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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. 22 November 2012. GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

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GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

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  1. GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues Paul Landless and Emir Nurmansyah 22 November 2012 Indonesian GMRA Annex

  2. Introduction 22 November 2012 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

  3. 22 November 2012 Part A: Framework & Transaction Initiation

  4. 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 22 November 2012

  5. Common Architecture 22 November 2012 • 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

  6. The Repo Master Agreement 22 November 2012 • 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

  7. Annexes to the GMRA 22 November 2012 • 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)

  8. Examples of GMRA Annexes 22 November 2012

  9. The Confirmation 22 November 2012 Commercial terms of an individual transaction or "trade" Standard form in Annex II

  10. 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 22 November 2012

  11. 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 22 November 2012

  12. 22 November 2012 GMRA Annex – Key Provisions, Market Standards and Relevant Legal Issues

  13. Overview - Terms under GMRA Annex (1) 22 November 2012 • 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

  14. Overview - Terms under GMRA Annex (2) 22 November 2012

  15. Parties to the GMRA 22 November 2012 • Each party enters individual transactions though designated offices and authorised individuals • Designated offices • Authorised individuals • Regulatory authority

  16. Applicability 22 November 2012 Paragraph 1 Buyer on one transaction, Seller on another Buy/sell-back transactions between the parties

  17. 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)) 22 November 2012

  18. 22 November 2012 Part B: Margin Maintenance & Income Payments

  19. 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 22 November 2012

  20. Margin maintenance – Example 1 • On Purchase Date: • Exposure • - Purchased Securities: $100 - Cash: $100 • - Exposure = 0 - Exposure: 0 Purchase Price: $100 Seller Buyer Purchased Securities: $100 market value Seller Buyer 22 November 2012

  21. 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 Seller Buyer Seller Buyer $30 Cash Margin 22 November 2012

  22. 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) 22 November 2012

  23. Margin maintenance – Example 3 • Initial Margin (GMRA 1995 & 2000): • 10% in favour of Buyer: • OR • 10% in favour of Seller: Buyer Seller Purchase Price: $100 Purchased Securities: $110 market value Purchase Price: $110 Buyer Seller Purchased Securities: $100 market value 22 November 2012

  24. Margin maintenance (3) – Margin Call Maintenance of Margin • 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 22 November 2012

  25. 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 22 November 2012

  26. Income Payments 22 November 2012 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?

  27. 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? 22 November 2012

  28. 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”? 22 November 2012

  29. Contractual Currency 22 November 2012 • Paragraph 7 • Contractual Currency (Para 7(a)) • Base Currency (Paragraph 2(d)) • Indonesian rupiah FX Issues • Foreign exchange restrictions • Reporting obligations

  30. Substitution 22 November 2012 • 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

  31. 22 November 2012 Part C: Events of Default & Close-out

  32. Representations and Warranties (1) 22 November 2012 • 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))

  33. Representations and Warranties (2) 22 November 2012 • 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

  34. 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)) 22 November 2012

  35. Events of Default (2) 22 November 2012 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))

  36. Events of Default (3) 22 November 2012 • 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))

  37. “Mini close-out” Provisions 22 November 2012 • “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

  38. Consequences for counterparty upon Event of Default 22 November 2012 • 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

  39. What happens on a default? – what will you seek to recover? 22 November 2012 Value of positions Recovery of expenses Your hedging costs No liability for consequential loss

  40. Close-out netting – Example (1) Transaction 1 • Purchase Date: • 3 months later: • - Purchased Securities: ↓$90 - Repurchase Price: ↑$110 Purchase Price: $100 Party B Party A Purchased Securities: $100 Party B Party A 22 November 2012

  41. Close-out netting – Example (2) Transaction 2 • Purchase Date: • 3 months later: • - Purchased Securities: ↑$120 - Repurchase Price: ↑$105 Purchase Price: $100 Party A Party B Purchased Securities: $100 Party A Party B 22 November 2012

  42. Close-out netting – Example (3) Event of Default occurs: • Step 1: Acceleration of obligations Repurchase Price: $110 Party A T1 Party B Purchased Securities: $90 Repurchase Price: $105 Party A Party B T2 Purchased Securities: $120 22 November 2012

  43. Close-out netting – Example (4) • Step 2: Conversion of delivery obligations into cash obligations Repurchase Price: $110 Party A Party B T1 DMV: $90 Repurchase Price: $105 Party A Party B T2 DMV: $120 22 November 2012

  44. Close-out netting – Example (5) • Step 3: Netting • Single net close-out balance $20 Party B T1 Party A $15 Party B Party A T2 $35 Party B Party A T1 + T2 22 November 2012

  45. What happens on a default? – close-out netting 22 November 2012 • 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?

  46. 22 November 2012 Part D: Boilerplates & Other General Provisions

  47. Tax Event 22 November 2012 • 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

  48. Interest 22 November 2012 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”

  49. Governing law 22 November 2012 • Paragraph 17 • Indonesia Annex • Arbitration Clause: Annex I election • BAPMI / BANI / SIAC / other • Waiver of immunity

  50. Buy/Sell back vs Repo: Key differences Buy/Sellback vs Repo: Key differences 22 November 2012

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