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Margin Transfer

Essentially, where on any given day a party has “Net Exposure” to its counterparty, the counterparty is required under the terms of the Global Master Repurchase Agreement to make a “Margin Transfer” to the party with the “Net Exposure” in order to extinguish that exposure.

Looked at from a less formal point of view, if a party has loaned money to its counterparty (the borrower) on a collateralised basis and the value of the collateral has fallen to the point where it, broadly speaking, no longer covers the loan value, the borrower will need to transfer more collateral to the lender in order to ‘top up’.  That transfer of collateral is a “Margin Transfer” for the purposes of the Global Master Repurchase Agreement.

Conversely, if a party has loaned money to its counterparty and the value of the assets provided by the borrower by way of collateral has INCREASED then the loan is over-collateralised and the lender will be required to return some of the collateral to the borrower.  This transfer is also a “Margin Transfer” for the purposes of the Global Master Repurchase Agreement.

A “Margin Transfer” can consist of a combination of three things:

  1. The payment (or repayment) of “Cash Margin”;
  2. The transfer of “Margin Securities”; or
  3. The transfer of “Equivalent Margin Securities”.

Any “Margin Transfer” must take place within the period specified in Annex I or, if no period, is specified, within the minimum period customarily required for the settlement or delivery of the relevant asset.  It is important to be aware of the fact that a failure to make a “Margin Transfer” is an Event of Default for the purposes of the GMRA and that there are no grace periods for defaulting in making a “Margin Transfer” (see paragraph 10(a)(ii) of the 1995 GMRA and paragraph 10(a)(iv) of the 2000 and 2011 GMRAs).  As such it is important for the parties to specify a period within Annex I and for this to be a period which is long enough for transfers to actually be effected whilst not being so long as to remove an important protection to the party with exposure.

Subject to eligibility criteria, it is for the recipient of the demand for a “Margin Transfer” to choose the mix of securities and/or cash that will make up the “Margin Transfer”.  Any “Margin Transfer” will take effect as an outright transfer of title to the assets in question.

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