2011 GMRA

A new version of the Global Master Repurchase Agreement, the 2011 GMRA, was published by ICMA on Friday 13 May.

The 2011 GMRA contains refreshed and improved termination and close-out netting provisions, reflecting experiences from the market events of 2008 in particular. The margining provisions have also been overhauled, addressing some anomalies contained in previous versions of the GMRA.

There are some new issues that you will need to consider before starting to use the 2011 GMRA. These are:

• Margining: The 2011 GMRA allows you to apply a haircut to Equivalent Securities when calculating Transaction Exposure instead of applying a Margin Ratio to the Repurchase Price. The new definition of Transaction Exposure requires you and your counterparty to specify whether Method A (Margin Ratio) or Method B (Haircuts) will apply - this can be done either in Annex I or at a trade level in the relevant Confirmation. If you choose Method B, you will need to ensure your systems - and, where applicable, your triparty agents - can calculate Transaction Exposure in this way.
• Margin Securities: The 2011 GMRA removes a long-standing oddity by permitting a Margin Percentage (i.e. a haircut) to apply to Margin Securities. The 2011 GMRA simply states that the haircuts will be "as agreed by the parties", so you will need to decide whether these should be agreed in Annex I or at the time the Margin Securities are transferred. If you do adopt haircuts for Margin Securities, you will need to ensure your  systems can accommodate these.
• Return of Margin Securities: The 2011 GMRA allows a party, if it is unable to return Equivalent Margin Securities due to illiquidity or problems with the relevant clearing system, to pay a "Cash Equivalent Amount" to the other party instead of making a return. If it is important to you that Margin Securities are redelivered to you, you might consider switching off this provision.
• Notices: The 2011 GMRA allows all written communications and notices to be sent by e-mail - even default and termination notices. You may want to consider amending this so that notices under Paragraph 10 may only be served by hand, by post or fax.
• Automatic Early Termination: The 2011 GMRA changes the position where an Act of Insolvency occurs. Now, an Event of Default does not occur automatically following certain Acts of Insolvency affecting your counterparty unless you elect Automatic Early Termination to apply to your counterparty in Annex I. You will need to check the GMRA legal opinions to see for which jurisdictions / entities Automatic Early Termination is needed or recommended.

Other changes introduced by the 2011 GMRA include:

• Early Termination Date:  Under the 2011 GMRA a non-Defaulting Party terminates the agreement by designating an Early Termination Date, which has to be on or within 20 days after the date of service of the termination notice (this now mirrors the position under the ISDA Master Agreement). Under the 2000 GMRA the termination always took effect on the date that such a Default Notice is served.
• Act of Insolvency: The definition of Act of Insolvency has been expanded to include a secured party carrying out other enforcement measures in relation to all or substantially all the assets of a party (provided the relevant process is not dismissed within 15 days).
• Calculation Statement: Following early termination, as non-Defaulting Party you are required, as soon as reasonably practicable after you have carried out your calculations, to provide a statement to the Defaulting Party showing in reasonable detail your calculations and setting out the net amount payable.
• Set-Off: The 2011 GMRA contains a set-off provision, in the same form as contained in the 2010 GMSLA.

ICMA has also published a 2011 GMRA Protocol. If you adhere to this, any 1995 GMRAs or 2000 GMRAs you have in place with counterparties who also adhere will have their termination and close-out provisions amended to reflect the new provisions in the 2011 GMRA. However, if you are considering adhering to the 2011 GMRA Protocol, you should be aware that this will result in Automatic Early Termination not being applicable to all your adhering counterparties. This is obviously undesirable if you have counterparties in jurisdictions for which Automatic Early Termination is needed or recommended. If you do have any counterparties in these jurisdictions, you should consider whether it is better to amend your 1995 and 2000 GMRAs on a bilateral basis rather than risk the enforceability of close-out netting.

Alongside the 2011 GMRA, ICMA also released their annual updates to the close-out netting opinions for 62 jurisdictions, which now cover the 2011 GMRA as well as the 1995 GMRA and 2000 GMRA.