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Equivalent Margin Securities

The concept of “Equivalent Margin Securities” must not be confused with the concept of “Equivalent Securities”, although both rest on the concept of “equivalence” (otherwise known as ‘fungibility’ – the ability of a good or asset to be interchanged with other individual goods or assets of the same type).

The definition of “Equivalent Securities” refers to securities which are equivalent to the “Purchased Securities”.  In other words, they are securities which are equivalent to the original securities which the Buyer bought from the Seller under the Repurchase Transaction (or, if it’s easier to look at a Repurchase Transaction as being economically equivalent to a loan, “Equivalent Securities” are securities which are equivalent to the securities which the ‘borrower’ originally provided to the ‘lender’ as security for the original ‘loan’).  In essence, therefore, “Equivalent Securities” are securities that are returned by the Buyer to the Seller at maturity of the Repurchase Transaction.  In simple terms, the securities which are repurchased by the Seller at maturity of the transaction should be “equivalent” to those originally sold.

In contrast, “Equivalent Margin Securities” are securities which are equivalent to Securities previously transferred as Margin Securities.  In other words, they are securities which are equivalent to securities which are transferred pursuant to a “Margin Transfer” (i.e., a transfer which occurs after one of the parties is calculated to have “Net Exposure” to its counterparty).

In theory, therefore, during the life of a transaction, “Equivalent Margin Securities” could be transferred from the Seller to the Buyer or from the Buyer to the Seller.  This is not the case with “Equivalent Securities”.  “Equivalent Securities” are only transferred from the Buyer to the Seller at the end of the Repurchase Transaction – think of it as the ‘return of collateral at maturity of the loan’.

Being securities, “Equivalent Margin Securities” are typically subject to a ‘haircut’ (in other words, a “Margin Percentage”) when transferred as part of the normal margining process.

Following the occurrence of an Event of Default, the obligation to return “Equivalent Margin Securities” becomes due on the “Early Termination Date” designated by the non-Defaulting Party under its Default Notice.  As part of the close-out process, the “Default Market Value” of “Equivalent Margin Securities” will also be calculated as at the “Early Termination Date”.

“Equivalent Margin Securities” are also relevant in terms of substitution rights under the GMRA.  More specifically, where one party has transferred Margin Securities to its counterparty (because its counterparty had “Net Exposure”) it can effectively ask for the return of those Margin Securities – well not the exact same securities – the obligation is to return “Equivalent Margin Securities”.  The party to which the original Margin Securities were transferred must agree to the substitution.

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