SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2008

OVERVIEW OF THE SECURITIES FINANCING MARKETS

Following a counterparty failure, under a robust legal agreement such as the GMSLA, a lender is only exposed to loss if the value of collateral held is insufficient to cover the repur- chase of the lent securities (together with any outstanding dividend and corporate action proceeds). This might occur because of large market movements in the intervening period between the lender’s last margin call, and the point at which the lender is able to liquidate his collateral. Lenders may also be exposed if the markets for either the collateral taken or the lent securities are illiquid at the time of the default. To minimise this risk, however, counterparts can define their acceptable collateral parameters to ensure that only liquid securities are used. Secondly, they can employ “haircuts” to ensure that they hold a buffer of collateral over and above the value of the lent securities. Risk management considera- tions are further examined in section 3.5. Originally published in 2000, the GMSLA has been adopted by many market participants in Europe and Asia. It was updated in July 2009, with the following objectives: > To reflect changes in law, tax, market practice and issues arising since 2000; > To address some of the amendments that lenders and borrowers were commonly making to the GMSLA bilaterally using a side letter; > To identify all likely events that may have a tax consequence and identify the party that will bear the associated tax risk; > To use, where appropriate, the same language and form as the Global Master Repo Agree- ment (GMRA – see below). As a result of the Lehman default, the July 2009 version of the GMSLA namely introduced key changes to the way in which securities are valued post-default and a party’s remedies following a failure by the other party to re-deliver securities or collateral. Further minor amendments were made in January 2010 by ISLA, in response to a number of concerns being voiced in the market. The Global Master Repurchase Agreement (GMRA) is the standard agreement for repos in the international market. It is jointly produced by ISMA (International Securities Market Association) and TBMA (The Bond Market Association, formerly PSA – Public Securities Association, a US-based industry organisation of participants involved in certain sectors of the bond markets). The GMRA sets out the relationships between parties and general positions applicable to all repo transactions in terms of definition, delivery and payment obligations of the parties, margin mechanics, rights of substitution, treatment of income on securities involved, notice provisions etc. The agreement also seeks to specify clearly the events of default and the consequential rights and obligation of the counterparties. The first version of the GMRA was published in 1992 and was followed by a substantially revised version in 1995. In October 2000 was released the third version, reflecting market developments since 1995. Since 1992, a number of annexes to the GMRA adapting it to suit different jurisdictions and markets have been produced. The latest version of the GMSLA is available in Appendix. The GMRA

1.3.2

The latest version of the GMRA is available in Appendix.

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