Template:M gen GMSLA 11.2

Gross Jurisdictions

Upon the insolvency of a Counterparty in a non-netting jurisdiction, provided a Non-Defaulting Party terminates each Loan individually under the "mini-closeout” method before it designates an Event of Default with respect to the whole Agreement, the worst-case scenario is to aggregate the market value of each “Loan” which is in the money to the Non-Defaulting Party (i.e., its net value having taken into account Posted Collateral held against that Loan), without taking into account the market value of any Loan which is out of the money for the Non Defaulting Party.

The “unit of account” under the GMSLA (the equivalent of a “transaction” under an ISDA Master Agreement) is a “Loan”, which is defined as a title transfer of Securities against a transfer of Collateral, with a simultaneous agreement to transfer back Equivalent Securities against Equivalent Collateral) Unless agreed otherwise, each Loan under a GMSLA is terminable by either party at any time without “cause”.

Each outstanding Loan is collateralised (by title transfer) daily, on an aggregated basis, but in a way which allows the Parties to deterministically assign Posted Collateral against each Loan.

Given that GMSLAs are margined daily, we would expect the market value of any Loan to be roughly equivalent to the “haircut” on the Posted Collateral for that Loan on any day. For example, where the Loaned Securities market value is 100% and the Posted Collateral value is 105%, the Loan value for the purposes of a mini-closeout would be 5%.

A party to a GMSLA has a general right to terminate any Loan at any time (thereby converting offsetting forward obligations into a single payment amount for that Loan), and could therefore terminate all Loans upon an insolvency without specifically invoking an Event of Default (although that right would also be available).

We reach this conclusion because a Party to a GMSLA has a general right to terminate any Loan at any time (thereby converting offsetting forward obligations into a single payment amount for that Loan), and could therefore terminate all Loans upon an insolvency without invoking an Event of Default (although that right would also be available).

Note that the position upon termination of the whole agreement expressly because of an Event of Default (without first having terminated each Loan per the above) is not quite as clear, as it does not specifically contemplate the termination of individual Loans as a stage of the close out process, but assumes all payments and deliveries will be netted down to a single figure.

Term Loans

Note term Loans may need to be treated differently, as the “without notice” termination right (under 8.1 and 8.2) will not necessarily apply. We recommend (i) updating template confirmation notices for term Loans to be clear that notwithstanding their term they are individually terminable upon any of the events listed in Events of Default (even where they have not been invoked) and (ii) updating template GMSLA schedules to include this provision.