Template:M comp disc Pledge GMSLA 11

There is little difference between the 2010 GMSLA and the 2018 Pledge GMSLA versions of Consequences of an Event of Default, as you can see more easily in this comparison of the nutshell versions. (There’s a comparison of the full provisions in the usual place in the panel). One thing you will notice is how utterly dismal is the drafting of the original provision. It was no small task to create nutshell versions — you can thank me later — but they boil down to not very much.

The differences that there are are significant, since the philosophical unpinning of what is going on is profoundly different, even if the commercial outcome is the same. Think VHS and Betamax. In a nutshell, under the 2018 Pledge GMSLA:

• Only the Borrower’s redelivery payments are accelerated, since by the theory of the game, the Lender never gets possession of the collateral and is not therefore in a position to redeliver it.
• There’s less fog and confusion because ISLA’s crack drafting squad™ in their wisdom removed Letters of Credit as a form of eligible Collateral from the 2018 Pledge GMSLA
• The reckoning of what is due under Paragraph 11.2(b) — setting off all sums owed by one party against all sums owed by the other — is less fraught, and will always be a net payable back to the Lender (because the Borrower never transferred title to the pledged Collateral in the first place)
• There is no concept in the2018 Pledge GMSLA of “Deliverable Securities” or “Receivable Securities”, seeing as there will not always be a receiver and a deliverer, so they don’t come into the frame for the reckoning of the Default Market Value in the same way.

ISLA thought leadership

ISLA published a curious piece of thought leadership in September 2018 which painted a worst-case scenario timeline for closing out a 2018 Pledge GMSLA which made it look quite a bit worse than the corresponding critical path under a normal GMSLA — hardly calculated to set at ease the jittery nerves of a very modern agent lender. The perceived difference was this:

2010 GMSLA	2018 Pledge GMSLA
Upon notice of default, Non-Defaulting Party can start immediately liquidate and has 5 days to trade and set pricing to allow for liquidity. You have to return any excess.	Upon notice of default Non-Defaulting Party can theoretically start liquidating but has value the pledged Collateral to be transferred. This may take a bit longer in an illiquid market. But seems to the JC there’s no reason you can’t execute trades in the collateral without physically holding it, seeing as it settles later. Any excess goes back to the pledgor.

In either case for the Default Market Value, the main thing you’re valuing is the Loaned Securities not (primarily) the Collateral: as long as you aren’t under-collateralised, and you take steps to get a reasonable price, you can sell all the Collateral — remember, that’s how security works — the Defaulting Party is in the soup and can’t be too particular about what happens to its collateral as long as, once the debt is satisfied, it gets the remainder back. If you are under-collateralised, it doesn’t make any odds whether you hold by pledge or title-transfer —either way, you are short.