# Legal Speak Securities Lending And Repo 101

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[00:00:00.000] Hello, and welcome to another Global Peer Financing Association Peer Connections podcast.
[00:00:05.660] I'm Debbie Caruso, the Associate General Counsel of the Investments Legal Team at Healthcare
[00:00:09.820] of Ontario Pension Plan, otherwise known as HOOP, and I will be your podcast host.
[00:00:14.640] I'm excited to host today's podcast because we will be chatting about a subject that my
[00:00:18.840] team and I are very familiar with at HOOP, which is how securities lending and repo documents
[00:00:23.120] work when dealing with various counterparties.
[00:00:25.600] More importantly, I'm excited to have our guest speaker, Lisa Mantello, discuss how these documents are structured and how different buy-side entities may approach these types of securities financing transactions from a documentation standpoint.
[00:00:38.320] Lisa is a partner in the Financial Services Group at the law firm Osler Hoskin & Harcourt LLP in Toronto, and she specializes in cross-border financing transactions, structured finance, and derivatives.
[00:00:49.460] Lisa is very familiar with the global documentation for securities lending and repo transactions
[00:00:53.560] and is also counsel to ISDA, ISLA, and ICMA, responsible for preparing and updating the
[00:00:59.380] Canadian legal opinions that cover the enforceability and netting provisions in these securities
[00:01:04.480] financing documents that we're going to talk about today.
[00:01:07.200] So we're very lucky to have her join us for this podcast.
[00:01:10.380] Osler is also a member of the GPFA and assisted with the formation of the association.
[00:01:15.720] Welcome, Lisa.
[00:01:16.360] Thanks very much for joining us.
[00:01:17.860] Oh, thank you very much for having me.
[00:01:20.260] So Lisa, why don't you start off by telling us about the basic framework of the legal agreements under which securities lending and repo transactions are executed?
[00:01:28.540] Sure. Thanks, Debbie. I think for background, I think it would be helpful to discuss the basic differences between repurchase transactions or commonly referred to as repos and security lending transactions.
[00:01:39.760] I know in the market, people often speak of them interchangeably, but they are really two different types of transactions.
[00:01:45.520] So a repo involves the sale of a security or a different type of asset by a seller to buy an
[00:01:52.360] equivalent asset back from the purchaser at a specified date. In a repo, the seller of the
[00:01:56.940] security will raise money on the sale and the buyer will receive a return on the security,
[00:02:01.800] which is based on the difference in price between the price it originally bought the security for
[00:02:06.380] and then sold it back to the seller. So repos are typically documented under one of two types
[00:02:11.400] agreement. The first is the Global Master Repurchase Agreement, or commonly called the
[00:02:16.600] GMRA, or the Master Repurchase Agreement, the MRA. The GMRA is governed by English law, so it's
[00:02:22.680] typically used in Europe and in Canada, also used in the U.S., but the MRA is governed by New York
[00:02:28.760] law, so it is typically used in the U.S. I find that much more common that Americans will use the
[00:02:33.680] MRA as it's governed by American law. Both the GMRA and the MRA are pre-printed forms of a master
[00:02:39.940] agreement. And what that means is that it is a standard document in both cases, and then there
[00:02:45.600] is an annex to each of them in which your specific terms with your counterparty can be negotiated. So
[00:02:51.560] this is for more of a bespoke situation where you're facing a counterparty, you agree to the
[00:02:57.240] standard terms in either the GMRA or the MRA, and then you negotiate specifically what you need for
[00:03:03.280] your counterparty. So most of the legal terms would be in the GMRA or MRA, and then the specific
[00:03:09.200] economic terms would be documented under a separate confirmation for each transaction.
[00:03:13.700] So for a repo, that would be things like the repo rate, the number of securities,
[00:03:18.080] or the repurchase date. Now turning to securities lending or stock loan transactions, which are also
[00:03:23.380] used interchangeably in terms of name. In a securities lending trade, securities are
[00:03:28.100] transferred from one party who's the lender to another party who is the borrower for a fee.
[00:03:32.940] Then the borrower is obligated to return equivalent securities on demand or at the
[00:03:37.420] end of an agreed-upon term. The borrower will then pay a lending fee for using the security
[00:03:42.300] and will provide collateral against the obligation to deliver the securities.
[00:03:47.780] So similar to repos, securities lending transactions are documented under pre-printed
[00:03:52.940] forms. There are also two types of forms, the Global Master Securities Lending Agreement,
[00:03:57.740] the GIMS law, which is governed by English law, or the Master Securities Lending Agreement,
[00:04:01.980] the MSLA, which is governed by New York law. And similar to the GMRA or the MRA,
[00:04:06.860] the English law version is used in Europe and often in Canada, and the MSLA is often used in
[00:04:14.100] the US. And similar to the GMRA, the legal terms are found in the GIMS law and the economic terms
[00:04:19.640] are found in confirmations. Thanks, Lisa. So you mentioned that the trades are actually documented
[00:04:25.820] under separate confirmations for repos and securities lending. Are those also in writing?
[00:04:30.500] It really will vary from institution to institution. What I see mostly in the market
[00:04:34.820] is that this is not in writing. This will be either by email or by way of Bloomberg Terminal,
[00:04:40.940] and it won't be an actual legal document. But I do know institutions have differing
[00:04:45.060] regulations and requirements. So sometimes it will be, but most often it is not.
[00:04:50.100] So it sounds like there are industry standard documents that a majority of the market uses,
[00:04:54.960] with some potential differences depending on the institution and also depending on what people
[00:04:59.800] negotiate in the annex to each of these agreements. Can you tell us if there are any
[00:05:04.460] differences in documentation if a buy-side entity uses an agent to conduct its trades as opposed to
[00:05:10.860] bilaterally trading with its counterparty? Yes, absolutely. So agency lending is really very
[00:05:16.260] common in the market. I would say a large percentage of entities that engage in securities
[00:05:21.300] lending and repo transactions are using an agent lender. And what this means is that there's an
[00:05:26.340] agent lender who's an intermediary, who's typically either custodian bank, will enter into the
[00:05:32.000] securities lending or repurchase transaction on behalf of a buy side entity or a beneficial owner
[00:05:37.160] who wants to lend or borrow the securities. So this custodian bank or other type of intermediary
[00:05:42.700] will act as an agent. And then there will be a pre-approved list of counterparties that that
[00:05:48.420] agent will trade with on behalf of its customers who are typically beneficial owners. And then the
[00:05:53.880] custodian bank will charge a fee for entering into these types of transactions. What I found is that
[00:05:58.800] this is typically done because the agent lender can benefit from economies of scale because they
[00:06:03.560] are facing so many different counterparties in the market. There would be standard form documents. So
[00:06:08.440] if you do have a custodian bank that you're using as an agent, that custodian bank will have standard
[00:06:13.840] foreign GIMS laws or GMRAs. So you really are trading on the basis of what's already been
[00:06:19.240] negotiated. And I find that people often use agent lenders as well because there's the technology
[00:06:26.240] that they can provide in terms of collateral management or other operations.
[00:06:30.720] Okay, thanks for explaining that. I think that'll be important for our listeners to hear. So can
[00:06:35.280] you tell us if engaging in peer-to-peer transactions would differ in any way from
[00:06:39.780] the securities financing transactions with traditional bank or broker-dealer counterparties
[00:06:44.420] from a legal standpoint? So in other words, do the GPFA members need to do anything different
[00:06:48.760] in terms of their securities lending and repo in order to trade with other GPFA members?
[00:06:54.360] No, not at all.
[00:06:55.380] I think from a legal perspective, in a peer-to-peer transaction, this would be very similar to
[00:07:00.120] trading with a dealer bank directly, and that you could definitely use GIMS law or
[00:07:04.640] JMRA, so typical industry documentation.
[00:07:07.800] So peer-to-peer basically means that you're facing the counterparty directly, and the
[00:07:11.740] counterparty would typically be another beneficial owner rather than a dealer bank, and definitely
[00:07:16.080] not an agent lender.
[00:07:17.660] So that really is the only difference.
[00:07:19.380] So I don't think there's anything to be concerned about from a legal perspective.
[00:07:23.840] Thanks, Lisa. I think that's going to be very helpful to prospective GPFA members and for any
[00:07:28.560] new members who haven't yet started trading with other GPFA members. I know at Hoop we have
[00:07:33.700] agreements with both our bilateral agreements with our counterparties that are GPFA members,
[00:07:39.160] and we also deal with agents who represent GPFA members. So if members are essentially
[00:07:45.200] continuing to work with what are considered industry standard securities financing documents
[00:07:50.400] or slight variations to the industry standard. Can you tell us how those securities financing
[00:07:56.060] documents have evolved over the years and how they stay current? Absolutely. So there have been
[00:08:01.220] various versions of both the GIMS law and the GMRA. The most recent version of the GMRA is from
[00:08:07.520] 2011 and the most recent version of the GIMS law is from 2018. So the industry associations that
[00:08:13.660] you mentioned, ICMA and ISLA, are responsible for producing these documents and they are on top of
[00:08:20.380] legal developments at all times. So there are yearly AGMs that both of those organizations
[00:08:26.920] put on with members of the community and the industry that come out to discuss legal issues.
[00:08:31.980] So I do think that there is constant improvement to these documents, and that's why they've become
[00:08:37.420] really the standard in the market. Okay, thanks for that. And I think that that is one of the
[00:08:42.660] key benefits of being a GPFA member is that the members can exchange information about what's
[00:08:48.980] happening in the market amongst one another. So one final question that I think everybody will
[00:08:53.340] be interested in hearing the answer to is, is there any general advice that you would offer
[00:08:58.360] the current GPFA members or any prospective members regarding what they should be thinking
[00:09:03.540] about in terms of their legal documents if they want to begin trading securities lending a repo
[00:09:08.920] with another GPFA member? Sure, absolutely. I think the first thing to think about is to
[00:09:14.700] familiarize yourself with the standard form industry documents. I do think it's always easier
[00:09:19.400] if you do use what the industry is using. So right now, you know, that would be the GIMS or the GMRA.
[00:09:24.720] So my first suggestion would be look at those documents and read them, make sure you understand
[00:09:28.940] them. Then in terms of what to negotiate in the documents, I think one area really to focus on
[00:09:35.520] would be what the events of defaults are. Are they appropriate for the type of counterparty that you
[00:09:40.540] are facing? Are they appropriate for the type of jurisdiction, what jurisdiction the counterparty
[00:09:45.260] is in? So for example, in Canada, many corporate entities or many other types of entities that you
[00:09:50.900] might be facing might undergo a corporate plan of arrangement as an insolvency proceeding.
[00:09:56.460] And that's not covered in the standard documentation, meaning if there was a
[00:10:00.620] corporate plan of arrangement that doesn't trigger an insolvency proceeding. So that's
[00:10:04.260] something that we would suggest making sure that the events of default are appropriate for the type
[00:10:09.260] of counterparty and what jurisdiction your counterparty is in. So that's the first area
[00:10:13.560] would be events of default. The second area that I find that there is a lot of negotiation on
[00:10:18.560] is what is the definition of market value and where are you going to get the determination?
[00:10:24.160] What's the pricing source of what the market value of the securities are? So this is important for
[00:10:28.640] purposes of the equivalent securities as well as for posting collateral. And what I mean by what
[00:10:34.000] the pricing source is, is are you going to use Bloomberg or are you going to give one party
[00:10:37.960] discretion to determine what the value is. So this is something that's often negotiated.
[00:10:43.160] The next thing to think about is what is the eligible collateral going to be for margining
[00:10:47.540] purposes? Is it only going to be cash? Is it going to be T-bills? Is it going to be equities? If it
[00:10:52.100] is equities, what types of equities from what jurisdiction do they need to be rated? Those
[00:10:57.100] types of things. And then the last thing I would mention from a legal perspective, which I also see
[00:11:01.400] being heavily negotiated, is the set-off clause. So what this means is what types of obligations
[00:11:07.180] under which documents can be set off against the obligations that are owing under your securities
[00:11:12.720] lending document, the GIMSLA, or the GIMRA, the repo document. And this can really cover a bunch
[00:11:18.940] of different types of situations. For example, should it be trades of any kind? So if you have
[00:11:24.260] obligations even under an ISDA with a counterparty, can those be set off under the obligations that
[00:11:29.420] are owing under the GIMSLA or GIMRA? Or is it any obligation under any document at all? So this can
[00:11:35.460] become very complicated depending on the counterparty in the relationship. Okay, thanks
[00:11:39.980] for that. And do you find that there are differences in what you've just mentioned between
[00:11:44.560] the GIMSLA and GIMRA, for example, versus the MRA and the MSLA? Are they fairly similar?
[00:11:51.540] I do think it's fairly similar. Where I find set off can be very different really has to do with
[00:11:56.980] what types of entities are asking for the set off and what are the particular policies. We act for
[00:12:02.800] bias identities all the time. And I can tell you that there are varying degrees of how much set
[00:12:07.580] off they're comfortable with. Some bias identities are comfortable with set off on everything because
[00:12:12.240] they think that that's efficient. And they think that that will serve them well, if there was ever
[00:12:16.200] an insolvency, others are not so comfortable with that. So I do think it varies. But definitely,
[00:12:20.860] this is something to focus on and something to think about.
[00:12:24.220] And is there anything else that the GPFA members should be thinking about in terms of trading with
[00:12:29.200] other GPFA members for example operational risks or anything else? I do think operations is something
[00:12:35.680] to think about and the reason I say that is we've negotiated many of these documents for counterparties
[00:12:41.700] and operations does come into play meaning what you're agreeing to in the legal documents can
[00:12:47.040] your back office actually deliver on this when we say that margin needs to be delivered by 10 a.m
[00:12:51.860] the next business day or the same day can your operations actually do that so I do think it's
[00:12:57.760] helpful to get your operations team involved and take a look at the documents and make sure that
[00:13:01.960] they can deliver what you're agreeing to. That's great. Thanks very much, Lisa. It sounds like you
[00:13:06.780] really do know these documents and these types of trades well. Thanks so much for your input and for
[00:13:11.340] joining me for this podcast. My pleasure. Thanks very much. I hope we didn't bore our audience too
[00:13:16.300] much talking about legal agreements because not everybody has a passion for legal agreements like
[00:13:20.540] you and I do. That's very true. Maybe they will after listening to this podcast. Let's hope so.
[00:13:26.780] Thank you to our listeners for joining another episode of Peer Connections by the Global Peer
[00:13:31.160] Financing Association. We hope that you have a better understanding of the legal framework for
[00:13:35.360] securities lending and repo as it relates to our GPFA members. If you have any other suggestions
[00:13:40.180] or topics that you would be interested in hearing about, please reach out to GPFA via its website
[00:13:45.400] www.globalpeerfinancingassociation.org or visit the GPFA's LinkedIn page. And to stay up to date
[00:13:53.620] on GPFA Peer Connection, so you can subscribe wherever you listen to your podcasts. Thank you
[00:13:58.820] for listening, and thank you again, Lisa, for joining me. Of course, thank you very much for having me.