Template:M summ GMSLA 9.1

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If the Lender decides to terminate, you are into the realm of the fabled and famous mini close-out, wherein the Lender exercises rights to terminate and value the Loan by itself as if it were an Event of Default, whilst not actually being an Event of Default.

So why isn’t a failure to return Securities or Collateral an Event of Default?

This reflects the reality that settlement failures in the equities markets are common and, seeing as the whole point of a stock loan is to provide the borrower with a security it can sell short, the Borrower is likely to be relying on someone else settling the security into it before it can return the security to the Lender — as such the Borrower’s failure is not necessarily evidence that your Borrower is about to auger into the side of a hill.[1]

The Lender has a self-help mechanism it can use to close out its market risk: a buy-in.

  1. The same is generally true of Collateral returns (though not Collateral deliveries - see paragraph 9.2.