Introduction

Following the administration proceedings recently instituted against a number of UK entities (Affected Companies), many counterparties (Counterparties) may wish to terminate transactions under the TBMA/ISMA Global Master Repurchase Agreement (GMRA) entered into between them and Affected Companies.

We set out a few of the most frequently asked questions arising in connection with the determination of the Default Market Value of Equivalent Securities or Equivalent Margin Securities (Relevant Securities) in respect of outstanding transactions under the GMRA.

Frequently asked questions

What is the Default Valuation Time?

The non-defaulting party may provide a Default Valuation Notice (which sets out the Default Market Value of the Relevant Securities) to the Affected Company between the occurrence of the relevant Event of Default and the Default Valuation Time. If the Default Valuation Notice is not provided by the Default Valuation Time, the GMRA has a fallback position for determining the Default Market Value which is described below.

The Default Valuation Time is defined in relation to an Event of Default as the close of business in the Appropriate Market on the fifth dealing day after the day (i) on which the relevant Event of Default occurs or (ii) where an Act of Insolvency has occurred and a Default Notice is not required, the time at which the non-defaulting party first became aware of such Act of Insolvency.

An Event of Default occurs under the GMRA when a Default Notice is served on an Affected Company. (It should be noted, however, that no notice is required where certain Acts of Insolvency have occurred.) The notice provisions under paragraph 14 of the GMRA are addressed in a separate note produced by us, entitled “Guidance on closing out derivatives, repos and stock loans”.

Assuming that the Default Notice requirements were satisfied prior to the close of business on a day on which commercial banks are open for business in the place where the notice was served, the Default Valuation Time would be the close of business on the fifth dealing day following service of such notice.

How should the Default Market Value with respect to the Relevant Securities be determined and what should the non-defaulting party include in the Default Valuation Notice?

The Default Market Value can be determined with respect to the Relevant Securities in accordance with paragraph 10(e)(i)(A), (B) or (C) of the GMRA. The Default Valuation Notice can provide for any of the following:

  • that the non-defaulting party has sold or purchased the Relevant Securities and elects to treat the net proceeds of such sale or purchase after deducting or, in the case of a purchase including, all reasonable costs, fees and expenses as the Default Market Value;
  • that the non-defaulting party has received bid or offer quotations in respect of the Relevant Securities to be sold or purchased, as the case may be, from two or more market makers or regular dealers in the Appropriate Market in a commercially reasonable size (determined by the non-defaulting party) and treats the price(s) so quoted by each of them, after deducting or adding, as the case may be, any Transaction Costs, as the Default Market Value; or
  • that the non-defaulting party has either:
    • acting in good faith, been unable to sell or purchase the Relevant Securities or obtain bid or offer quotations (or both); or
    • determines that it would not be commercially reasonable to obtain or use such quotations, and that the non-defaulting party has determined the Net Value of the Relevant Securities and elects to treat such Net Value as the Default Market Value.

If a Default Valuation Notice is not provided, the Default Market Value shall be the Net Value at the Default Valuation Time of the Relevant Securities. If it is not possible to determine a Net Value that is commercially reasonable at the Default Valuation Time, such determination shall be made as soon as reasonably practicable after the Default Valuation Time.

What if the proceeds of a sale of the Relevant Securities under Paragraph 10(e)(i)(A) are lower than the amount mentioned in the Default Valuation Notice?

Prior to the Default Valuation Time, the non-defaulting party may only serve a Default Valuation Notice on an Affected Company if it has already determined the Default Market Value with respect to the Relevant Securities sold or to be sold in accordance with paragraph 10(e)(i)(A), (B) or (C) of the GMRA. Therefore, if the non-defaulting party gives a Default Valuation Notice to an Affected Company under paragraph 10(e)(i)(B) of the GMRA in which it states that the non-defaulting party has received bid quotations (as described above) and treats the price(s) quoted, after deducting any Transaction Costs, as the Default Market Value, then this shall be the value given to the Relevant Securities.

This means that the non-defaulting party will offset the Default Market Value of the Relevant Securities against the Repurchase Price (plus any Cash Margin) with respect to the Relevant Securities and a net amount (reflecting amounts calculated pursuant to paragraph 10(k) of the GMRA, if any) will be due by one party to the other. If the non-defaulting party is subsequently only able to sell the Relevant Securities for an amount less than the Default Market Value, the net sum due will have crystallised at the value specified in the Default Valuation Notice and the non-defaulting party will have no right to any further recovery.

What happens if the non-defaulting party does not send a Default Valuation Notice before the Default Valuation Time because it believes it is not commercially reasonable to do so? Is “commercially reasonable” an easy test or is there a risk that the value will be determined at the Default Valuation Time?

Pursuant to paragraph 10(e)(ii) of the GMRA, if at the Default Valuation Time the non-defaulting party reasonably determines that, owing to the circumstances affecting the market in the Relevant Securities, it is not possible for the non-defaulting party to determine a Net Value which is commercially reasonable, the Default Market Value of such securities shall be determined by the non-defaulting party as soon as reasonably practicable after the Default Valuation Time.

If the non-defaulting party determines that the Net Value can only be determined in a commercially reasonable manner after the Default Valuation Time, the non-defaulting party should consider carefully any circumstances it is relying on to justify the delay. While some circumstances might be justifiable (e.g., the relevant markets are completely frozen), others may be open to challenge (e.g., prices are likely to move in the non-defaulting party’s favour).

What if the non-defaulting party is unable to sell all of the Relevant Securities by the Default Valuation Time?

Pursuant to paragraph 10(e)(i)(A)(aa) of the GMRA, if the non-defaulting party has not sold the whole amount of the Relevant Securities, the non-defaulting party can treat the net proceeds of sale with respect to the portion of the Relevant Securities sold as the Default Market Value with respect to such Relevant Securities and the non-defaulting party can determine the balance of the Relevant Securities (Remaining Securities) separately in accordance with paragraph 10(e) of the GMRA by serving a separate Default Valuation Notice. The method of determining the Default Market Value with respect to such Remaining Securities can be any of the methods described under paragraph 10(e)(i) and (ii) of the GMRA.