In case you missed it: Repo and Securities Lending Legal Opinion Coverage 2019
Vice President - KYC
Friday 26 July 2019
One of the most significant developments in the repo and securities lending market in 2019 was the decision of both the International Capital Markets Association (“ICMA”) and International Securities Lending Association (“ISLA”) to discontinue coverage of a number of master agreements in their legal opinions from 2019 onwards, effectively phasing them out of existence.
Agreements covered by the decision are:
Global Master Repurchase Agreement (1995 version)
Overseas Securities Lender's Agreement (1994 Version)
Overseas Securities Lender's Agreement (1995 Version)
Master Gilt Edged Stock Lending Agreement (1996 Version)
For many years, ICMA and ISLA has obtained and annually updated legal opinions on the Global Master Repurchase Agreement (“GMRA”) and the Global Master Securities Lending Agreement (“GMSLA”) from numerous jurisdictions worldwide (as of July 2019, 68 jurisdictions are covered by a legal opinion), ensuring they are up-to-date and take into account recent legal developments.
The legal opinions cover both the enforceability of the netting provisions of the respective agreement as well as its validity as a whole. Regulators require repos and securities lending to be documented under robust written legal agreements like the GMRA, supported by regularly updated legal opinions, as a condition of recognising the reduction of credit risk by collateral and close-out netting in the calculation of regulatory capital requirements and large exposures.
With the decision to discontinue coverage, what options are available for market participants who continue to rely on these uncovered agreements? There are three options available:
1. Market participants can look to obtain their own legal opinions that will cover the uncovered agreements – whilst this would avoid the need to conduct a repapering exercise, the cost of commissioning the opinion (and continuing to update such opinion on an annual basis) would be disproportionate in comparison to updating their documentation
2. For the GMRA, ICMA has published the 2011 Global Master Repurchase Agreement Protocol to enable the parties to a GMRA 1995 or GMRA 2000 to amend the terms of each such Agreement to reflect certain provisions of the GMRA 2011 (i.e. close-out netting provisions). However, there has been little uptake in the market for the protocol approach, with only 14 market participants adhering as of July 2019
3. Repapering Exercise: Without a valid legal opinion in place, market participants will not be able to continue trading in repo and securities lending transactions until they have updated their respective documentation. Repapering is therefore inevitable and market participants, depending on what products they are trading, will need to decide on whether to use the (i) 2000 or 2011 versions of the GMRA for repo and (ii) the 2000 or 2010 versions of the GMSLA for securities lending
FinTrU can assist our clients by providing experienced repo and securities lending negotiators to draft, negotiate and execute updated securities financing documentation, bringing them in line with the requirements of the 2019 legal opinions.
For more information on how FinTrU can assist with repapering of trading documentation, please contact:
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