Template:M summ GMSLA 11.2

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Closing out a 2010 GMSLA is done following designation by a Non-Defaulting Party of an Event of Default under Paragraph 11.2 as follows:

Loan Definition

Under the GMSLA a “Loan” is defined as the transfer of securities from Lender to Borrower against a transfer of collateral by Borrower to Lender, with a simultaneous agreement to transfer back equivalent securities against equivalent collateral in the future.

Collateralisation

Collateral for Loan transactions is marked-to-market on a daily basis. In the market, such collateralisation operates on an “aggregated” basis across all outstanding Loans as is contemplated by Paragraph 5.4 of the GMSLA.

Where aggregated collateralisation under Clause 5.4 applies, Clause 5.6 contemplates “net” transfers of collateral on a daily basis (as a matter of settlement convenience), and Clause 5.7 provides that where the Parties do not specifically allocate specific Collateral deliveries to specific Loans, any new or substituted Collateral deemed to be transferred on any day will be attributed first to the earliest outstanding Loan (up to the point where that Loan is fully collateralised) and then to the next earliest outstanding Loan, and so on.

Therefore for the purposes of termination and close-out the value of Collateral held against each Loan at any time is able to be clearly determined.

Loan Termination

  • Under clause 8.2 and 8.2 of the GMSLA, subject to the terms of any Loan*, either party may terminate any Loan at any time by calling for redelivery of Equivalent Securities (in the case of a Lender) or giving notice of redelivery of Equivalent Securities (in the case of a Borrower), in each case by title transfer.
  • Delivery obligations are reciprocal, such that neither Party is obliged to make delivery unless it is satisfied the other party will make such delivery to it (cl 8.6), and an innocent party is entitled to suspend performance of its delivery obligation until satisfied the relevant delivery by its counterparty will be made.
  • If a Party fails to deliver Equivalent Securities or Equivalent Collateral, the other party may elect either to continue the Loan (i.e., as suspended) or may by written notice declare that the Loan is terminated immediately as if an Event of Default had occurred with respect to that Loan only (note such a termination would not actually be an Event of Default under the GMSLA so let's call this a "quasi-Event of Default") and it was the only 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” with respect to a single Loan the Non-Defaulting Party will determine the Default Market Value of the Equivalent Securities and Equivalent Collateral under that Loan, the relevant amounts will be offset to arrive at a balance payable by one party to the other in respect of that Loan on the next business day.

Under this analysis this procedure would be followed in respect of all outstanding Loans, to arrive at a series of “termination amounts”, one payable in respect of each Loan.

Clause 11.8 of the GMSLA purports to allow a Non-Defaulting Party to set such individual termination amounts off against each other and this clause is the one that might be challenged in insolvency in a gross jurisdiction.

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