GMRA: A-Z Equivalent Securities
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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 (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. There is one slight wrinkle to this. To the extent that the original purchased securities have been redeemed mid-term, the Buyer’s obligation to return “Equivalent Securities” is replaced by an obligation to pay an amount which is equal to the relevant redemption proceeds (on the Repurchase Date, with no interest being payable on that amount).
Within the context of the GMRA, the concept of “Equivalent Securities” is primarily relevant in the following ways:
- The Buyer must ‘return’ “Equivalent Securities” to the Seller on the “Repurchase Date” (in other words, the Buyer must ‘return something equivalent to the Seller’s original collateral’ on the “Repurchase Date”). Any failure to do so constitutes an Event of Default for the purposes of the GMRA, but can instead be subject to the ‘mini close-out’ provisions of the GMRA instead.
- The value of “Equivalent Securities” is a fundamental input in the calculation of “Transaction Exposure” (under both “Method A” and “Method B”). This intuitively makes sense as ‘exposure’ is fundamentally an assessment of whether the ‘loan’ represented by the Repurchase Agreement is over- or under-collateralised.
- On a close-out, “Equivalent Securities” will be given their “Default Market Value” as at the “Early Termination Date”.