ISLA: GMSLA Pledge to help reduce regulatory capital costs when borrowing securities
18 June 2019 Madrid
Image: Shutterstock
The main motivation behind the development of the Global Master Securities Lending Agreement (GMSLA) Pledge Master Agreement was to help regulated borrowers reduce their regulatory capital costs when borrowing securities, according to Habib Motani of Clifford Chance, who was a speaker at this year’s International Securities Lending Association conference in Madrid.
The current GMSLA that is being used is called a title transfer structure. Motani explained that the lender transfers ownership of the borrowed securities to the borrower and the borrower transfers ownership of the collateral securities to the lender.
He explained that industry participants say the fact that title to the collateral is transferred means that the lender can readily realise on a borrower default by immediately selling the collateral securities.
Although Motani explained that is true, he said it’s actually a “slight misunderstanding”.
Motani said: "It sees the collateral as the collateral securities. Really the ‘collateral’ is the lender’s obligation to return equivalent collateral securities on a default, the value of that obligation being set off against the value of the obligation of the borrower to return the equivalent of the borrowed securities.”
He added: “Because lenders require borrowers to over collateralise, that set off will generally result in an amount payable by the lender, resulting in the borrower having an exposure on the lender and being required to hold regulatory capital against that exposure. This can be expensive. The GMSLA Pledge is designed to enable collateralisation without creating this exposure.”
The current GMSLA that is being used is called a title transfer structure. Motani explained that the lender transfers ownership of the borrowed securities to the borrower and the borrower transfers ownership of the collateral securities to the lender.
He explained that industry participants say the fact that title to the collateral is transferred means that the lender can readily realise on a borrower default by immediately selling the collateral securities.
Although Motani explained that is true, he said it’s actually a “slight misunderstanding”.
Motani said: "It sees the collateral as the collateral securities. Really the ‘collateral’ is the lender’s obligation to return equivalent collateral securities on a default, the value of that obligation being set off against the value of the obligation of the borrower to return the equivalent of the borrowed securities.”
He added: “Because lenders require borrowers to over collateralise, that set off will generally result in an amount payable by the lender, resulting in the borrower having an exposure on the lender and being required to hold regulatory capital against that exposure. This can be expensive. The GMSLA Pledge is designed to enable collateralisation without creating this exposure.”
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