loan}} the {{{{{1}}}|Non-Defaulting Party}} will determine the {{{{{1}}}|Default Market Value}} of the {{{{{1}}}|Equivalent}} {{{{{1}}}|Securities}} and {{{{{1}}}|Equivalent}} {{{{{1}}}|Collateral}} under that {{{{{1}}}|Loan}}, the relevant amounts will be offset to arrive at a balance payable by one party to the other in respect of that {{{{{1}}}|Loan}} on the next business day.

This procedure would be followed in respect of all outstanding {{{{{1}}}|Loans}}, to arrive at a series of “termination amounts”, one payable in respect of each {{{{{1}}}|Loan}}.

Para {{{{{1}}}|11.8}} allows a {{{{{1}}}|Non-Defaulting Party}} to set such individual termination amounts off against each other. This is the provision that might be challenged in a non-net insolvency.