Event of Default

There are ten “Events of Default” under the 2000 and 2011 GMRAs, but only 8 under the 1995 GMRA.  The occurrence of an “Event of Default” allows the non-defaulting party to terminate the GMRA as well as all outstanding transactions.  At a high level, the Events of Default address circumstances where:

1. The Buyer fails to pay the Purchase Price on the Purchase Date or the Seller fails to pay the Repurchase Price on the Repurchase Date (in other words, the lender fails to make the ‘loan’ available at the outset of the trade, or the borrower fails to repay the ‘loan plus interest’ at maturity of the trade);
2. The Seller fails to deliver the Purchased Securities on the Purchase Date or the Buyer fails to deliver Equivalent Securities on the Repurchase Date (in other words, the borrower fails to transfer collateral to the lender at the outset of the transaction or the lender fails to return the collateral at maturity of the transaction – note that this event did not exist under the 1995 GMRA);
3. Following a failure by the Seller to deliver collateral in relation to the ‘loan’ at the outset of the trade, the Seller fails to return the ‘loan’ (if required to do so by the Buyer) OR following a failure by the Buyer to return collateral at the end of the loan the Buyer fails to return the repaid ‘loan plus interest’ to the Seller (if required to do so by the Seller) – note that this event didn’t exist under the 1995 GMRA either.
4. Either the Seller or Buyer fails to comply with its obligations with respect to making Margin Transfers;
5. Either the Seller of the Buyer fails to make “Income” payments to its counterparty, as required by the Global Master Repurchase Agreement;
6. An “Act of Insolvency” occurs in relation to either the Seller or the Buyer;
7. The Buyer or the Seller makes any kind of material misrepresentation;
8. Either the Buyer or the Seller repudiates its obligations under the GMRA;
9. Either the Buyer or the Seller is suspended from or expelled from membership of any securities exchange; or
10. Either the Buyer or the Seller breach any other obligation under the GMRA (subject to a 30-day grace period).

Where the text is in red in the table below, this indicates that a non-Defaulting Party would have to serve a Default Notice on the Defaulting Party in order to trigger the Event of Default in question.  Just to note, where notice is required in order to trigger an Event of Default, the Event of Default will occur on the date that the notice given by the non-Defaulting Party becomes effective, provided that this is a business day (when the notice becomes effective depends, to some extent, on the method by which the notice is delivered):

Para	Description	1995	2000	2011
10(a)(i)	Buyer fails to pay the Purchase Price on Purchase Date or Seller fails to pay the Repurchase Price on Repurchase Date.	Yes	Yes	Yes
10(a)(ii)	Provided that the parties have specified in Annex I that this clause is applicable, the Seller fails to deliver Purchased Securities on the Purchase Date or the Buyer fails to deliver Equivalent Securities on the Repurchase Date.   In essence, therefore, if the parties choose to ‘switch on’ this provision then a failure to deliver securities on the appropriate date WILL constitute an Event of Default.  Conversely, if the parties choose to ‘switch off’ this provision then a failure to deliver securities on the appropriate date WILL NOT constitute an Event of Default.  Instead, the parties will have to rely on their “mini close-out” rights under paragraphs 10(h) and 10(i).	No	Yes	Yes
10(a)(iii)	Seller or Buyer fails to pay when due any sum payable under sub-paragraph (h) or (i) (in the 2000 GMRA, these are reference to “sub-paragraph (g) and (h)” – but the underlying clauses are the same).   Broadly, paragraphs 10(h) and 10(i) of the 2011 GMRA (which are paragraphs 10(g) and 10(h) of the 2000 GMRA) are known as the “mini-close out” provisions and deal with the situation where either the Seller fails to deliver Purchased Securities on the Purchase Date or the Buyer fails to redeliver Equivalent Securities on the Repurchase Date.  In either of these circumstances, various options are open to the non-Defaulting Party.  One of those options is to require the return of the Purchase Price or the Repurchase Price (as the case may be and on the assumption that it has actually been paid).	No	Yes	Yes
10(a)(iv)	Either the Seller or the Buyer fails to comply with its obligations with respect to making Margin Transfers pursuant to paragraph 4 of the GMRA.	Yes	Yes	Yes
10(a)(v)	The Seller or Buyer fails to comply with Paragraph 5.  Paragraph 5 deals with the payment of income and distribution in relation to the underlying securities.	Yes	Yes	Yes
10(a)(vi)	An “Act of Insolvency” occurs with respect to the Seller or the Buyer.  In the 1995 and 2000 versions of the GMRA, the non-Defaulting Party would have to serve a Default Notice on the Defaulting Party in order to trigger this clause, unless the “Acts of Insolvency” involved (a) the presentation of a winding-up petition, or (b) the appointment of a liquidator.  In contrast, under the 2011 GMRA, there is never any requirement on the non-Defaulting Party to serve a Default Notice on the Defaulting Party – the event is triggered automatically in all circumstances.	Yes	Yes	Yes

Under the 2011 GMRA, following the occurrence of an Event of Default, the non-Defaulting Party may, by giving not more than 20 days’ notice to the Defaulting Party, designate an “Early Termination Date” for all outstanding transactions (unless “Automatic Early Termination” applies to certain insolvency-related events).

Between the 1995, 2000 and 2011 versions of the GMRA, the wording of the event of default provisions appears to be quite different.  It makes a direct comparison of each document difficult and not particularly enlightening.  However, there are a large number of aspects of the provisions dealing with Events of Default which are common to all three documents.  That commonality is summarised in the table below.  The point to take away from this is that there is a large degree of overlap between all three documents, despite the different wording of the actual clauses.

Event of Default	1995	2000	2011
A Default Notice is required in order to crystallise an event as an Event of Default?	Yes	Yes	No1
The Repurchase Date for each transaction immediately occurs?	Yes	Yes	No
The non-Defaulting Party has the ability to designate the Early Termination Date (which is also the Repurchase Date) within a window of time?	No	No	Yes
All cash margin and interest becomes immediately repayable on the Repurchase Date?	Yes	Yes	Yes
Equivalent Margin Securities become immediately deliverable on the Repurchase Date?	Yes	Yes	Yes
Non-Defaulting Party calculates Default Market Value as of the Repurchase Date with respect to:
Equivalent Securities	Yes	Yes	Yes
Equivalent Margin Securities	Yes	Yes	Yes
Cash Margin and interest	Yes	Yes	Yes
Repurchase prices	Yes	Yes	Yes
Amounts owing between the parties as at the Repurchase Date to be calculated and set-off against each other?	Yes	Yes	Yes
Amounts calculated as being owing are to be paid on the Business Day following the calculation?	Yes	Yes	No
The non-Defaulting Party is to provide a statement showing its calculations as soon as reasonably possible after those calculations are made?	No	No	Yes
Amounts calculated as owing are to be paid on the Business Day following the date of the statement?	N/A	N/A	Yes
Non-Defaulting Party can calculate “Default Market Value” by reference to actual prices, quotes or “Net Value” calculations (where prices/quotes are not available/not commercially reasonable)	N/A	Yes	Yes
The “Default Market Value” is the “Net Value” if no “Default Valuation Notice” is given by the “Default Valuation Time”?	N/A	Yes	No
The Defaulting Party is liable for all expenses of the non-Defaulting Party?	Yes	Yes	Yes
If the Seller fails to deliver Purchased Securities on the Purchase Date:
Buyer can require immediate repayment of any sums paid?	Yes	Yes	Yes
Buyer can require a margin transfer in order to extinguish any Transaction Exposure?	Yes	Yes	Yes
Buyer can terminate on notice (for so long as the failure is continuing)?	Yes	Yes	Yes
If the Buyer fails to deliver Equivalent Securities on the Repurchase Date:
Seller can require immediate repayment of the Repurchase Price (if paid)?	Yes	Yes	Yes
Seller can require a margin transfer in order to extinguish any Transaction Exposure?	Yes	Yes	Yes
Seller can terminate on notice (for so long as the failure is continuing)?	Yes	Yes	Yes
Paragraph 10 remedies constitute a complete statement of the remedies available on the occurrence of an Event of Default?	Yes	Yes	Yes
Neither party is liable to the other for consequential damage?	Yes	Yes	Yes
‘Innocent’ party is to be compensated for the cost (and must provide compensation in relation to any profit) of entering into replacement/unwinding transactions terminated before Repurchase Date because of:
A party giving notice to terminate following the occurrence of an Event of Default?	N/A	Yes	Yes
The Buyer giving notice to terminate following a failure by the Seller to deliver Purchased Securities on the Purchase Date?	N/A	Yes	Yes
The Seller giving notice to terminate following a failure of the Buyer to deliver Equivalent Securities on the Repurchase Date?	N/A	Yes	Yes
Each party is to immediately notify the other of any event which would constitute an Event of Default?	Yes	Yes	Yes

¹ A notice is only needed in order to trigger the actual termination process, not to crystallise the Event of Default itself.

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