GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
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Transcript of GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
Paul Landless and Emir Nurmansyah
22 November 2012
Indonesian GMRA Annex
Introduction
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
• Part A: Framework & Transaction Initiation• Part B: Margin & Income Payments• Part C: Events of Default & Close-out• Part D: Boilerplates
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Part A: Framework & Transaction Initiation
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Introduction to GMRA Master Agreement
What are Master Agreements?• Standard contractual terms apply
Why are they used?• Formalities• Transactions agreed orally over
telephone• Uncertainty• Entire agreement clauses
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Common Architecture
• Documentation Architecture• Master Agreement produced by trade association• GMRA Annex (Annex I)• Customised Annexes for particular markets or
products• Confirmations
• Forms a single agreement• No cherry picking• Forms the basis for close-out netting
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The Repo Master Agreement
• Standard form principal agreement is Global Master Repurchase Agreement (GMRA) • Framework agreement used to carry out any number of
individual repo transactions
• Documentation issued by SIFMA and ICMA
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 622 November 2012
Annexes to the GMRA The GMRA is designed for use in particular
situations where:• UK regulatory requirements and UK tax• Issuer of the transferred securities may pay the
coupon gross• Seller and Buyer act as principals
• Agency Annex The GMRA may be adapted for use in other
situations (e.g. buy/sell-back transactions)GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 722 November 2012
Examples of GMRA Annexes
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 822 November 2012
The Confirmation
• Commercial terms of an individual transaction or "trade"
• Standard form in Annex II
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Details of the Confirmations• Date of the relevant GMRA• Date of the transaction• Type and nominal value of the
securities transferred• Identifying numbers for the
securities• Name of the buyer and the seller
and bank account details• Purchase date• Additional terms may also be
incorporated
• Purchase price• Currency of the contract• Repurchase date (or, if the repo
is terminable on demand, a statement to this effect)
• Repo rate• Sell-back price (if the transaction
is a sell/buy-back)• Agency transaction; if so, name of
party acting as agent and as principal
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Negotiating a GMRA Annex• Buy/Sell-Back Annex
applicable?• Net-paying Securities to be
covered under the agreement?• Agency Transactions
permitted?• Base Currency• Designated Offices• Pricing Source• Spot Rates
• Delivery of Confirmations• Interest Rate on Cash Margin• Interest Payment Intervals• Delivery Period for Margin
Calls• Delivery and payment
condition precedent applicable?
• Event of default for fails on a per trade basis applicable?
• Addresses for communication• Agent for service of process
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 1122 November 2012
GMRA Annex – Key Provisions, Market Standards and Relevant
Legal Issues
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 1222 November 2012
Overview - Terms under GMRA Annex (1)
• Standard Terms common to all transactions, e.g.:• Representations and Warranties • Events of Default
• Other matters to be agreed between the parties, e.g.:• Base Currency for the Transactions• Each Party's Address for Service• Name of any Process Agent
• Supplemental Provisions
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Overview - Terms under GMRA Annex (2)
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Parties to the GMRA• Each party enters individual transactions
though designated offices and authorised individuals• Designated offices• Authorised individuals
• Regulatory authority
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 1522 November 2012
• Paragraph 1• Buyer on one transaction, Seller on
another• Buy/sell-back transactions between the
parties
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Applicability
22 November 2012
Initiation; Confirmation; Termination• Paragraph 3• (a): A transaction may be entered into orally or in writing
at the initiation of either the seller or the buyer• (b): Obligation to deliver written confirmation• (c): Purchase Date• (d)&(e):Termination
• “On demand” transactions• (f): Transfer of Equivalent Securities against
payment of the Repurchase Price (Paragraph 2(pp))• Pricing Rate (Paragraph 2(jj))
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 1722 November 2012
Part B: Margin Maintenance & Income Payments
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Margin maintenance (1)• Paragraph 4• Concepts:• (1) Exposure
• Party with “Net Exposure” in respect of other party may require other party to make Margin Transfer equal to Net Exposure
• Net Exposure determined with reference to Transaction Exposure
• Transaction Exposure = diff between Repurchase Price x Margin Ratio and market value of equivalent securities
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Margin maintenance – Example 1
• On Purchase Date:
• Exposure
- Purchased Securities: $100 - Cash: $100- Exposure = 0 - Exposure: 0
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Buyer SellerPurchase Price: $100
Purchased Securities: $100 market value
Buyer Seller
Margin maintenance – Example 2• Exposure mid-way through transaction
- Purchased Securities: ↑ $150 - Repurchase Price: ↑ $120- Exposure = 0 - Exposure: $30
• Margin call
- Purchased Securities: $150 - Repurchase Price: $120- Exposure = 0 - Cash (Cash Margin): $30
- Exposure: 0
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Buyer Seller
Buyer $30 Cash Margin Seller
Margin maintenance (2)• (2) Initial Margin
• Fixed proportion or ratio of collateralisation for one party
• (3) Haircut• Discount to actual market value of a security• Purchased Securities or Margin Securities (for 2011
GMRA)
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 2222 November 2012
Margin maintenance – Example 3
• Initial Margin (GMRA 1995 & 2000):• 10% in favour of Buyer:
OR• 10% in favour of Seller:
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Buyer SellerPurchase Price: $100
Purchased Securities: $110 market value
Buyer SellerPurchase Price: $110
Purchased Securities: $100 market value
Margin maintenance (3) – Margin Call
Maintenance of Margin
(1)Margin Call (Paras 4(a)-(h))
• Paragraph 4(a)-(b): Margin calls / Margin call notices• Paragraph 4(c): Net Exposure (Exposure, Haircuts
and Initial Margin)• Paragraph 4(d): Composition of margin transfers• Paragraph 4(e)&(f): Cash Margin• Paragraph 4(g): Delivery period for margin• Paragraph 4(h)&(i): Alternative methods of margining
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Margin Maintenance (4) - Repricing & Adjustment
• Parties can agree that Net Exposure may instead be eliminated by repricing (Para 4(j)), adjustment (Para 4(k)) or a combination:
(2) Repricing (Paragraph 4(j))• Repurchase Date under original transaction deemed to
occur• Parties deemed to enter into a new transaction• Net sum is payable (diff between Repurchase Price under
original transaction and Purchase Price under new transaction which is based on market value of securities on Repricing Date)
(3) Adjustment (Paragraph 4(k))• Similar to repricing• Net amount of securities delivered on Adjustment Date
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 2522 November 2012
Income Payments• Paragraph 5• Purpose – economic nature vs legal relationship• “Manufactured income payments”• Buyer to credit the seller's account with income on the
securities during the term of the repo• “Income” on securities provided as margin / collateral• Voting rights and corporate actions?Relevant Legal Issues• Recharacterisation issues• Power of attorney required?
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 2622 November 2012
Payment and Transfer (1)• Paragraph 6• Payment and transfers (Para 6(a))
• Method for transferring securities
• Gross-up (Para 6(b))• Gross-up unless otherwise agreed• Para 11 – Tax Events
• Delivery versus payment (Para 6(c) & (d))• May waive simultaneous transfer/payment but must be on same day
• Outright title transfer (Para 6(e)&(f))• Absolute title transfer of title to all securities and money• Indonesia Annex: paragraph 6
• Formalities for the transfer of Indonesian securities / bonds?
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 2722 November 2012
Payment and Transfer (2)• Time of the essence (Para 6(g))
• Close-out provisions and EODs • Settlement netting provisions (Paragraph 6(h) & (i))
• Settlement netting vs close-out netting• Cash payments• Deliver of Securities
• Paragraph 6(j): Suspension of obligations• Optional • No Potential EOD• Currently the subject of litigation in English courts
• Indonesian legal position?
• Recharacterisation-related issues re transfer of “Margin Securities”?
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 2822 November 2012
Contractual Currency
• Paragraph 7• Contractual Currency (Para 7(a))
• Base Currency (Paragraph 2(d))
• Indonesian rupiah FX Issues• Foreign exchange restrictions• Reporting obligations
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Substitution• Paragraph 8• Seller’s right to substitute equivalent securities for the
securities transferred• Equivalent Margin Securities /Equivalent Securities (Paragraphs 2(r)&(s))
• Buyer’s consent required (Para 8(a))• Buyer re-transfers the original securities back to Seller (or an
agreed portion of them) (Para 8(b) & (d))• Seller transfers the substitute securities (Para 8(b) & (d))• At least market value as at the date of the re-transfer (Para
8(a) & (d))• Timing of valuation
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Part C: Events of Default & Close-out
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Representations and Warranties (1)
• Paragraph 9(a) – (h)• Breach or representations and warranties an EOD• The representations and warranties are repeated on
• The date on which any transaction is entered into• On each day on which the securities are transferred
• Due authorisation (Para 9(a))• Acting as principal (Para 9(b))• Governmental and regulatory authorisations (Para 9(d))
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 3222 November 2012
Representations and Warranties (2)
• No breach of law, constitution or agreement (Para 9(e))• Non-reliance and acceptance of risks (Para 9(g))• Ability to transfer securities free of encumbrances (Para
9(h))
• Indonesia Annex• No events of default• No litigation or arbitration• Capacity• Portfolio management purpose
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Events of Default (1)
• Paragraph 10(a)• Events of Default and Close-out Netting• Events of Default following service of Default
Notice • Exception: Act of Insolvency (Paragraph 2(a))
• Revocation of business license?• 2011 GMRA changes to Default Notice
• Grace Periods?• Business Day (Paragraph 2(e))
• “Mini close-out” provisions (Para 10(g) & (h))
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 3422 November 2012
Events of Default (2)Events of Default (Para 10(a))
• Failure to pay Purchase Price or Repurchase Price (Para 10(a)(i))
• Failure to deliver securities (optional) (Para 10(a)(ii))
• Failure to comply with margin maintenance provisions (Para 10(a)(iv))
• Failure to pay manufactured payments (Para 10(a)(iii))
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 3522 November 2012
Events of Default (3)• Act of Insolvency (Para 10(a)(vi))• Indonesia Annex:
Business licence revocation: liquidation Bankruptcy and Suspension of Tagment Consent, approval and acquiescence of above
• Business licence revocation: new 10(a)(xi) • Breach of representations in any material respect (Para
10(a)(vii))• Regulatory action against party (Para 10(a)(ix))• “Sweep up” clause – breach of any other obligations –
30 day grace period (Para 10(a)(x))
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 3622 November 2012
“Mini close-out” Provisions
• “Mini close-out” (Paras 10(g) and (h)) Failure by Seller to deliver securities on Purchase Date (Para
10(g)) Failure by Buyer to deliver securities on Repurchase Date
(Para 10(h))• Termination of transaction• Determination default market value of securities and repurchase
price• Set-off
• Timing• Indonesia Annex: Articles 1425 – 1435 of Code
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Consequences for counterparty upon Event of Default
• Default Notice• Notification of EOD or Potential EOD • Required for all events except presentation of
winding up petition or appointment of a liquidator• Practical difficulties of serving notice• Special default notice procedure
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What happens on a default? – what will you seek to recover?
• Value of positions• Recovery of expenses• Your hedging costs• No liability for consequential loss
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 3922 November 2012
Close-out netting – Example (1) Transaction 1
• Purchase Date:
• 3 months later:
- Purchased Securities: ↓$90 - Repurchase Price: ↑$110
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 4022 November 2012
Party A Party BPurchase Price: $100
Purchased Securities: $100
Party A Party B
Close-out netting – Example (2) Transaction 2
• Purchase Date:
• 3 months later:
- Purchased Securities: ↑$120 - Repurchase Price: ↑$105
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Party B Party APurchase Price: $100
Purchased Securities: $100
Party B Party A
Close-out netting – Example (3) Event of Default occurs:
• Step 1: Acceleration of obligations
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 4222 November 2012
Party A Party BRepurchase Price: $110
Purchased Securities: $90
Party B Party APurchased Securities:
$120
Repurchase Price: $105
T1
T2
Close-out netting – Example (4) • Step 2: Conversion of delivery obligations into
cash obligations
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 4322 November 2012
Party A Party BRepurchase Price: $110
DMV: $90
Party B Party ADMV: $120
Repurchase Price: $105
T1
T2
Close-out netting – Example (5) • Step 3: Netting
• Single net close-out balance
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Party A Party B
$15Party B Party A
T1
T2
$20
Party AT1 + T2 Party B$35
What happens on a default? – close-out netting
• Paragraphs 10(b)-(f) & (i)-(k)• Repurchase Date accelerated• Cash margin repayable and equivalent margin
securities deliverable• Non-defaulting party establishes “Default Market
Value” of securities, the amount of cash margin to be transferred and the repurchase prices payable
• Amounts set off to produce single net amount payable by one party to the other• Limits on rights to set-off & net? • Preferential Transfers under Indonesian Bankruptcy Law?• Automatic Early Termination?
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 4522 November 2012
Part D: Boilerplates & Other General Provisions
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 4622 November 2012
Tax Event• Paragraph 11• Material adverse effect on that transaction• Action by tax authority or change in fiscal or regulatory regime• Affected party may give notice to terminate
• The notice must specify a date for close-out (at least 30 days after the date of notice)
• Other party may serve counter-notice to prevent such termination• The counter-notice will constitute the other party's agreement to
indemnify the first party against the adverse effect• If no counter-notice, termination will go ahead and the first party will
indemnify the other party against any reasonable legal and other professional expenses incurred by the other party
• Stamp Duty Issues?• Sale of Indonesian shares or bonds
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 4722 November 2012
Interest
• Paragraph 12• Interest is payable on late payments• The rate of interest is the greater of the repo
rate specified in the confirmation and LIBOR• 2011 GMRA: “Applicable Rate”
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 4822 November 2012
Governing law
• Paragraph 17• Indonesia Annex
• Arbitration Clause: Annex I election• BAPMI / BANI / SIAC / other• Waiver of immunity
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Buy/Sell back vs Repo: Key differences
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues50
Buy/Sellback vs Repo: Key differences
Buy / sellback RepoDocumentation • Simple: structured as two
separate transactions (spot purchase and forward sale) not under a master agreement
• More complex: sale and repurchase structured as one transaction under a master agreement
Close-out netting • Not available due to absence of master agreement
• All transactions under a master agreement can be terminated if an Event of Default occurs under any one transaction
• If Party A defaults on any one transaction, Party B must wait for other transactions with Party A to mature
22 November 2012
Buy/Sell back vs Repo: Key differences
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 51
Buy/Sellback vs Repo: Key differences (2)
Buy / sellback Repo
Margining • Typically not margined • Securities regularly valued or marked-to-market and margin called for accordingly
• Documentation provides for non-compliance and release of excess margin
Insolvency Risk • Risk that a party becomes insolvent after initial purchase but before forward sale
• Reduced exposure due to operation of close-out netting
• Solvent party could be unsecured creditor as regards all sums owing to it from the insolvent party
• Solvent party will be unsecured creditor only as regards the net balance owing to it from the insolvent party
22 November 2012
Buy/Sell back vs Repo: Key differences
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
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Buy/Sellback vs Repo: Key differences (3)
Buy / sellback Repo
Insolvency Risk • “Cherry picking” a possibility in some jurisdictions
Accounting treatment
• Treated as outright sale • Seller retains securities on its balance sheet
• Securities leave Seller’s balance sheet
• Coupon accrues for benefit of the Seller
• Securities appear on Buyer’s balance sheet
• Coupon accrues for benefit of the Seller
22 November 2012
Buy/Sell back vs Repo: Key differences
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
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Buy/Sellback vs Repo: Key differences (4)
Buy / sellback Repo
Regulatory capital treatment
• Increased requirement based on gross exposure to counterparty due to lack of close-out netting and margin
• Reduced requirement based on net exposure to counterparty as obligations can be netted and/or margined
Distributions • Buyer keeps income when distributed
• Buyer promptly pays equivalent sum to Seller (“manufactured dividend”)
• Accounted for in sellback price paid at maturity
• Convention only – no contractual obligation on Buyer to pay distributions to Seller
22 November 2012
Questions?
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues 5422 November 2012
Your Contacts
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Paget Dare BryanPartner28th FloorJardine HouseOne Connaught PlaceCentralHong Kong SAR
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Paul LandlessCounselClifford Chance12 Marine Boulevard25th Floor Tower 3Marina Bay Financial CentreSingapore 018982Singapore
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Terry YangSenior Associate28th FloorJardine HouseOne Connaught PlaceCentralHong Kong SAR
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Philip Payne Foreign Of CounselGraha CIMB Niaga 24th FloorJl. Jend. Sudirman Kav. 58Jakarta 12190
T +62 21 2505125F +62 21 2505001, 5121, 5122,5392E [email protected]
Emir NurmansyahPartnerGraha CIMB Niaga 24th FloorJl. Jend. Sudirman Kav. 58Jakarta 12190
T +62 21 2505125F +62 21 2505001, 5121, 5122,5392E [email protected]
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GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues