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GMRA A-Z: Adjustment Date

The concept of an “Adjustment Date” is relevant to the ‘transaction adjustment’ methodology described under Paragraph 4(l) the GMRA whereby an “Original Transaction” is ‘adjusted’ on the “Adjustment Date” with the result that it is terminated and replaced by a “Replacement Transaction”.  At a high level, the adjustment process is an alternative to making a traditional margin call for a party with either “Transaction Exposure” (with respect to a single transaction) or “Net Exposure” (with respect to multiple transactions).

In contrast to transaction repricing, under which the cash leg of the transaction is altered, in a transaction adjustment the cash leg of the transaction is kept static and, instead, the securities leg of the transaction is adjusted.  At a high level, if the value of the securities has fallen and can no longer support the level of ‘lending’, the Seller will have to provide additional securities by way of ‘top-up collateral’.  Conversely, if the value of the securities has increased, the ‘loan’ is now effectively over-collateralised and some securities will be returned to the Seller.

More specifically, if a transaction is being adjusted:

  1. The “Original Transaction” is terminated on the “Adjustment Date”.
  2. The “Purchase Date” of the “Replacement Transaction” is the “Adjustment Date”.
  3. The “Purchased Securities” (in other words, the loan ‘collateral’) under the “Replacement Transaction” are such Securities as the parties agree on or before the “Adjustment Date”.
  4. As of the “Adjustment Date”, the Securities under the “Replacement Transaction” must have a Market Value which is substantially equal to the Repurchase Price under the Original Transaction multiplied by the Margin Ratio.
  5. The obligations of the parties with respect to the payment and delivery of securities on the “Adjustment Date” under the “Original Transaction” and the “Replacement Transaction” are to be set off against each other.

In this way, the “Original Transaction” can be seamlessly ‘rolled into’ the “Replacement Transaction”.

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