The main difference between, on the one hand the 1995 and 2000 GMRAs and, on the other hand, the 2011 GMRA insofar as they relate to “Events of Default” lies in the way in which the concept of the “Default Notice” is used.
Under the 1995 and 2000 GMRAs, the delivery of a “Default Notice” (once it has become effective) actually TRIGGERS the occurrence of the relevant Event of Default. In turn, this results in the acceleration of the “Repurchase Date” and the close-out of the underlying Repurchase Transactions.
Under the 2000 GMRA, effective delivery of the “Default Notice” also starts the clock ticking down to the “Default Valuation Time”. The “Default Valuation Time” is – effectively – a long-stop date for valuing obligations of the parties on a close-out (under the 2000 GMRA this takes place at close of business on the fifth dealing day after the day on which the relevant Event of Default occurred).
Default Notices must be in writing and can be served by hand, fax, telex, post or electronic messaging system.
The 2000 GMRA also introduced the concept of a “Special Default Notice”. “Special Default Notices” were introduced in recognition of the difficulty that some parties faced in practice in actually serving a “Default Notice” on their counterparty. If a party had used all practical efforts to serve a Default Notice (including at least two of telex, fax or electronic messaging) but had been able to do so it could essentially self-certify that an Event of Default had occurred through signing a “Special Default Notice” – obviating the need to serve an actual “Default Notice”. From that time, the Special Default Notice was regarded as a Default Notice and the relevant Event of Default was treated as having arisen from the time specified within the Special Default Notice.
In contrast, under the 2011 GMRA, it is not necessary to serve a Default Notice for an Event of Default to arise. Instead, the Event of Default will arise (or not) simply on the facts of the matter. Rather, under the 2011 GMRA, the Default Notice is used to designate the Early Termination Date. The Default Notice mechanism under the 2011 GMRA is very reminiscent of the right to terminate under the ISDA Master Agreement following the occurrence of an Event of Default. This is not an accident. One of the main drivers behind the publication of the 2011 GMRA was an attempt to learn the lessons from the financial crisis of 2008. It had become apparent that different methodologies and timelines applied to the termination of different types of transaction executed with the same defaulting counterparty. As such, it was felt beneficial to try and – to the extent possible – align all close-out methodologies across different master agreement types.
Paragraph 10(b) of the 2011 GMRA states that:
- If an Event of Default has occurred and is continuing, then
- The non-Defaulting Party may serve a Default Notice on the Defaulting Party.
- That notice can designate a date as an Early Termination Date in respect of all outstanding Transactions.
- Termination cannot take effect any earlier than the date the Default Notice itself takes effect and cannot take effect later than 20 days after the date of the Default Notice.
- However, if “Automatic Early Termination” has been specified as being applicable in Annex I, then termination of all outstanding transactions will occur at the time immediately preceding the occurrence of an “Act of Insolvency” in the form of (a) the presentation of a petition for winding up or (b) the appointment of a liquidator.