Template:Cross default in securities financing agreements
There’s no need for cross default in any master trading agreement, actually — this is the JC’s considered view, about which you can read at length elsewhere — but the 2010 GMSLA and Template:Repo are a particularly bad candidates for cross default because their transactions are by definition short term (in the case of Template:Repo) and on call (in the case of 2010 GMSLA), so the “mischief” the cross default is designed to remedy — large credit exposure under transactions with long tenor and few regular cashflows — does not exist.
Cross default, remember, is a banking concept, designed to protect lenders who have unsecured credit exposure to borrowers under fixed rate loans where the only material payments will be regular interest payments, which might be as infrequent as quarterly, semi-annual or even annual. If the lender knows the borrower has defaulted on material indebtedness to another lender, it will not want to wait nine months to see if there is a failure to pay on its own facility. Hence, a cross default right.
SFTRs are collateralised daily, so:
- Neither party has material exposure[1];
- There will usually be payment flows happening daily as loaned Securities and Collateral values move around with the market, creating collateral transfers; and
- Even if there aren’t, either party can recall the loans on any day[2]
- ↑ Okay, okay, a borrower under an agent lending transaction may have a significant exposure across all lenders due to aggregated collateral haircuts, but that is by definition diversified risk, and the borrower can generally break term transactions.
- ↑ Unless they are term transactions, but even there the terms tend to be short — ninety days is a maximum — and see above re usual daily collateral flows.