Securities Lending & Repo markets Overview of the securities financing market Definition, characteristics and comparison of main instruments used Brief historyStandard agreements Securities lending & repo market size and features in geographical regions Disparate regulation, a challenge for the business Heterogeneous tax frameworks but an on-going harmonisation in Europe Operational efficiency and transparencyMastering collateral management in an evolving environment Risk versus return Challenges & opportunities Main players and arrangements in securities lending Main users of repos and arrangements Electronic trading platforms and Central Clearing Counterparts (CCPs) Main players and arrangements A practical guide
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8/10/2019 Securities Lending & Repo Markets - A Practical Guide 2010 by Maxime Bianconi, Nathalie Collot and Guy Knepper…
Continuing our series of academic guides*, we are pleased to present you our latest publica-
tion dedicated to the securities lending and repo markets.
Today securities lending and repo markets are a vital component of domestic and interna-
tional financial markets, providing liquidity and greater flexibi lity to securities, cash and deriva -
tives markets. They notably improve the functioning of securities markets by allowing sellers
immediate access to securities needed to settle transactions where those securities are
not available, by offering an efficient means of financing securities portfolios and by support-
ing participants’ investment and trading strategies. As such, they play a core role for asset
managers, pension funds, insurance companies, investment banks, central banks, sovereign
funds, broker-dealers and hedge funds.
The past 3 years have been challenging for the securities lending and repo markets on aglobal scale, as the industry experienced unprecedented events in financial markets world-
wide: A credit crunch, impaired liquidity in cash collateral vehicles, the bankruptcy of a major
global investment bank, increasing scrutiny from regulators and politicians, the introduction
of temporary short-selling bans, and more recently sovereign risk concerns. These events ob-
viously created uncertainty and many beneficial owners allocated a signif icant amount of time
reflecting on the lessons learn t from the crisis, reviewing their securities lending programs
and looking for greater transparency and control of risks. Meanwhile, the financial turmoil
further enhanced the importance of the repo market and secured funding.
As the worst of the economic downturn appears now to have abated, we can assert that
the securities lending and repo business has proved resilient. We are confident in the future
of the industry, which is likely to remain an important element of modern financial markets.
Besides, the latest industry statistics available confirm a rebound of the market from a low
point in 2008.
Since clients are eager to capture the opportunities the securities lending and repo markets
can bring to the table, but they need guidance so that they can do so in an environment that
they are comfortable with, th is publication aims to act as a reference handbook. CACEIS is an
experienced player, providing asset managers, other institutional investors, broker-dealers,
central banks and sovereign funds with full securities lending/borrowing and repo services
from dealing to operational processing on main international markets. It is this experience,
expertise and know-how gained through supporting various clients over the years that we
share once again in this brochure.
You will find hereafter a comprehensive overview of the securities financing market (main
instruments and standard agreements used, history, securities lending and repo market
size and features), a description of the various market participants and their motivations, as
well as of the main arrangements set up. The guide also discusses a number of significant
challenges for the market players: Regulation and taxation, operational efficiency and trans-
parency, collateral management, risk versus return. Finally it reminds the importance of ap-
pointing a proven specialist to conduct this business.
We trust this publication will reply to the numerous questions you may have and that you will
find it both relevant and informative.
* Cross-border distribution of UCITS, A thorough understanding of private equity
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A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010
EXECUTIVE SUMMARY
SECTION I – OVERVIEW OF THE SECURITIES FINANCING MARKET
The securities financing market encompasses two main types of instruments: Repo and securities loan transactions.
• Repos are a key product for market participants in search of liquidity or specific securities. As a fund-raising tool,
they are an alternative to unsecured loans and the issuance of short-term securities. They are also an essential
instrument used by central banks to manage their open-market operations in the implementation of monetary
policies.
• Securities lending provides lenders of securities with a low risk yield enhancement to their investment portfolios,
while enabling borrowers to cover failed trades or short positions.
Although these instruments may have their own specific legal, accounting and regulatory characteristics, as well as
different tax treatment, economic considerations are similar. We can distinguish securities-driven transactions, in
which parties seek to gain temporary access to specific securities against collateral, from cash-driven transactions,
in which parties seek to post securities as collateral to obtain secured cash financing.
Two main standard agreements govern the international securities lending and repo industry: The Global Master
Securities Lending Agreement (GMSLA) and the Global Master Repurchase Agreement (GMRA). In order to mini-
mise legal risks, it is highly recommended to sign such standard agreements, which clearly set out the rights and
obligations of the counterparties during the life of the transaction.
In recent years, new financial structures (total return swaps, contracts for difference, equity swaps) have emerged
as alternative securities financing instruments. These substitutes are especially useful in emerging markets where
securities lending/repo is limited to a few selected participants and where a local securities lending/repo infrastruc-
ture has not been fully developed.
The repo and securities lending business, which really developed in the United States in the 1960s before spreading
into Europe in the 1980s, has expanded rapidly in the last two decades, being now a 24-hour global activity. The fi-
nancial market turmoil that began in August 2007 with the subprime crisis and led to the collapse of Lehman Brothers
in mid-September 2008, affected the repo and securities lending markets in several ways. The importance of col-lateral management as an as an essential tool for managing counterparty risk, in particular, was highlighted, as well
as the need for much more transparency. In the context of the crisis, regulators began looking at securities lending
and repos with greater scrutiny and short selling restrictions were put in place by a number of them worldwide.
In terms of geographical market size and features, the US global lending market is a large mature market. The US
equity lending market was until recently the largest in the world, comfortably exceeding the European and the Asian
Pacific markets. The treasuries/bonds US lending market is also very significant. In Europe, France and Germany are
the most active equities lending markets. Furthermore, the German sovereign bonds are particularly desirable as
they are considered high quality and liquid collateral. In Asia Pacific, the Japanese equities lending market is the
larger, in front of the Hong Kong and Australian markets.
The European repo market is much bigger in size than the European securities lending market, since repo has be-
come the main refinancing product in Europe. Despite its late start, the European repo market is now larger than its
US equivalent.
SECTION II – MAIN PLAYERS AND ARRANGEMENTS
Lenders are primarily institutional investors owning on a long-term basis securities portfolios of sufficient size. They
are typically asset managers, mutual funds/unit trusts, pension funds, insurance companies, endowments, etc. Their
main motivation is to get additional revenue obtained at relatively low risk on assets that would otherwise have re-
mained dormant in the securities accounts. They have various possible routes to enter the securities lending busi-
ness, direct or intermediated.
The most active borrowers of specific securities are typically major securities dealers, broker-dealers, hedge
funds, prime brokers and investment banks. They seek to borrow securities in circumstances where they do notcurrently have possession of those securities. Other motivations include trading strategies requiring short posi-
tions or financing.
If theorically securities lending can take place directly between beneficial owners (lenders) and borrowers, in prac-
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A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010
tice a number of layers of intermediaries, whether acting as agent or principal, are often involved. This can be ex-
plained by the fact that securities lending involves a variety of complex administrative, operational, accounting and
risk management activities, including credit evaluation and cash management, which may be better handled by
specialists in that field. The relationship that custodian banks have with their clients puts them in a strong position
to participate as principal or agent lender.
With regard to repo, the bilateral market must be distinguished from the tri-party market. In the bilateral market, ac- tive repo users fall into three main categories (banks and broker-dealers, investors, central banks), all of them oper-
ating on both the cash-taking and the cash-providing sides of the market. In the tri-party arrangement, buyers and
sellers outsource the management of the collateral to a tri-party agent and there tends to be a clearer segmentation
between cash-takers and cash providers. Cash-takers are traditionally institutions such as investment banks, bro-
ker-dealers, hedge funds or prime brokers who have a constant thirst for the cheapest and most reliable sources of
liquidity in order to finance their trading activities or their investment portfolios, whereas cash-providers are typi-
cally central banks, supra-nationals, commercial banks, asset managers and other institutional investors or agent
lenders, who are looking to re-invest their cash in exchange for acceptable collateral.
In the repo market as in the securities lending market, the business is heavily relationship-driven and the majority of
transactions are still performed out of electronic trading platforms, on a voice-brokered and bilateral trading basis.
Moreover, central clearing counterparties are far from enjoying a significant market share and are the hottest point
of debate in the industry.
SECTION III – CHALLENGES & OPPORTUNITIES
In the current environment, where regulators are looking at securities lending and repos with greater scrutiny, one
of the biggest challenges facing the industry is regulation. Short-selling in particular remains a concern. Further-
more, disparate regulation and taxation among various jurisdictions is a key issue when conducting cross-border
transactions. These aspects obviously need to be taken into account as they may create restrictions of investment.
Some strategies focus on these taxation gaps to enhance yields. However, as tax harmonisation spreads, opportuni-
ties decrease.
Other challenges include operational complexity in terms of clearing and settlement for cross-border transactions
due to the fragmentation of infrastructures and the lack of automation, but also in terms of collateral valuation and
management, corporate actions and income collection processing, etc., as well as the need for highly sophisticated
collateral management and risk management infrastructures.
The risks involved in repo and securities lending should neither be under- nor over-estimated. However, they are
quantifiable and, if properly understood and monitored, manageable through a broad range of mitigation techniques.
Collateral is an essential component of securities lending and repo transactions and is the key factor which makes
them attractive secured financing instruments, compared to other products. However, one should keep in mind the
importance of selecting high-quality and liquid collateral. The United States continue to be predominantly a cash
collateral market whereas overall in Europe, non-cash collateral has historically been the collateral of choice.
Post-crisis, many beneficial owners are looking for greater transparency, control and customised lending solutions
built around their risk/return parameters and objectives. They have put greater restrictions on their programs, limit-ing how much they will lend, what type and quality of collateral are acceptable, as well as being more selective in
who they do business with. They are increasingly requiring more information from their lending agents so that they
can better understand and evaluate the risk, returns and exposures in their programs.
Among the beneficial owners, we also witness the re-emergence of the intrinsic value model of securities lend-
ing which produces returns based upon the securities loan itself, with little incremental benefit from collateral
reinvestments.
As a conclusion, securities lending and repo are complex markets where business expertise and the right capa-
bilities are of paramount importance to succeed. Additionally, securities financing and liquidity management re-
quire a professional approach and scale capabilities.
A glossary is provided in appendix, as well as a copy of the GMSLA and GMRA standard agreements respectively
used for securities lending and repo transactions in international markets.
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1.1.3 Comparison of both instruments...........................................................................................16
1.1.4 Alternative securities financing instruments ...................................................................17
1.2 Brief history ................................................................................................................................................ 18
1.2.1 Early stages of securities lending and repo markets ..................................................18
1.2.2 The 1960s and 1970s: The development of securities lending
and repo markets .........................................................................................................................19
1.2.3 The 1980s and 1990s: The globalisation of securities lending
and repo markets ........................................................................................................................19
1.2.4 The 2000s before the financial crisis: Growth of emerging markets,
development of new transaction types and arrangements .....................................20
1.2.5 2007-2010: The credit crunch and the Lehman collapse ......................................20
1.3 Standard agreements ............................................................................................................................. 21
1.3.1 The GMSLA ......................................................................................................................................21
1.3.2 The GMRA ........................................................................................................................................ 22
1.3.3 The EMA ............................................................................................................................................ 23
1.4 Securities lending & repo market size and features in geographical regions .............24
1.4.1 Analysis of RMA data (global lending market) .................................................................24
1.4.2 Analysis of ICMA data (European repo market) .............................................................27
MAIN PLAYERS AND ARRANGEMENTS .................................................................................................31
2.1 Main players and arrangement in securities lending ..............................................................31
3.1 Disparate regulation, a challenge for the business ...................................................................43
3.1.1 General points ................................................................................................................................. 43
A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010
Figure 2 displays a valuated example of a repo transaction
If rights of substitution of collateral have been negotiated up-front between the parties, the
seller can get back the securities before the termination of the repo and substitute them
with other securities of at least equal quality and value, acceptable to the buyer.
Furthermore, a repo transaction can generally be terminated by the parties involved with a
24- or 48-hour advance notice (call).
Such rights of substitution and 24- or 48-hours calls give sellers flexibility in managing their
securities portfolios.
Figure 3 schematises the typical lifecycle of a repo transaction, from its initiation to its termination.
OVERVIEW OF
THE SECURITIES
FINANCING MARKETS
1 . 1
Figure 2: Valuated example of a repo transaction
Trade date 16/09/2010
Settlement date 20/09/2010
Termination date 20/10/2010
Term 30 days
Seller Firm B
Buyer Firm A
Security Bund DBR 4% 4/1/18
Nominal amount €10,000,000.00
Clean price 112.550685
Accrued interest 2.8493
All in price 115.40
Cash payment (purchase price) €11,540,000.00
Repo rate 0.40% per year
On termination, Firm A returns the securities to Firm B on a DVP basis and the Firm B re-pays Firm A
the original cash amount of €11,540,000.00 plus 30 days’ return on that cash at the agreed repo rate of
0.40% per year. The return is calculated as follows:
€11,540,000.00 x 0.40% x 30/360 = €3,846.67
Copyright CACEIS, 2010
For clarity, processes have
been simplified.
REPO INITIATION
2 - NEGOTIATION OF TERMSBETWEEN THE PARTIES
Nature of collateral deliveredagainst cash, duration, rates
3 - CONFIRMATION OF PURCHASE TRANSACTION
Written or electronic confirmation issued on the day of the trade, including contract and settlement dates, details ofrepoed securities, identities of buyer and seller, haircut, term,rates, bank & settlement a/c details of the buyer & seller
4 - SETTLEMENT
Delivery of the securities and transferof funds between the buyer and seller (DVP)
5 - DAILY MARK TO MARKET
Daily mark to market to ensure that t he cashreceived matches the daily market valueof the securities sold in repo. Margin callsoccur between the buyer and the seller
6 - POSSIBLE EVENTS:
Collateral substitution (if right of substitution)Re-pricingCorporate action on the securitiessold in repoProrogation of term
7 - REPURCHASE OF SECURITIES BYSELLER, PAYMENT OF CASH + INTEREST
At the end of t he repo (pre-defined term or onseller’s recall for open repos), the buyerresells the securities to the seller and deliver
them via its custodian bank/sub-custodiannetwork or ICSD).At the same time, the seller returns the funds to the buyer plus an interest calculatedaccording to the repo rate negotiated up-front.
R E P O I N
P R O G R E
S S
R E P O T E R M I N A T I O N
>
>>
>
1 - MEETING OF THE FINANCING NEEDS
>
>
A seller needs cash/ wants to finance its
securities availableA buyer wants to remunerate its cashavailable in a secured manner
Figure 3: Repo transaction lifecycle
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A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010
• GC versus Specials
The general motivation for repos is financing, i.e. the need to borrow or lend cash. Such
repos are called “General Collateral (GC) repos” and constitute the bulk of the repo market.
With GC repos, the buyer does not insist on the seller providing a particular securitiesissue as collateral but will accept any of a range of similar quality issues
However, repos can also be used to borrow securities in order to cover short positions. In
that case, buyers will seek a specific security as collateral in the repo market. Such repos
are called “specials” and are comparable to securities lending. The interest given up by
the buyer of a special in the repo market is equivalent to the fee paid by the borrower
of the same securities in the securities lending market. The repo rate for a security in
demand is generally below the GC repo rate.
• Reverse repo
A reverse repo is the mirror image of a repo (buyer’s viewpoint). It involves the short-term
purchase of securities versus a transfer of cash, with a simultaneous agreement to resell
the securities at a future date at an agreed-upon price. Reverse repos may be used to
borrow specific securities in order to cover short positions, to finance a new purchase or
meet short-term cash needs.
• Credit repo
The bulk of collateral in most repo markets is comprised of domestic government bonds, gen-
erally considered as free of default risk and liquid.
An alternative collateral repo market – called “credit repo” and including instruments such as
covered bonds, other Mortgage-Backed Securities (MBSs), other Asset-Backed Securities
(ABSs), Collateral Debt Obligations (CDOs) or unsecured corporate bonds – also exists but is
much smaller and was set back by the recent crisis.
• Equity repo
In addition to traditional government bonds repos that have been around for many years, it
should be noted that there is a growing but still fairly new equity repo market. In the past,
equity repo was not popular because fixed income assets were considered the most safe, but
with the collapse in the structured products market and as modern markets have expanded,
banks and broker-dealers have sought to increase their financing capabilities by using alter-
native forms of repo collateral, such as equities. Equity repo has become a strong component
of the overall repo market because of the benefits provided by transparent pricing, which is a
more dependant book of liquidity, and reduced execution risk. Adding equity repo to a portfo-lio disaggregates risk and makes it more transparent. Simply put, equity repo is a repurchase
agreement, which uses various types of equities as collateral2.
The repo market is currently a key tool for market participants in search of liquidity or
specific securities. As a fund-raising tool, repos are an alternative to unsecured loans
and the issuance of short-term securities. Originally confined to the back-office, repo
has gradually grown in importance and is now considered as an integral liquidity man-
agement tool for all financial institutions across the industry. Repo is also an essential
tool used by central banks to manage their open-market operations in the implementa-
tion of monetary policies. With unsecured financing no longer an option beyond the very
short term, the repo market has become increasingly attractive.
A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010
Securities loans
Securities loan refers to a transaction in which one party (the lender) transfers to another
party (the borrower) securities (equities, bonds), often against the transfer of collateral inorder to protect the lender against the possible default of the borrower, with the simulta-
neous agreement by the borrower to transfer to the lender equivalent securities on a fixed
date or on demand (open), against the transfer to the borrower by the lender of assets
equivalent to such collateral.
Open term loans, which can be recalled at any time with a minimal notice period, are more
commonly used than fixed term. Indeed, they provide flexibility as they enable the lender to
exit the securities lending transaction on demand and sell at any time the concerned securi-
ties. Thus, in a deteriorating credit environment a lender can reduce his exposure to, or even
cease trading with, a counterpart in very short order.
Throughout the life of the loan, the market value of the lent securities and of the collateral (if
securities collateral) will fluctuate. To maintain sufficient levels of collateralisation, a daily (or
even intraday) mark to market is typically done and margin calls are exchanged accordingly
between the parties.
The borrower pays the lender a fee for the use of the borrowed securities, paid monthly or at
the termination of the transaction (in fine). This fee takes into account factors such as demand
and supply (the more sought-after on the market securities are, the higher the fee a lender
can obtain) or collateral flexibility.
In case of cash collateral, the securities lender pays the borrower an interest rate calculated
on the cash collateral received (rebate rate). A rebate rate of interest implies a fee for the loan
of securities and is therefore regarded as a discounted rate of interest.
Figure 4 illustrates the characteristics and the main flows of a standard securities lending
transaction, while figure 5 shows a valuated example of securities loan transaction.
OVERVIEW OF
THE SECURITIES
FINANCING MARKETS
1.1.2 1 . 1
Party A«LENDER»
Securities lending
Collateral delivery (Cash/Securities)
Margin calls
Lending fee
Possible interest on cash collateral (rebate)
Party B«BORROWER»
Securities lending transactioncharacteristicsTrade date
Settlement date
Lender identityBorrower identity
Maturity (open/fixed)
Security name and ID
Dividend entitlement
Quantity lent
Loan market valueLending fee
Nature of collateral
(cash/securities)
Margin required
Amount of collateral required
Settlement instructions
Figure 4: Illustration of a standard securities lending transaction
Copyright CACEIS, 2010
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A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010OVERVIEW OF
THE SECURITIES
FINANCING MARKETS
It should be noted that constraints such as accepted types of securities, loan periods, coun-
terparties, collateral, limits per issue, per fund and per counterparty often make each trade
a specific transaction.
The reasons why a borrower needs to temporarily borrow securities vary but generally the
securities lent are needed to support a trading strategy or a settlement obligation. These
motivations are further analysed in section II.
• GC versus Specials As for repos, the securities lending market makes the distinction between GC and Specials.
> The General Collateral (GC) market is composed of securities that are not in high demand by
the market, i.e. commonly and largely available securities.
> On the contrary, Specials – also called “hot” securities or “specifics”- refers to securities
that are specifically located and highly demanded in the market. The “hotter” the portfolio,
the higher the returns to lending.
Securities lending provides lenders of securities with a low risk yield enhancement
to their investment portfolios, while enabling borrowers to cover failed trades or
short positions.
Today modern securities lending is a specialised activity, which can significantly con-
tribute to the generation of alpha and the overall performance of investment funds.
1 . 1
For clarity, processeshave been simplified.
Direct lending model (no intermediary)
LOAN INITIATION
5 - DAILY MARK TO MARKET
The lender performs daily mark to market toensure that the collateral is adjusted basedon the daily market value of the securitieslent. Margin calls occur between the lenderand the borrower
6 - POSSIBLE EVENTS:Collateral substitution
Portfolio substitution
Re-rate Re-pricing Corporate action on the securities lent Prorogation of term
L O A N
I N P R O G R E
S S
L O A N T E R M
I N A T I O N
>
>>
>
>
>
1 - MEETING OF THE SUPPLY & DEMAND> A borrower needs a particular security> A beneficial owner wants to place
its securities available for loan
4 - COLLATERAL DELIVERYThe borrower delivers cash or securitiescollateral to the lender (e.g. 105% of the loanvalue). In case of pre-collateralisation,collateral is delivered before securities
4 bis - SECURITIES DELIVERYSettlement through the lender’s and theborrower’s custodian banks, sub-custodiannetworks or ICSD (intruction to deliver vsinstruction to receive)
2 – NEGOTIATION OF TERMS BETWEENTHE PARTIES
> Quantity of securities lent, duration,rates, collateral
3 - CONFIRMATION OF TRANSACTION Written or electronic confirmation issued on the day of the trade,including contract and settlement dates, details of lent securities,identities of borrower and lender, acceptable collateral and
margin %, term, rates, bank & settlement a/c details of the lender& borrower
7- RETURN OF SECURITIES TO LENDERAt the end of the loan (pre-defined term or onlender’s recall for open loans), the borrowerreturns the securities to the lender via itscustodian bank/sub-custodian network or ICSD
7bis - RETURN OF COLLATERALAt the end of the loan, the lender returns
the collateral taken to the borrower
8- PAYMENT OF LENDING FEESAt the end of the loan, the borrower
A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010
Alternative securities financing instruments
Although the most common, repo and securities loan are not the only securities finance
instruments. In recent years, new financial structures, such as total return swaps (TRSs) –see illustration figure 9 -, contracts for differences (CFDs) and equity swaps, have been de-
veloped and increasingly become an alternative to the classic securities lending and repo
instruments described in the previous sections. These synthetic or swap transactions have
the same economic effect as securities lending/repo but do not involve an actual exchange
of securities and are treated as off-balance sheet transactions. They are typically governed
by ISDA international standard agreements.
These substitutes are especially useful in emerging markets where securities lending/repo
is limited to a few selected participants and where a local securities lending/repo infra-
structure has not been fully developed.
They also gives access to the securities lending/repo markets to additional entities that
may not have the infrastructure to monitor fees and rebates or are not permitted to conduct
securities lending/repo transactions under regulatory guidelines but can trade options.
Furthermore, they can be attractive to counterparties that want to avoid the operational
burden of securities settlement or that face tax obstacles to securities lending.
In Taiwan for example, where securities lending is complicated by the combined influence
of a tax on earnings and different settlement timetables for purchases and sales, offshore
synthetic transactions have provided a convenient alternative to the onshore market 4.
1.1.4
OVERVIEW OF
THE SECURITIES
FINANCING MARKETS
1 . 1
Figure 9: How total return swaps (TRS) work
1 – Institution sells security (e.g. bond) at market price
2 – Institution executes a swap transactionfor a fixed term, exchanging the total returnon the security for an agreed rateon the relevant cash amount
In theory, each leg can be executed separatelywith different parties but in reality trade isbundled together and so economicallyidentical to a repo.
The bond trader will receive the “total return”on the bonds, which means that:> if bond rises in value, trader pays the difference in value to the counterparty.> if bond falls in value, the trader will receive the
difference from the counterparty.
As part of the swap, trader pays for exampleLibor +/- swap on the cash proceeds.
The cash investor counterparty has full title andcan sell securities in the open market at termination.
Dealer has no legal obligation to repurchase the bonds.
The trade will take bonds off dealer’s balance sheet,which may be desired if a year-end is approaching.
3 – On maturity of the swap, institutionrepurchases security at the market price
Copyright CACEIS, 2010
4 Source: JP Morgan, “Securities lending as an asset management technique”, 2010
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A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010
1.2.2
1.2.3
OVERVIEW OF
THE SECURITIES
FINANCING MARKETS
The 1960s and 1970s: The development of securities lending and repo markets
As the US securities trading markets expanded, so did the securities lending markets from
the 1960s, with the development of an active inter-dealer market in stock loans in the UnitedStates during this decade, which was associated with increased short-selling activity and
a rising incidence of settlement fails. Separately, a financing market developed in US Treas-
ury bonds to enable dealers to finance their inventory through repo transactions with cash
lenders such as banks and corporations.
The first cross border or international securities lending transactions took place in the
1970s. During that time, US custodian banks began to lend specific securities to broker-
dealers on behalf of their clients such as insurance companies, endowment funds and cor-
porate investment portfolios. Meanwhile, the US treasury bond repo market became a key
part of the money market, as an alternative to interbank deposit and bill/CD markets.
The 1980s and 1990s: The globalisation of securities lending and repo markets
The modern repo developed in the United States in the 1980s, driven by securities firms
which lacked access to retail or interbank deposits. Without repo, such firms had to borrow
in the unsecured market by issuing commercial papers and taking loans, both financed by
commercial banks. The cost of such unsecured funds to securities firms was high, reflect-
ing the highly leveraged and risky nature of their business. The collateralised nature of repo
allowed securities dealers to benefit from a reduction in the cost of funding and an increase
in leverage. Direct access to end-investors also did away with the need of third-party inter-
mediaries such as the commercial banks.
The European repo market development has been heavily influenced by the major US in-
vestment banks, who imported the repos into Europe during the 1980s to make up for the
lack of securities lending markets in countries such as Italy and to support trading in bund
futures from 1988.
In 1981, the Employee Retirement Income Security Act (ERISA), a US law governing private
US pension plan activity, was amended to permit plans to lend securities in accordance
with specific guidelines. This amendment led growth in securities lending.
In 1982, the collapse of Drysdale Securities, a US securities firm, had a profound impact on the securities lending and repo industry. It led to the standardisation of contracts, collateral
margin requirements being specified, coupon accrual being established and more careful
scrutiny of counterparties and their balance sheets.
Securities lending volumes increased sharply in the 1980s and 1990s, supported by hedging
and trading strategies, as well as by the removal of many regulatory, tax and structural bar-
riers to securities lending throughout the world during the 1990s. The activity also became
increasingly international and the large US custodian banks began to run their securities
lending businesses on a global basis from hubs in Europe, Japan and North America.
In 1991, legislation in the United Kingdom reinstated the ability of British investors to lend non-
UK assets. Further regulatory changes permitted British unit trusts to lend their securities.
Meanwhile the European repo market also grew at a dramatic pace, interrupted occasion-
ally by market crises. By the early 1990s, most of the major European banks had followed
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the US pioneers into the nascent European repo market. The reform of the French market
in 1994 and the creation by the Bank of France of a group of repo primary dealers known
as “Spécialistes en pensions sur valeurs de Trésor (SPVTs)”, as well as the opening of a
sterling repo market in the United Kingdom in 1996 and a change in regulation in Germany the same year to exempt repos from the minimum reserve requirement, played a key role
in the take-off of the European repo market. Other key drivers included regulatory capital
pressure on unsecured lending and the rapid growth of hedge funds and proprietary trading
in fixed income.
In 1997, the industry was marked by the Asian crisis, when liquidity really dried up. This was
the first elevation of the business – so far considered as a back-office activity mainly used
for settlement coverage and not properly recognised as a business in its own right - with se-
curities lending and repo being used to protect liquidity; It was no longer just an operational
business but a funding business.
The rising hedge fund industry and the increasing use of prime brokerage arrangements
were key factors in the more recent growth of securities lending and repos.
The growth of securities lending itself also further fueled repo market volumes as the lend-
ers often turned to the repo markets to reinvest the cash collateral received.
The 2000s before the financial crisis: Growth of emerging markets, deve-
lopment of new transaction types and arrangements
With the start of European Monetary Union in January 1999, the Eurosystem adopted repos
as a key instrument and in the 2000s, central banks began using repo more widely, not only
as a liquidity management instrument, but also as an efficient way of funding investments
and investing their growing pools of reserves. Meanwhile, the market became more seg-
mented, with specialist regional players developing and outsourcing developing (e.g. third
party securities lending agents). New securities lending markets such as Brazil, India, Korea
or Taiwan emerged, as well as new transaction types (e.g. equity repo, contracts for diffe-
rences, total return swaps).
The rising hedge fund industry and the increasing use of prime brokerage arrangements
were key factors in the more recent growth of securities lending and repos.
The growth of securities lending itself also further fueled repo market volumes as the len-
ders often turned to the repo markets to reinvest the cash collateral received.
2007-2010: The credit crunch and the Lehman collapse
The financial market turmoil that began in August 2007 with the subprime crisis and led to
the collapse of Lehman Brothers in mid-September 2008, affected the repo and securities
lending markets in several ways. Below are a few – non exhaustive – illustrations of major
impacts faced by the industry:
> During the liquidity crisis, a global shift from unsecured to secured financing was expe-
rienced. Unsecured money market models collapsed and the markets in general were
looking for deeper protection. In this difficult context, securities lending and repo instru-
ments provided a secured option to market participants. As the ability of banks and other
institutions to borrow in the interbank market was severely constrained, repos offered an
alternative form of financing to market participants.
1.2.4
1.2.5
OVERVIEW OF
THE SECURITIES
FINANCING MARKETS
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THE SECURITIES
FINANCING MARKETS
1.3
1.3.1
Since then the market has been facing a huge liquidity surplus, which had again a signifi-
cant impact on the securities lending and repo industry as key liquidity management tools.
> After the collapse of Lehman Brothers, who was a major borrower, the market partici-pants had to experience the liquidation processes in real-life. Fortunately, the majority
of lenders closed out successfully and did not lose out, demonstrating the solidity of the
securities lending business for beneficial owners. However, the importance of collat-
eral management as an essential tool for managing counterparty risk was highlighted,
as well as the need for much more transparency, especially in the United States where
some breach of trust relating to cash collateral reinvestment programs were put under
the spotlight.
> In the context of the crisis, regulators began looking at securities lending and repos with
greater scrutiny and short selling restrictions were put in place by a number of them
worldwide, generating negative impact on the business and creating uncertainty. Some
restrictions are still in force at the time of writing.
Standard agreements
Two main standard agreements govern the international securities lending and repo in-
dustry: the Global Master Securities Lending Agreement (GMSLA) and the Global Master
Repurchase Agreement (GMRA). Another option in Europe consists in using the European
Master Agreement (EMA). All these agreements are described hereafter.
In order to minimise legal risks in repo and securities lending transactions, it is highly recom-
mended to sign such standard agreements, which clearly set out the rights and obligations
of the counterparties during the life of the transaction and in the event of a problem arising
(e.g. default by one of the parties). It should be noted that in the context of the Lehman
default, these contracts have proven to be robust when enforced in a real default scenario.
The GMSLA
The Global Master Securities Lending Agreement (GMSLA), issued by the International Se-
curities Lending Association (ISLA), is the standard agreement for securities lending in the
international market.
Signed between the lender and the borrower of securities, it defines the terms and condi-
tions governing the securities lending transactions operated between both parties through-
out the contract lifecycle:
> Loans of securities ;
> Delivery ;
> Collateral (including acceptable form of collateral and margin) ;
> Distribution and corporate actions ;
> Rates applicable to loaned securities and cash collateral ;
> Delivery of equivalent securities ;
> Failure to deliver ;
> Events of default and consequences ;
> Taxes ;
> Lender and borrower’s warranties ;
> Interest on outstanding payments ;
> Termination of the agreement.
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Following a counterparty failure, under a robust legal agreement such as the GMSLA, a
lender is only exposed to loss if the value of collateral held is insufficient to cover the repur-
chase of the lent securities (together with any outstanding dividend and corporate action
proceeds). This might occur because of large market movements in the intervening period
between the lender’s last margin call, and the point at which the lender is able to liquidate
his collateral. Lenders may also be exposed if the markets for either the collateral takenor the lent securities are illiquid at the time of the default. To minimise this risk, however,
counterparts can define their acceptable collateral parameters to ensure that only liquid
securities are used. Secondly, they can employ “haircuts” to ensure that they hold a buffer
of collateral over and above the value of the lent securities. Risk management considera-
tions are further examined in section 3.5.
Originally published in 2000, the GMSLA has been adopted by many market participants in
Europe and Asia.
It was updated in July 2009, with the following objectives:
> To reflect changes in law, tax, market practice and issues arising since 2000;
> To address some of the amendments that lenders and borrowers were commonly making
to the GMSLA bilaterally using a side letter;
> To identify all likely events that may have a tax consequence and identify the party that will
bear the associated tax risk;
> To use, where appropriate, the same language and form as the Global Master Repo Agree-
ment (GMRA – see below).
As a result of the Lehman default, the July 2009 version of the GMSLA namely introduced
key changes to the way in which securities are valued post-default and a party’s remedies
following a failure by the other party to re-deliver securities or collateral.
Further minor amendments were made in January 2010 by ISLA, in response to a number of
concerns being voiced in the market.
The latest version of the GMSLA is available in Appendix.
The GMRA
The Global Master Repurchase Agreement (GMRA) is the standard agreement for repos
in the international market. It is jointly produced by ISMA (International Securities Market
Association) and TBMA (The Bond Market Association, formerly PSA – Public Securities
Association, a US-based industry organisation of participants involved in certain sectors of the bond markets).
The GMRA sets out the relationships between parties and general positions applicable to
all repo transactions in terms of definition, delivery and payment obligations of the parties,
margin mechanics, rights of substitution, treatment of income on securities involved, notice
provisions etc. The agreement also seeks to specify clearly the events of default and the
consequential rights and obligation of the counterparties.
The first version of the GMRA was published in 1992 and was followed by a substantially
revised version in 1995. In October 2000 was released the third version, reflecting market
developments since 1995. Since 1992, a number of annexes to the GMRA adapting it to suit
different jurisdictions and markets have been produced.
The latest version of the GMRA is available in Appendix.
1.3.2
OVERVIEW OF
THE SECURITIES
FINANCING MARKETS
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The EMA
The European Master Agreement (EMA) was released in 1999 by the European Banking
Federation in co-operation with the European Savings Banks Group. The EMA aimed to
consolidate into a single set of harmonised documents, various master agreements used
within the euro zone and certain neighbouring countries, particularly for repurchase trans-actions and securities lending. At the same time, parties to the EMA are able to choose the
applicable law, jurisdiction and contractual language and can take into account various
specific national legal requirements.
The EMA was primarily designed to replace master agreements existing under the laws
of various continental European countries, which were used predominantly (though not
exclusively) in a domestic context. It should also be suitable, however, for cross-border
transactions.
The EMA is a multi-jurisdictional and multi-product agreement:
> Multi-jurisdictional: It is intended to be used in different jurisdictions under the laws of
different jurisdictions in different languages, particularly within the EU;
> Multi-product: It enables market participants to document potentially all trading transac-
tions under a single master agreement, including repurchase transactions and securities
loans. The structure of the agreement is open for new product annexes to be added in
order to expand the scope of the agreement to include other financial transactions, such
as FX, swaps and options6.
In the framework of arrangements involving an agent or principal intermediary, it
is highly recommended to sign an operating memorandum between the beneficial
owner and this intermediary (e.g. custodian bank), in addition to these standard
agreements. This document should describe in detail all processes from the nego-
tiation to the termination of the transaction.
> Thus, the arrangements to be followed in the event of a rights issue or other cor-
porate action should be clearly established by all parties before a security loan is
made, with due recognition of local market rules and practice and any deadlines
imposed by the various parties’ local agents or custodians. Moreover, lendersneed to be aware that if they lend their entire holding of a particular security, they
may cease to receive information about corporate events in relation to it.
> In the context of securities recall or collateral substitution, the rights and obliga-
tions of each party, as well as the procedure to follow and the time period allow-
able for the return of securities, should be clearly established.
1.3.3
OVERVIEW OF
THE SECURITIES
FINANCING MARKETS
6 Source : European Savings Banks Group, Press Release: “European Master Agreement is published”, 29 October 1999
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Securities lending & repo market size and features in geographical
regions
It should be noted that definitive and internationally comparable statistics on the types of transactions traded (securities loans, repos, other) and the associated amounts are not
readily available, all the more as securities lending and repo transactions are typically OTC
trades, often conducted outside a central electronic trading system.
However, estimations of global securities finance market size can be made based on peri-
odic market participant surveys such as the European repo market survey conducted every
six months since 2001 by the International Capital Market Association (ICMA) among 58
major financial institutions (central bank excluded) and the quarterly aggregate data survey
conducted among 16 major lending banks since 1999 by the Securities Lending Commit-
tee of The Risk Management Association (RMA). The full size of the market is obviously
somewhat larger than the samples surveyed. Thus the ICMA and RMA figures displayed
hereafter should be considered only for information.
Analysis of RMA data (global lending market)
According to the latest RMA survey, the aggregate total lendable assets worldwide reached
USDMM 8,882,551 at the end of Q2 2010 against a total on loan of USDMM 1,151,578, that
is to say 13% of lendable assets. Figure 11 displays the split between bonds and equities,
whereas figure 12 shows the breakdown of total on loan by geographical region.
1.4
1.4.1
OVERVIEW OF
THE SECURITIES
FINANCING MARKETS
Figure 11: Aggregate total of lendable assets and total on loan worldwide (Q2 2010)
Figure 12: Total on loan, breakdown by geographical region in USDMM and in % (Q2 2010)
Lendable assets (USDMM) Total on loan (USDMM) Total on loan (%)
Total equities 5,445,088 485,647 9%
Total bonds 3,437,462 665,930 19%
Totals 8,882,551 1,151,578 13%
Source: RMA quaterly aggregate data survey, Q2 2010
NORTH AMERICA
6,175,070
EUROPE
1,552,842
ASIA PACIFIC
658,613
OTHER
496,026
70%
6%
17%
7%
Source: RMA quaterly aggregate data survey, Q2 2010
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The following sub-sections further analyse the market with a focus on North America, Eu-
rope and Asia Pacific.
> North America
The US global lending market is a large mature market. Its liquidity, depth and breadth con-
tribute to ensure an efficient market.
Although badly hit by a reduction in size and not as profitable as it had been before the
crisis, the US equity lending market has remained so far the largest in the world, reaching
USD344bn in terms of lendable assets in Q2 2010, that is to say 65% of global equity lend-
ing. It comfortably exceeds the European equity lending market (USD111bn) and the Asian
Pacific one (USD66bn).
The treasuries/bonds US lending market is also very significant, with USD251bn in terms of
lendable assets in Q2 2010, split into US treasuries/UST strips, US agencies, US mortgage
backed securities and US corporate bonds.
Table 13 displays detailed figures of lendable assets and total on loan in the United States
and in Canada, with the breakdown between treasuries/bonds and equities.
The Canadian market size is quite small compared to the giant US, with only USD13bn of
equities lendable assets and USD9bn of bonds lendable assets in Q2 2010. It has weathered the storm well, with conservative programs structured more towards realising the intrinsic
value of the loan as opposed to relying on the earnings from additional spreads from an ag-
gressive cash reinvestment program like in the US and the UK markets. One of the unique
characteristics of the Canadian market is that there is very little third party lending done in
Canada, compared with the United States and the United Kingdom; 85 to 90% of the lending
activity is handled through custodians7.
> Europe
As displayed in figure 14, the European bonds lendable assets reached USD44bn in Q2 2010
for a total on loan of USD14bn. It is a very active market with a ratio of “total on loan/lend-
able assets” of 31% (against only 19% in North America). The German sovereign bonds are
OVERVIEW OF
THE SECURITIES
FINANCING MARKETS
7 Source : Global Investor magazine, “Canadian market forum”, June 2010
Figure 13: Lendable assets and total on loan, North America (Q2 2010)
Lendable assets (USDMM) Total on loan (USDMM) Total on loan (%)
North American
treasuries/bonds
2,601,635 487,290 19%
> US 2,508,102 472,060 19%
> Canadian 93,533 15,230 16%
North Americanequities
3,573,435 296,682 8%
> US 3,439,616 283,410 8%
> Canadian 133,819 13,272 10%
Source: RMA quaterly aggregate data survey, Q2 2010
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> Asia Pacific
As displayed in figure 16, the Asia Pacific equities lendable assets reached USD66bn in Q2
2010 for a total on loan of USD4bn. If compared with Europe, it is not a very active marketwith an average ratio of “total on loan/lendable assets” of only 6%.
With USD28bn of lendable assets and a USD1.6bn total on loan in Q2 2010, the Japanese
equities lending market remains the largest in Asia, accounting for 37% of equities lent in
value. Despite a 28% decline compared to Q2 2009 (USD21.6bn on loan), the Japanese equi-
ties lending market still comfortably exceeds both the Hong Kong and Australian markets.
The Australian compulsory superannuation scheme is an important driver for growth on the
supply side of securities lending in Australia. It was introduced in 1992 and began as a 3%
compulsory superannuation contribution by the employer of any worker in the country. Over
the years it has grown to 9% where it currently stands today. These massive superannua-
tion funds represent a very large and growing pool of assets, and one that has historically
engaged in securities lending8.
The expansion of securities lending and borrowing into new markets
Continuing deregulation and tax changes make possible the establishment of new se-
curities lending markets. The list of new markets continues to grow. Latin America for
example, in particular Brazil, continues as a promising and yet largely under-penetrated
region for borrowing and lending.
Other markets to watch include Eastern Europe, Israel and a few in Asia. Generalthemes in these markets include the potential to earn significant spreads in the early
stages, often less-developed legal, tax and regulatory regimes, and a shortened market
development cycle 9 .
Analysis of ICMA data (European repo market)
In terms of market size, the European repo market is much bigger than the European secu-
rities lending market, since repo has become the main refinancing product in Europe. As
the unsecured money markets get more limited and expensive, the secured repo product
became the way that banks managed liquidity and collateral and is now the predominant
method. The last survey conducted by ICMA shows in Europe a proportion of 85% for repos
and 15% only for securities lending as at December 2009.
1.4.2
OVERVIEW OF
THE SECURITIES
FINANCING MARKETS
8 Source : Australian Securities Lending Association (ASLA)
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Beneficial owners have various possible routes to enter the securities lending business, direct
or intermediated:
> In the direct lending model, the lender will run its own securities lending program and will be
responsible for revenue generation, risk management and operations. As this model requireshaving the necessary infrastructure in-house in place and sophisticated risk management to
work with a broad range of counterparts, it generally concerns funds of a certain size which
have an interest in getting control over the activity and can afford the cost.
> In the intermediated model, beneficial owners can:
• use their custodian bank or third party lenders to enter the securities lending market;
• grant exclusive access to a part or the totality of their portfolios to a single borrower, either
directly or through an auction (in that case, borrowers will bid for the lender’s portfolios by
offering guaranteed returns in exchange for gaining exclusive access);
• lend directly their portfolios but outsource to third parties collateral management and/or all
the necessary administrative support (settlement instructions, corporate actions manage-
ment, fee calculation and payment, etc.).
Selecting one principal borrower will allow beneficial owners to avoid dealing and contracting
with a vast number of counterparts. Then the principal borrower will be responsible for revenue
generation, risk management and operations. He or she will also carry the counterpart risk
when the securities of the beneficial owner are re-lent to the market. This model, illustrated in
figure 21, is offered by many custodian banks to their clients under custody. It notably enables
asset managers and other institutional investors to exchange potentially lucrative but unknown
opportunities in the future for the certainty of an up-front fee.
It should be noted that lenders can use a combination of different models across their port-
folios and the various markets. However, only the largest institutional lenders with the most
valuable and diversified portfolios would make use of all of the options described above.
MAIN PLAYERS AND
ARRANGEMENTS
Figure 21: Illustration of a typical “Principal borrower” model offered by a custodian bank
LENDERS(Beneficial owners)
e.g. Asset manager or
Institutional investor
having their assets under
custody with the Principal
borrower
PRINCIPAL BORROWER
e.g. Custodian bank of
the beneficial owner of
securities
LENDER
e.g. Custodian bank of
the beneficial owner of
securities
BORROWERS
Securities lending market
- Bridge
CASH &
COLLATERAL
MANAGEMENT
Securities
lending
Collateral
delivery
Securities
lending
Collateral re-investment
in secure instruments
> Beneficial owners have only one
counterpart: their custodian bank
>The custodian bank carries all the
market & regulatory risks in the
securities lending transaction
>The custodian bank operating as a
principal borrower is remunerated
by a split of the revenues generated
by the loan of the beneficial
owner’s securities (e.g. 70% for the
beneficial owner and 30% for the
custodian bank
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MAIN PLAYERS AND
ARRANGEMENTS
Borrowers
The most active borrowers of specific securities are typically major securities dealers, bro-
ker-dealers, hedge funds, prime brokers and investment banks. Since 2008, the borrowerglobal landscape has dramatically changed, with the disappearance of major players such
as Lehman Brothers and Bear Stearns.
Securities borrowers seek to borrow securities in circumstances where they do not cur-
rently have possession of those securities, for example:
> When they need to cover a failed transaction in the course of their trading activity;
> When they have put on a short position;
> When they need to deliver securities they have not yet purchased against the exercise of
a derivatives contract;
> When they want to raise specific collateral, perhaps for another securities lending
transaction.
Their motivation can also stem from trading strategies requiring short positions, as those
displayed in the following table.
Other borrowing motivation includes financing, i.e. borrowing as part of a financing trans-
action motivated by the desire to lend cash. In the case of bonds, the typical financing
transaction will be a repo whereas in the case of equities, both securities lending and repo
may be used.
2.1.2
Figure 22: Illustration of trading strategies relying on securities borrowing
Trading strategy Definition and objectives
Directional short-sellingstrategy
Borrowing of securities that one does not own, with the aim ofrealising a profit from an expected fall in the security price.
Someone sells a security and simultaneously borrows thesame quantity of the security to deliver to the purchaser, in thehope he will be able to buy back the security once the pricehas fallen. The security bought back is then used to unwind thesecurities borrowing trade.
Market neutral short-sellingstrategy
Profiting from the relative price movements of specificsecurities irrespective of broader market movements(e.g. pairs trading)
Hedging strategy Borrowing securities as a defensive measure against marketmovements (e.g. using short positions to gain protectionagainst long exposures)
Arbitrage strategy Exploiting a price difference between two instruments thatshould have identical values (e.g. buying a security at low pricein one market and simultaneously shorting the same security inanother market at a higher price)
Common forms of arbitrage transactions involving securitiesborrowing are convertible bond arbitrage, index arbitrage oryield enhancement
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MAIN PLAYERS AND
ARRANGEMENTS
It should be noted that borrowing securities for the specific purpose of influencing a sharehold-
er vote (as a reminder, the borrower of securities obtains the right to vote in AGMs/EGMs) is
not regarded as an acceptable market practice. This corporate governance issue has been ad-
dressed by the industry associations as well as by regulators for a few years. Thus, the FrenchFinancial Market Authority (AMF) is currently contemplating enforcing disclosure requirements
for firms borrowing significant amounts of securities just before an AGM. Besides, a new joint
ISLA/ICGN (International Corporate Governance Network) Code on securities lending and vot-
ing is being developed at the time of writing (initial target was June 2010).
Intermediaries
The level of sophistication and the infrastructure required can make the direct lending model
cost prohibitive for the smaller players. Furthermore, securities lending involves a variety of
complex administrative, operational, accounting and risk management activities, including
credit evaluation and cash management, which may be better handled by specialists in that
field. Additionally, loan transactions generally exceed USD250,000 and lesser holdings are of
limited appeal to direct borrowers. Holdings of small size are best deployed through intermedi-
aries who can pool these holdings with other inventories. All these barriers can drive beneficial
owners to use intermediaries to enter the securities lending business. These intermediaries
can be of different nature, as described hereafter. They are typically remunerated by the split of
the securities lending revenues with lenders.
A - Agent intermediaries (lending agents)
Agent intermediaries include custodian banks lending securities as agents on behalf of benefi-
cial owners, alongside the other services provided to these clients. Some specialist securities
lending agents (third-party agents) have also emerged.
In an agency model, the intermediary facilitates securities lending on behalf of the ben-
eficial owner. He is responsible for revenue generation, risk management and operations
but not for counterparty risk, which remains carried by the beneficial owner himself. The
beneficial owner retains full responsibility for deciding to which borrowers their securities
may be lent to by the agent. Figure 23 illustrates a typical lender agent model offered by a
custodian bank to its clients.
2.1.3
Source: EMPEA (Emerging Markets Private Equity Association), October 2009
Figure 23: Illustration of a typical “lender agent” model offered by a custodian bank
LENDER(Beneficial owner)
e.g. Asset manager or
Institutional investor
having their assets under
custody with the Lender
agent
LENDER AGENT
BORROWERS
Securities lending market- Bridge
CASH & COLLATERAL
MANAGEMENT
Collateral
delivery
Securities
lending
Collateral re-investment
in secure instruments>The custodian bank operating as a
lender agent is only an intermediary,
lending the securities of the
beneficial owner to agreed
borrowers, on behalf of the
beneficial owner
> The beneficial owner carries all the market & regulatoryrisks in the securities lending transaction
> The custodian bank operating as a lender agent is
remunerated by a split of the revenues generated by the
loan of the beneficial owner’s securities
e.g. Custodian bank of
the beneficial owner of
securities
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• Third-party agents
Advances in technology and operational efficiency have made it possible to separate the
administration of securities lending from the provision of basic custody services, and a
number of specialist third-party agency lenders have established themselves as an alterna- tive to the custodian banks. Their market share is growing from a relatively small base. Their
focus on securities lending and their ability to deploy new technology without reference to
legacy systems can give them flexibility.
B - Principal intermediaries
Another category of intermediaries are dealers trading as principals. We can distinguish
five broad types of principal intermediaries: Custodian banks, investment banks, broker-
dealers, prime brokers and specialist intermediaries. In contrast to the agent intermediar-
ies, they can assume principal risk, offer credit intermediation and take a position in the
securities they borrow. Indeed, they intermediate between lenders and borrowers but they
also use the market to finance their own wider securities trading activities and may seek
Through their prime brokerage operations, they also meet the needs of hedge funds and the
borrowing of securities to finance their positions has grown rapidly.
Principal intermediaries match the supply of beneficial owners who have large stable port-
folios with those that have a high borrowing requirement. They also distribute securities to a
wider range of borrowers than underlying lenders, who may not have the resources to deal
with a large number of counterparts.
• Broker-dealers
Broker-dealers are the most important intermediaries in the securities lending markets and
provide a wide range of services as well as trading in their own right. First, they act as prin-
cipal intermediaries between the ultimate borrowers and suppliers of funds or securities.
Running repo books, dealers use their capital and market-making capabilities to interpose
themselves between two counterparties, earning a spread on the trade. This can offer the
lender a measure of protection against an unknown counterparty and anonymity to a se-
curities borrower who does not wish to reveal his identity. Secondly, broker-dealers offer
exclusive securities lending programs or agency lending services to institutional investors,
similar to those traditionally provided by custodian banks12.
Many broker-dealers combine their securities lending activities with their prime brokerageoperation to achieve significant efficiency and cost benefits.
• Prime brokers
Prime brokers serve the needs of hedge funds and other alternative investment manag-
ers. Securities lending is one of the central components of a successful prime brokerage
operation, with its scale depending on the strategies of the hedge funds for which the prime
broker acts. Both long/short equity and convertible bond arbitrage strategies heavily rely on
securities borrowing.
MAIN PLAYERS AND
ARRANGEMENTS
12 Source: Global Custodian, “Collateral: Securities Lending, Repo, OTC Derivatives and the Future of
Finance”, 2007
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• Central banks
The primary role of a central bank is to manage the cost and quantity of credit in an econ-
omy in order to control economic growth and the rate of inflation. They control the supply
of liquidity, i.e. the deposits held by banks with the central bank, mostly by means of openmarket operations. Most central banks intervene in the money markets in order to influence
very short-term interest rates.
Repo has become the preferred tool of central bank intervention around the world in open
market operations to control short-term interest rates, because of the size of the repo mar-
ket, its role in funding other financial markets and the fact that repo reduces credit risk
being taken with public funds.
Tri-party repo market
In a tri-party repo, the two parties (buyer and seller) outsource the management of the col-
lateral to a tri-party agent, generally an International Central Securities Depository (ICSD
such as Euroclear Bank or Clearstream Banking) or a custodian bank, based upon a pre-
defined set of rules and criteria agreed by both parties, namely the collateral eligibility crite-
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ARRANGEMENTS
After the 2007-2008 crisis, regulators have been keen to see CCPs taking on an increasing role
in the repo and securities lending markets, as in other financial markets such as OTC deriva-
tives, considering that the CCP model offers a relative transparency compared to OTC products.
However, the market participants overall, both lenders and borrowers, remain strongly reluctant to such an initiative. If they agree to support any initiative to increase efficiency and reduce risk,
they argue that simply shifting the risk to another party (the CCP) does not necessarily mean
reduced risk. Furthermore, there are many types of assets used in repos and securities lending
and managing multiple risks across a wide range of financial products may diminish CCP ef-
fectiveness. They also argue that CCP will need to gain very specific expertise for these markets
and that access to CCP services may include membership requirements, which could represent
a barrier of entry for some categories of market players and could inhibit market growth18.
Last but not least, the non-standardisation of securities lending and collateral management pro-
grams is a significant barrier for central counterparties. If a CCP brings risk mitigation benefits,
it could also bring complications from an operational perspective. Where central counterparties
have been successful in others markets, those markets have not had the lifecycle complications
of securities finance, say some industry players19.
In the future, CCPs will definitively have to develop a thorough understanding from market partic-
ipants – especially prime brokers and agent lenders-, as to how this model will work in practice
and in identifying the inherent risks within the context of a securities lending and repo environ-
ment, if they want to truly become successful.
18 Source: Euroclear, “Steering a new course for the repo market”, 2010
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3.2
3.2.1
participants. The improved flow of information and engagement should serve to reduce the
opportunity for ‘unintended consequences’ of new regulation. Another example of a posi-
tive development stemming from US regulators is the impact of the SEC’s Rule 204, which
mandates the closeout of failed sale transactions. This rule led to a significant drop-off in the number of failed deliveries since its introduction21.
Short-selling in particular remains a concern, reinforced by the recent Greek crisis. Driven
by the wish to promote market stability and preserve investor confidence, regulators are
discussing how to control short-selling and in particular naked short-selling. Whereas the
Committee of European Securities Regulators (CESR) and the UK Financial Services Author-
ity (FSA) are focusing on public disclosure and the ability to intervene in an emergency
rather than any generalised restrictions, in the United States restrictions rules on short-
selling were introduced in February 2010 by the Securities and Exchange Commission (SEC)
with no exemption to market-makers22. In Europe, following a series of consultations with
market participants, the European Commission adopted a proposal for a regulation on short
selling on 15 September 2010. Under the draft legislation, short sellers will have to disclose
their net short positions to regulators once they reach 0.2% of issued share capital and to
the market when they reach 0.5% of issued share capital. National regulators will also be
given the authority to restrict or ban short selling in coordination with the new pan-Euro-
pean regulatory body for securities trading, the European Securities and Markets Authority
(ESMA), which is expected to come into being in Q1 2011. The proposal will now pass to the
European Parliament and the EU member states for consideration. Once adopted, the short
selling rule would apply from 1st July 2012.
Disparate regulation is a real challenge for the business. The US is by far the most regulated
market with 15c3-3, RegSHO, Rule 402, Agency Lending disclosure, Rule 2a-7 and the more
recently introduced short sale circuit breaker. In the rest of the world, the problem is in
some ways more complex in that regulations vary by jurisdiction as already mentioned. The
recent attempt by CESR to set standard guidelines for new post-crisis regulation seemed
somewhat undermined by the German regulator’s variation from the “standards”23.
Heterogeneous tax frameworks but an on-going harmonisation in
Europe
Current tax framework in main countries
The tax treatment of securities lending and repo transactions is largely determined by
whether the transaction is deemed to be a secured loan or a sale and repurchase of the
securities and whether these transactions receive beneficial tax treatment in the relevant
jurisdiction. Tax authorities may treat securities loans and repos differently despite the simi-
larities in their economic consequences.
The income attached to securities (coupon, dividend) may also be taxed differently from one
jurisdiction to another and depending on the investor’s tax residency. Accounting standards
may also vary from one jurisdiction to another.
We thought it would be interesting to insert hereafter a description of the current tax land-
scape in North America, Europe and Asia Pacific. The following tables examine the general
tax framework, direct tax considerations, as well as other taxes and considerations in the
main countries of business as at 1st January 2010.
21 Source: Goldman Sachs,
“Securities lending: New
priorities”, April 2010
22 Source: Global Securities
Lending magazine, “Still
under siege?”, Issue 08,Q2 2010
23 Source: Global Securities
Lending magazine, Issue 08
Q2 2010
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Figure 29: Tax framework in North America (based on information current as at 01/01/2010)
GENERAL DIRECT TAX CONSIDERATIONSOTHER TAXES ANDCONSIDERATIONS
Canada The Canadian Income Tax Actcontains rules governing the tax treatment of securitieslending arrangements (“SLA”).Arrangements that would beconsidered securities lendingcommercially, as well as repos andreverse repos, will generally beSLAs for tax purposes, if entered intobetween arm’s length parties.Certain lending arrangementsbetween non-arm’s length personswill also be SLAs.
Payments made to a non-resident of Canadaunder an SLA may be subject to withholding tax at 25% (this rate may be reduced underan applicable double tax treaty). Lending feespaid to a non-resident lender are treatedas interest and should not be subject towithholding tax if paid to an arm’s lengthperson. Compensating payments paid to anon-resident lender will either be treated asinterest or retain the original character of
the income from the borrowed security (e.g.,dividends on a share) depending upon thelegal nature of the borrowed security and theextent of the collateralisation of the loan. Anyinterest earned by a non-resident borrower inrespect of the collateral on an SLA should notbe subject to withholding tax.
Where the borrower/lender is a resident ofCanada, the deductibility of the compensatingpayments and the treatment of compensatingpayments will be determined under generalconcepts.
The SLA rules deem the lender to not havedisposed of the security and to continue
to be the owner for tax purposes, thus nocapital gains tax implications would applyon the transfer of the security. However, theAct is silent regarding the borrower – so firstprinciples apply – and legally a securities loanis a disposition so the borrower would alsobe considered to own the borrowed securityfor tax purposes. For a securities lendingarrangement that is not an SLA, the borrowerwould be considered to have disposed of the
security for tax purposes and reacquired itlater and thus could realise a gain or loss on the initial borrowing.
No indirect or transfer taxesshould apply to securitieslending arrangements.
USA Section 1058 of the U.S. InternalRevenue Code specifically deals with
the U.S. taxation of securities lendingarrangements and states that no gainor loss should be recognised on the
transfer of securities in exchange foran obligation under such a lendingagreement, subject to the followingconditions:
> The borrower must return to thelender securities identical to thoseoriginally transferred;
> During the period of the lending
arrangement the borrower mustmake payments to the lenderequivalent to any interest,dividends or other distributions that
the lender is entitled to;
> The lending agreement mustnot reduce the risk of loss oropportunity for gain for the lender;
> The arrangements must meetany such future requirements as
the U.S. Treasury Secretary mayprescribe by regulation.
U.S. tax may arise in the event thatsecurities are transferred under anarrangement that was intended tocomply with the requirements ofSection 1058 but subsequently failed
to do so.
In general, if the borrower is a U.S. person,borrow fees are treated as U.S. source andsubject to 30% U.S. withholding tax unless anapplicable income tax treaty reduces suchwithholding to zero under relevant paragraphsconcerning ‘other income’ or business profits’.Rebate fees, i.e., interest income on cashcollateral (deposits) posted with a U.S lenderwould be subject to 30% U.S. withholding taxunless U.S. domestic law or an applicableincome tax treaty reduces such withholdingunder relevant paragraphs concerninginterest.
Substitute payments made to the lender undera securities lending arrangement would retain
the character and sourcing of the underlyingpayments (i.e., treated as interest or dividendsdepending on the security involved). Therefore,payments made to nonresidents with respect
to borrowed U.S. securities would be subject to U.S. withholding tax generally at a rate of30% (or lower if an income tax treaty applies).Please note that Notice 97-66 is currently stillapplicable to dividend substitute paymentsmade under a typical lending arrangementinvolving U.S. securities.
There is currently no indirect or transfer tax regime in the U.Sapplicable to securities lendingarrangements. In addition,pursuant to the US SenatePermanent Subcommitteeon Investigation’s report onDividend Tax Abuse,
Notice 97-66 which currentlyregulates foreign to foreignlending, is to be revokedand replaced by the ForeignAccount Compliance
Act of 2009 (contained within the Tax Extender Act 2009).
Source:Deloitte (extract from Data Explorers Securities Lending Yearbook, 2009-2010)
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Source: NVCA (National Venture Capital Association - United States), 2009
Figure 30: Tax framework in Europe (based on information current as at 01/01/2010)
GENERAL DIRECT TAX CONSIDERATIONSOTHER TAXES ANDCONSIDERATIONS
UK Generally under UK tax rules, full beneficialand legal ownership is transferred toenable the borrower to sell the securitiesand purchase replacement securities at a
later date to fulfil its obligations. However, the lender retains economic ownership andshould continue to recognise the securitiesin the financial statements.
As the title of the securities are transferred, dividends or interest wouldbe received by the borrower. UK legislation provides that any capitalgain that arises on the initial lending and the final transfer back to thelender (provided that the securities returned are in the same quantities
and nominal value,) is disregarded for the purposes of Capital Gains Taxunless the lender requires the return to be paid in cash. In such a case the proceeds of redemptions would fall under the CGT legislation.
There are tax rules in place to prevent lenders from receiving a returnfrom the borrowers in non taxable form and legislation in the eventa borrower fails to return the securities. The legislation stipulates
that where it becomes apparent that the borrower will fail to return the securities, the borrower is deemed for capital gains purposes asacquiring them at that time and the lender disposing of them at marketvalue. Following the collapse of Lehman Brothers, an exception to thisrule was included in legislation where default is due to the insolvencyof the borrower and the lender uses collateral provided to acquirereplacement securities.
Collateral from the borrower typically takes the form of cash or othersecurities. The UK has legislation in place to prevent agreementswhereby no manufactured dividends are provided but instead replacedby interest income that has arisen on the collateral received. Furtheranti avoidance legislation is also in place to prevent the lender orborrower from substituting a non taxable or lowly taxed income in placeof existing taxable income stream.
An important feature of the UK lending market is the complexManufactured Overseas Dividends (‘MOD’) rules operated by the UK
tax authorities (‘HMRC’). The MOD regime regulates the securitieslending industry and aims to put the UK lender of securities in the sameposition, from a tax perspective, as if the securities loan had not beenmade (i.e. tax neutrality). This tax neutral treatment is implementedvia the imposition of a ‘relevant withholding tax’. To facilitate theregime, financial intermediaries may assume, by application to HMRC,
tax designations of Approved UK Intermediary (‘AUKI’) or ApprovedUK Collecting Agent (‘AUKCA). Complex rules exist to enable thedisapplication by AUKIs/AUKCAs of the relevant withholding tax.
Relief from stamp duty andSDRT is available in respectof stock loans or recall where
there is an arrangement for
transfer and return of the samekind and amount of securities.An appropriate flag on theCREST system is used to effect
this. Generally, the non-returnof securities under a lendingarrangement triggers SDRT on
the borrower. In Finance Bill 2009,legislation was introduced toprovide relief from taxes whereone of the parties to a stocklending or repo arrangementbecomes insolvent before thearrangement is completed by thereturn of the securities originallylent or sold. The relief applies to
the recipient of the securities,covering any securities provided
as collateral and subsequentpurchases of securities by thesolvent party to replace those notreturned.
GERMANY German GAAP and tax accounting rulesdo not provide for specific accounting
rules for securities lending arrangement(Wertpapierleihe). Under the applicablegeneral accounting rules the loanedsecurities are transferred from thelender’s balance sheet to the borrower’sbalance sheet as not only the legalownership but – according to the prevailinginterpretation - also the economicownership of the securities is transferred
to the borrower during the lendingperiod. However, given the nature of thesecurity lending arrangement as a loanin kind (Sachdarlehen) the transfer of thesecurities doesn’t lead to a realisation ofany hidden profits as a corresponding claim
to re-transfer the securities to the lender isaccounted for in the balance sheets.
Non-German resident lenders/ borrowers are only subject to Germannon-resident taxation with certain income deriving from German
sources. Any lending fees and the manufactured dividends are notsubject to German non-resident taxation and therefore basically alsonot subject to German withholding tax.
Interest income on any cash collateral received by a non-Germanresident lender is not subject to German non-resident taxation unless
the loan is collateralised with German real estate and the right to tax such interest is not attributed to the state of residence under anapplicable double tax treaty.
For German resident lenders/ borrowers:Any dividends received by a resident borrower during the loan termof loaned equities are subject to the German participation exemptionrules, i.e. the dividends are effectively 95% tax exempt as 5% of thegross dividends received are treated as non-deductible businessexpenses. The participation exemption rules do not apply to banks andfinancial institutions holding the equities as current assets as well as tolife and health insurance companies. The resident borrower is entitled
to deduct German dividend withholding tax on the dividends receivedfrom the loan securities from its own tax liability.
Any lending fees as well as the manufactured payments received by the lender are fully taxable (the German participation exemption rulesdo not apply to manufactured dividends).
Lending fees as well as manufactured payments are tax deductiblefor the borrower for German tax purposes. However, effective as of2007 an anti-avoidance regulation has been introduced under whicha deduction is not available where (1) the equities are lent from thecurrent assets of a German resident bank or financial institution aswell as from a German life and health insurance company, (2) theborrower is entitled to the benefits of the German dividend participationexemption and (3) the equities are lent over the dividend payment date.
Lending fees and the manufactured dividends remain tax deductible aslong as the manufactured dividend has been subject to a withholding
tax. Basically, no dividend withholding tax applies on manufactured
dividends. However, a 15% withholding tax applies to lending fees andmanufactured dividends paid to certain German public bodies and taxexempt corporations.
Interest income on any cash collateral received by the lender is fully taxable in Germany
Germany does not levy anyindirect (VAT) or transfer taxes on
securities lending transactions.
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GENERAL DIRECT TAX CONSIDERATIONSOTHER TAXES ANDCONSIDERATIONS
FRANCE Securities lending arrangements in Franceare normally structured as two sales and areaccordingly fully taxable transactions.
However, there are two main types of securities
lending transactions which benefit from afavorable French corporate income tax regime (no
taxation of capital gains):
>“prêt de titres”, i.e. a securities lendingagreement;
> “pension livrée”, equivalent to a “repo” contract.
The following conditions need to be met to benefit from the capitalgains neutral tax regime on these transactions:> Securities cannot be subject to “pension livrée” or “prêt de titres” if,
during the lending period, a dividend giving rise to a foreign tax creditis distributed, or interest subject to withholding tax or giving rise to aforeign tax credit is paid;
> The securities must actually be returned at the end of the lendingperiod. In this respect, this condition will be met, even if the securitiesreturned to the lender are not the same as the securities originallylent, provided that they are fungible with the original securities.
The remuneration paid by the borrower to the lender would be taxdeductible for the borrower (under the general deductibility conditionsand in particular provided it complies with the arm’s length principle)and fully taxable for the lender (treated as interest) if they are residentin France.Dividends received by a French resident borrower and paid on to aFrench resident lender should not benefit from the French parent/subsidiary regime and accordingly, should be taxable at the standardCIT rate (effective rate of 34.43% in 2010). This should apply whether
the lending transactions benefit from one of the tax favorable specificlending regimes described above, or not. A tax deduction should be
available for the manufactured dividend provided it meets the general tax deductibility criteria.Where there is a non-resident lender and a resident borrower, themanufactured dividend paid by the borrower to the lender wouldbe within the scope of French withholding tax. However, from aFrench legal and tax perspective, it is uncertain as to whether themanufactured dividend will be deemed to be (a) consideration forservices (domestic withholding tax equal to 1/3 of the gross amountpaid, subject to applicable tax treaties), (b) interest (unlikely, nodomestic withholding tax as from March 1, 2010, if not paid to anentity located in a tax haven) or (c) an additional part of the purchaseprice paid by the borrower for the securities (not subject to Frenchwithholding tax except if the lender owns more than 25% of the shares).This would primarily depend on the documentation entered into for thelending transaction.
Finally, transfer tax on thesale of securities shouldapply to securities lendingarrangements (at the rateof 3% or 5%, with potentialcapping to €5,000 per
transaction depending on the nature of the security),except for “pensions livrées”
that benefit from a specificexemption.
ITALY There are no specific rules for securities lendingarrangements in Italy and the parties are free
to agree terms and conditions of the relevantarrangement.
In principle, proceeds (i.e. lending fees) deriving from securities lendingwhich have been realised by non-resident entities are subject towithholding tax at the rate of 12.5% (or the reduced rate provided forby the applicable tax treaty, if any) except for manufactured dividendswhich are subject to withholding tax at the rate of 27% (or the reducedrate provided for by the applicable tax treaty). Note that since April2009, new Italian legislation applies such that dividends received by theborrower under securities lending arrangements would be essentiallysubject to the relevant tax implications applicable to the lender, as if thesecurities had not been lent. Accordingly consideration to these rulesshould be given in the case of cascading trades.Non-resident entities may benefit from a domestic withholding taxexemption which may apply to proceeds from securities lending exceptfor manufactured dividends. The exemption applies to entities residentin Countries allowing an adequate exchange of information with theItalian tax authorities to the extent that a proper documental procedurehas been implemented. Certain anti-abuse provisions are in place fornon-resident entities.Should the Borrower be a resident company, proceeds from securities
lending would be included within the overall taxable income (withoutbeing subject to withholding tax) subject to corporate income tax at
the rate of 27.5%. Proceeds realised by banks, financial institutions andinsurance companies would also be subject to local income tax at therate of 3.9 % up to 4.82%.
Securities lendingarrangements are exemptfrom VAT. Registration
tax is due on the relevantagreement at the flat rate of€168.00 in case of use. Thereis no transfer taxes/stampduty on securities lending
transactions.
SPAIN From a Spanish standpoint, there is a Special TaxRegime that may be applicable for two types ofsecurities loans in: (i) securities listed on a Spanishsecurities market exchange and (ii) securities listedon market exchanges and other organised markets(subject to certain conditions).In general terms,
the purpose of the borrowing must be to fulfil asale order, for onward lending, to post as collateralin a financial transaction, or to participate in acorporate action (eg. rights issue).Additionally,
there are a number of other conditions to qualifyas a stock loan, including the requirement to returnequivalent securities, to make payments to thelender to deliver the economics rights (eg. income)from the securities, and the loan term should notexceed one year and be made or implementedwith the involvement of certain Spanish financialinstitutions.
For a Spanish lender, no capital gain/loss would arise from the deliveryor the repayment of the securities on loan. Fees received by the lenderwould be taxable as returns obtained on the assignment of capital at
the general corporate rate of 30%. The borrower would be required to withhold on income paid to the lender, except where the lender is acredit institution registered with the Bank of Spain (Banco de España).If a credit institution was an intermediary in the security loan, the creditinstitution would be required to withhold.
For a resident borrower, income derived from securities borrowedwould be taxed at the corporate rate of 30% as income derived fromholdings in the equity (e.g. dividends). Manufactured dividends would
be assessed as interest/ financial expense, and would be tax deductibleaccording to the Spanish Tax legislation.
Both the transfer and theacquisition of securities by
the borrower or the sale ofborrowed securities, areexempt from Value AddedTax, Capital Duty and StampDuty.
Source:Deloitte (extract from Data Explorers Securities Lending Yearbook, 2009-2010)
Copyright CACEIS, 2009
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Figure 31: Tax framework in Asia Pacific (based on information current as at 01/01/2010)
GENERAL DIRECT TAX CONSIDERATIONSOTHER TAXES ANDCONSIDERATIONS
JAPAN There are no specific provisions inJapan dealing with securities lendingarrangements, and accordingly, incomeand expenses related to securities lending
transactions are subject to general taxationregulations. As such, income shouldbe recognised on an accruals basis. Ingeneral, expenses should be recorded in
the period when, the underlying obligationis fixed, events that directly trigger thepayments with respect to the obligationhave occurred, and the amount of theexpense is reasonably determinable.
For Japanese tax purposes, a lending fee for bonds issued by theJapanese government, municipalities or domestic corporation is
treated as Japan source income taxable to a non-resident taxpayer(i.e., business income from assets held in Japan) whether or not the
taxpayer has a permanent establishment (PE) in Japan. This may beexempt by an applicable tax treaty. The tax rate for a foreign companywith no PE in Japan would be the national corporate tax rate of 30%.(Domestic companies and foreign companies with a PE are also subject
to local taxes, resulting in an effective tax rate of approximately 41%.)Manufactured payments are generally not treated as dividends.Rather, unless otherwise classified as the lending fees mentionedabove, they are treated as payments under contract, and as such, nonresident lenders that do not have a permanent establishment in Japanare not subject to any corporate income tax or withholding tax onmanufactured payments.Interest paid to non-residents that do not have a permanentestablishment in Japan is subject to withholding tax at 20%. This maybe reduced by an applicable tax treaty.For resident counterparties, the withholding tax treatment would be
the same as above, although many financial institutions involved in the stock lending/borrowing business may enjoy an exemption fromwithholding tax on interest. The key difference for resident companieswould be that they would have to include any income and expensesearned through the stock lending/borrowing business in calculating
their taxable income.For Japanese tax purposes, the lender would not treat the securitiesloan as a sale, but rather a financing transaction, debiting the collateralreceived to cash and crediting a payable to the borrower. Accordingly,no capital gains tax implications should arise.
Lending fees shouldnot be subject toConsumption Tax.Documentation signedin Japan in respectof securities lendingarrangements shouldgenerally be subject
to stamp taxes, at aminimal rate (JPY200).
AUSTRALIA Eligible SLAs are specifically dealt with inAustralia under section 26BC of the IncomeTax Assessment Act 1936. A number ofcriteria need to be satisfied for section26BC to apply to the borrower and lender,including a written SLA agreement underwhich the replacement securities must
be provided to the lender less than 12months after the securities were borrowed,and any distributions during the paymentmust be paid to the lender.Recentlyintroduced provisions dealing with the
tax timing of income and deductions forfinancial arrangements would also requireconsideration.
The effect of section 26BC is to reflect commercial practice, which treats SLAs as loans. Section 26BC allows the lender and borrower to ignore the sale and repurchase of the securities for tax purposes.Accordingly, no taxable gain or loss is deemed to arise on the SLA.If section 26BC does not apply, the transfer of title to the borrowedsecurities would usually give rise to a taxable gain or loss for the lenderand transfer of title to the replacement securities would usually give
rise to a taxable gain or loss for the borrower.For Australian tax residents borrowers and lenders, and non-residentsfrom a country with which Australia has a tax treaty that engage inSLAs through a permanent establishment in Australia, fees receivable/payable, distributions (or compensatory payments) paid to the lenderand interest on cash collateral provided under the SLA would beassessable/deductible under ordinary rules.Non-residents from a country with which Australia does not have a
tax treaty that engage in SLAs would be subject to tax in Australia onlending fees, distributions (or compensatory payments) received orprofits from SLAs on revenue account, if the SLA activities have anAustralian source. Interest paid to a non-resident on cash collateralmay, however, be subject to interest withholding tax.
Germany does notlevy any indirect (VAT)or transfer taxes onsecurities lending
transactions.
HONGKONG
Hong Kong domestic legislation provides foran exemption from Hong Kong profits tax forstock borrowing and lending transactionsby allowing disposals and reacquisitionof “specified securities” (e.g. listed debtor equity securities) under certain stockborrowing and lending agreements tobe disregarded for Hong Kong profits taxpurposes.
Certain conditions must be met for the exemption to apply. Broadly, the borrowed stock under a lending agreement must be used by theborrower for a “specified purpose” (e.g. settling a sale) and stock of
the same description must be returned to the lender within a specifiedperiod. Further, the lender must be compensated for any distributionsreceived by the borrower. Both the borrower and lender should bedealing with each other at arm’s length and the transaction must not beentered into with the purpose of avoiding or deferring amounts whichwould otherwise be chargeable to profits tax.
The Hong Kong tax system is based on a territorial concept and notresidency. Accordingly, only Hong Kong sourced profits derived froma trade, profession or business in Hong Kong are subject to profits
tax. For borrowers and lenders who are not considered as carrying onbusiness in Hong Kong, no taxes should fall due as a result of lending
transactions on lending fees, rebates or manufactured payments.For lenders or borrowers who carry on a business in Hong Kong, thegeneral principle (e.g. based on location of services for lending feesand other specified rules for interests for manufactured paymentsarising from such distribution) would apply to determine the profits tax.
However, the receipt of a dividend distribution by a borrower and
manufactured dividends to the lender should be ignored for taxpurposes because dividends are generally exempt from tax in HongKong.
Where specificconditions aresatisfied, stock lendingarrangements are not
treated as transactionswhich will give rise tostamp duty. However, itis important to note that
this concession onlyapplies to the sale andpurchase of Hong Kongstock which is subject to
the rules and practicesof the Stock Exchangeof Hong Kong Limited.In other words, sharesin private companies donot fall within the scopeof the relief.
Source:Deloitte (extract from Data Explorers Securities Lending Yearbook, 2009-2010)
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Recent developments
• The progressive disappearance of tax-driven arbitrage opportunities
As for regulation, disparate taxation is a challenge for the business but it has also offered
so far many opportunities for market players. Indeed, in securities lending as in repo, somestrategies may focus on these taxation gaps to enhance yields.
However, it should be underlined that a variety of tax initiatives, including withholding tax re-
lief at source, the renegotiation of double taxation treaties on more favorable terms and the
tax harmonisation drive led by the European Commission, today pose an existential threat
to the yield enhancement transactions on which equity lending has traditionally thrived.
In the repo market as in the securities lending market, arbitrage opportunities are progres-
sively disappearing as tax harmonisation occurs. A number of European Court of Justice
cases have emerged in recent years which successfully challenged the withholding rules
applied to dividend payment arising from various member states. The most recent case, the
Aberdeen decision, was in line with the Denkavit and Amurta decisions which dealt with tax
discrimination in regards to withholding taxes on outbound dividends. These cases have
provided the basis for reclaim of withholding taxes by investors on the grounds that rules
applied by some member states result in a different treatment between domestic and over-
seas recipients of dividends. The issue of whether and how the case law should apply for
entities making claims to recover withholdings taxes on manufactured payments on certain
stocks (rather than actual dividends) raises fundamental questions around the impact on
securities lending agreements, including the pricing of contracts. We would expect some of
these issues to be further explored in the coming months24.
• The impact of the new FATCA Act in the United States
FATCA, the Foreign Account Tax Compliance Act which came into effect on 18 March 2010,
will have a considerable impact on the financial sector, as it forces financial institutions all
over the world to submit detailed information on their customers to the US tax authority (IRS)
which goes far beyond the current Qualified Intermediary (QI) regime. The new rules will
apply to payments from the start of 2013 and to some dividend-equivalent payments even as
early as autumn 2010. In particular, total return swaps and securities lending, among others,
are affected25.
The following table provides an insight of the most important changes to come.
3.2.2
24 Source : Deloitte, “A taxing year for the lending industry ”, 2010
25 Source: Ernst & Young, “Foreign Account Tax Compliance Act (FATCA), Mastering the challenges of the new US
regulation”, 2010
Figure 32: An overview of the most important changes related to new FATCA Act in the US
> Foreign financial institutions are required to enter into an agreement with the IRS; Otherwise theywill force imposition of a 30% withholding tax
> The withholding tax is set at 30% and shall apply as of 2013 to interest, dividends and sales returnspaid to uncooperative institutions and customers from US sources
> Products previously exempt from withholding tax, such as total return swaps or securities lending,which are referenced to US securities, now qualify as US source payments
> Foreign (non-US) securities held directly or indirectly by US persons are now also includedin reportings
> The definition of foreign financial institutions (FFIs) is wide-ranging, such that FATCA applies tobetween 50,000 and 100,000 institutions
> Completely new reporting and withholding obligations in addition to (and further-reaching than) those of the existing QI regime
> Identification and documentation of customers becomes considerably more laborious, whereby the burden of proof partly resides with the financial institutions
> Annual (very detailed) reporting to the IRS
Source: Ernst & Young, 2010
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CHALLENGES
& OPPORTUNITIES
As a consequence, having the right capabilities in terms of infrastructure, processes and
procedures, sub-custodian network (to have a global coverage of markets) and expert re-
sources (for the trading side as well as for the administrative side) is crucial.
Sophisticated risk management and collateral management infrastructures are no longer a
“nice to have” but really a “must have” for market participants to remain competitive and
to be able to generate value in a risk-controlled environment. Both aspects are examined
further in sub-sections 3.4 and 3.5.
Investors’ focus on transparency
Another operational challenge for agent lenders today consists in satisfying the benefi-
cial owner’s need for transparency which emerged after the Lehman collapse, fueled by
increased regulatory scrutiny and changing views and expectations of beneficial owners.
Indeed, after this major default event, many beneficial owners asked themselves about their
lending programs. The most common questions raised were the followings:
> Do we fully understand the risks of our lending program?
> Do we have the tools and reporting to adequately monitor and manage those risks?
> Who else in the organisation should be apprised of our securities lending program and
its activities?
They now want to see where returns are being generated and what risks they are taking to
achieve these returns. They also want to ensure that earnings are being allocated appropri-
ately and not subsidising other clients’ accounts.
This new focus on transparency requires the ability of agent lenders to produce sophisti-
cated reporting on the securities lending activity conducted on behalf of their clients and to
give them access to this information on a daily basis or even in real-time.
Even five years ago, it was unusual for any meaningful information to be available for lend-
ers, and retrospective reports on positions and earnings were delivered perhaps once a
month. That time is definitively gone. Today, securities lenders can see information in most
asset classes on a daily basis, and some of them require information in real-time. They
also have access to full details of assets on loan, the proportion of a portfolio on loan,
and the risks to which they are exposed through counterparts and collateral, across allof the routes they take to market. The more sophisticated provider platforms even offer
current and historical performance measurement analysis. Besides, some lenders now
require reports to be disseminated more broadly in their organisation, while the oversight
and management of lending was previously the sole responsibility of the Operations or
Treasury group27.
3.3.3
27 Source : JP Morgan, « Securities lending as an asset management technique », 2010
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CHALLENGES
& OPPORTUNITIES
and time-consuming. It also requires having the appropriate collateral and risk manage-
ment capabilities.
Furthermore, as the nature of collateral assets evolves and activity expands, marking tomarket becomes a crucial valuation challenge. This requires investment in both theoretical
valuation algorithms and multiple internal and external sources of current and historical
prices and volatilities to feed them. Prices have to be sourced from data providers such as
Reuters, Bloomberg or Markit, but also from electronic trading platforms, investment banks
and inter-dealer brokers.
Players such as custodian banks or tri-party agents have integrated these aspects well and
offer outsourcing services of collateral management to their clients, so that they can focus
on their core business.
Outsourcing collateral management to expert service providers is often more ef-
ficient for asset managers and institutional investors from an operational and eco-
nomic viewpoint.
Additionally, collateral optimisation and management efficiency can be achieved by cen-
tralising collateral and managing it from a pool of assets spanning various types of securi-
ties, markets and transactions, such as repos, securities loans, OTC derivatives, cash and
forex, as illustrated in figure 33. A trend also well integrated by major market participants.
The importance of high-quality and liquid collateral
Collateral is an essential component of securities lending and repo transactions and is
the key factor which makes them attractive secured financing instruments, compared toother products.
However, what collateral one accepts and how it performs is of critical importance, espe-
cially when things go wrong, as in the case of Lehman.
Securing transactions through collateralisation is necessary but, on its own, no longer
sufficient. Cash investors have understood, sometimes the hard way, that collateral
selection and the spread on financing transactions should take into consideration the
liquidity factor of assets taken as collateral.
The trend in the market today is towards high quality collateral that is liquid in the secondary
market, so that in case of counterparty default, players are able to execute the collateral
received in the markets.
3.4.3
Figure 33: Illustration of a typical arrangement to optimise collateral management
REPO OTCDERIVATIVES
SECURITIESLENDING
FOREX CASH
Pool of collateral
COLLATERAL MANAGEMENT OPTIMISATION
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An overview of assets used as collateral in securities lending and major trends
As already mentionned, in securities lending transactions collateral can theorically be cash or
securities.Non-cash collateral is typically drawn from:
> Government bonds;
> Corporate bonds;
> Convertible bonds;
> Equities of specified indexes, mainly large caps;
> Letters of credit from banks of a specified credit quality;
> Certificates of deposit drawn on institutions of a specified credit quality;
> Other money market instruments.
The bulk of the non-cash collateral market is made of highly rated government bonds, such as
German Bunds, French OAT, UK Gilts or US Treasury bonds.
Yet, equities, in particular blue-chip stocks in indices, account for a growing weight of non-cash
collateral, due to their inherent advantages of liquidity, transparency and ready available pric-
ing information. In addition, equities collateral offers good correlation when the securities lent
are also equities and potential diversification of risks. The predominance of non-cash collat-
eral, such as equities, has served lenders outside the US well during the recent credit crunch.
However, it should be noted that in the United States, many types of beneficial owners would
be unable to take equity collateral without regulatory change.
The overall securities lending market, which has for a long time been a cash collateral market, is
now progressively moving towards a non-cash collateral market (from 67% of cash collateral in
early 2007 to 57% in early 2010 according to Data Explorers information), as displayed in figure 34.
Overall in Europe, non-cash collateral has historically been the collateral of choice, with high
quality government and supranational bonds being the most popular forms of collateral. Today
cash collateral accounts for only about 20% of the European market.
By contrast, the United States continue to be predominantly a cash market, with cash col-
lateral accounting for 95% of the US market. The variety of habits around the world in terms
of nature of collateral used reflects historical legislation and tax incentives. Thus, US pension
funds regulated by the Department of Labour for example are not allowed to take securities ascollateral, whereas in the United Kingdom, until the mid 1990s, the manner in which reinvest-
ment earnings were taxed made cash collateral unattractive and pushed market participants
to adopt non-cash collateral.
CHALLENGES
& OPPORTUNITIES
3.4.4
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Figure 34: % of collateral taken as cash in securities lending transactions
Jan. 2007 Jan. 2008 Jan. 2009 Jan. 2010
Overall 67% 59% 59% 57%
Australia 75% 66% 85% 79%
Canada 37% 24% 20% 20%
Netherlands 48% 44% 50% 35%
Sweden 76% 55% 71% 75%
United Kingdom 18% 12% 15% 21%
United States 96% 92% 95% 95%
Source: Data Explorers, 2010
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It should be noted that contrary to the securities lending market, the OTC derivatives mar-
ket is still predominantly cash collateral orientated, with rates ranging from 80 to 90% of
cash collateral. ISDA’s latest estimations state that the collateral value in the OTC market is
USD3.2tr. If this market moves away from cash, then there will be a demand on the GC col-lateral, which will undoubtely benefit to the securities lending and repo market.
Cash collateral reinvestment in securities lending programs
In the case of cash collateral, securities lending transactions and cash collateral reinvest-
ment are often closely linked together. Indeed, a lender taking cash as collateral pays rebate
interest to the securities borrower, so the cash must be reinvested at a higher rate to make
any net return on the collateral. Typically lenders delegate reinvestment to their agents.
This process is illustrated in figure 35.
Cash collateral reinvestment obviously offers more attractive investment opportunities in
the context of low money market yields, as it is the case today.
Furthermore, reinvesting cash collateral in assets that carry a higher credit risk expects
higher returns.
Hence it is crucial that the beneficial owners understand the risk/rewards attached to any
cash program and customise their reinvestment program to match their level of risk toler-
ance. In other words, beneficial owners must ask themselves what they expect from cash
collateral: Only an insurance or an insurance plus an opportunity to make more money?
Risk versus return
Risk management considerations
The risks involved in repo and securities lending should neither be under- nor over-estimat-
ed. However, they are quantifiable and, if properly understood and monitored, manageable.
An outcome of the financial crisis from a lender perspective is the realisation that
risk needs to be identified, understood and controlled. Risk management is more im-
portant than ever.
The following table sums up the main risks which can occur in repo and securities lending,
splitting them in three distinct categories - market-related risks including counterparty and col-
lateral-related risks, operational risks and legal risks -, and the best practices to mitigate them:
3.4.5
3.5
3.5.1
FISCAL AND
OPERATIONAL ISSUES
Figure 35: Illustration of the cash collateral reinvestment process
LENDER
LENDER AGENT
BORROWER
MONEY MARKET
INSTRUMENTS
Cash collateral delivery
Securities lending
Cash
collateral
re-investment
SPREAD BETWEEN
INTEREST RATE PAID
AND INTEREST RATE
RECEIVED
Interest
rate
received
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The management of each of these risks must involve a detailed set of disciplines
throughout the lifecycle of a loan/repo transaction, using the different means of mitiga-
tion described above.
FISCAL AND
OPERATIONAL ISSUES
Figure 36: Identification of risks in repo & securities lending and means of mitigation
POSSIBLE RISK DEFINITION BEST PRACTICES TO MITIGATE RISK
MARKET-RELATED RISKS > Counterparty or credit risk : Risk that canarise when a counterpart defaults on itsobligations (e.g. in a securities lending
transaction, the borrower does not return
the loaned securities and there is insufficientcollateral to buy in the securities)
> Mismatch risk between the securities lentand the collateral (securities lending) orbetween the securities sold in repo and thecash received (repo transaction): Risk thatcan arise in case of price volatility, marketliquidity and exchange rate fluctuations if
the market price of the underlying securitiesor the collateral move adversely in a shortperiod of time, so that the value of collateralaccounts for less than the value of thesecurities lent (sec. lending) / of the cashreceived (repo)
> Collateral reinvestment risk: Risk thatcan occur in securities lending when thecollateral received is reinvested into assetsof lower quality or in instruments of non-diversified issuers
> Liquidity risk: Risk that the counterpartycannot settle an obligation for the full valuewhen it is due, for any reason (e.g. demandfor large quantities of securities or funds thatrenders the counterparty unable to meetits obligations when due, counterparty’sunability to unwind its short outright position)
> Credit evaluation: Careful analysis, selectionand on-going monitoring of participatingborrowers/buyers
> Indemnification insurance for borrower/buyer default
> Securities lending: Maintenance of sufficientmargin levels and collateral types dependingon the assets on loan, with continuousmonitoring of collateral levels (daily mark-to-market for securities collateral) and timelymargin calls
> Repo: Marking-to-market (re-pricing)on a daily basis to revalue repos usingcurrent market prices, reflect changes andre-calculate exposures. Mark-to-marketmargining allows repo buyers to call for
additional cash or securities assets from the seller
> Credit quality, maturity, liquidity anddiversification of eligible collateral
> Loan and collateral correlation
> VaR analysis
> Over-collateralisation to cover marketfluctuations (current market practicedictates collateral to be at least 105% of themarket value of the loaned securities)
> Strong procedures and control systems
> Securities lending: Collateral reinvestmentguidelines reflecting the beneficial owner’srisk and reward objectives
> Use of buffer securities (e.g. a higher bufferfor less liquid issues) or reserve cash
OPERATIONAL RISK > Delivery risk: Risk that can occur when:
- securities have been lent and collateral hasnot been received at the same time or prior
to the loan
or- collateral is being returned but the loan
return has not been received
- settlement fails
> Other operational risks: Risk thatdeficiencies in information systems, manualprocesses or internal controls could result inan unexpected loss or in penalties imposed
by a counterparty. Risks that can arise when the securities lending/repo players have not the adequate infrastructure (e.g. manualinterventions) and processes in place tocope with the business rules (e.g. recallin time to enable a sale of the securitieslent). Operational risks may be greatestwhen conducting securities lending/repo inforeign markets.
> Delivery Versus Payment (DVP) or DeliveryVersus Delivery (DVD) processes
> Pre-collateralisation (collateral received inadvance of delivering the loan securities)
> Use of triparty collateral agents
> Data granularity and quality to cope with thebusiness rules
> Straight Through Processing (STP)
> Use of intermediaries having the rightinfrastructure, high levels of automation andefficient processes (e.g. corporate actions,recalls/security substitutions)
LEGAL RISK > Risk of loss because of the unexpectedapplication of a law or regulation, orbecause a contract cannot be enforced
> In the case of cross-border trades, riskof not being compliant with the laws andregulations of the counterparty’s, asset orintermediary’s jurisdictions
> Written contract in the form of a robuststandard master agreement, addressing
the various legal aspects of securitieslending/repo and clarifying the roles andresponsibilities of the participants, as wellas the legal framework in a particularjurisdiction (e.g. GMSLA, GMRA)
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2000 VERSION
TBMA/ISMAGLOBAL MASTER REPURCHASE AGREEMENT
Dated as of _________________
Between:______________________ («Party A»)
and
______________________ («Party B»)
1. Applicability
(a) From time to time the parties hereto may enter into transactions in which one party, acting through a Designated Office, («Sel-
ler»)agrees to sell to the other, acting through a Designated Office, («Buyer») securities and financial instruments («Securities»)
(subject to paragraph 1(c), other than equities and Net Paying Securities) against the payment of the purchase price by Buyer to
Seller, with a simultaneous agreement by Buyer to sell to Seller Securities equivalent to such Securities at a date certain or ondemand against the payment of the repurchase price by Seller to Buyer.
(b) Each such transaction (which may be a repurchase transaction («Repurchase Transaction») or a buy and sell back transaction
(«Buy/Sell Back Transaction»)) shall be referred to herein as a «Transaction» and shall be governed by this Agreement, including
any supplemental terms or conditions contained in Annex I hereto, unless otherwise agreed in writing.
(c) If this Agreement may be applied to -
(i) Buy/Sell Back Transactions, this shall be specified in Annex I hereto, and the provisions of the Buy/Sell Back Annex shall
apply to such Buy/Sell Back Transactions;
(ii) Net Paying Securities, this shall be specified in Annex I hereto and the provisions of Annex I, paragraph 1(b) shall apply to
Transactions involving Net Paying Securities.
(d) If Transactions are to be effected under this Agreement by either party as an agent, this shall be specified in Annex I hereto, and
the provisions of the Agency Annex shall apply to such Agency Transactions.
2. Definitions
(a) «Act of Insolvency» shall occur with respect to any party hereto upon -
(i) I ts making a general assignment for the benefit of, entering into a reorganisation, arrangement, or composition with credi-
tors; or
(ii) Its admitting in writing that it is unable to pay its debts as they become due; or
(iii) Its seeking, consenting to or acquiescing in the appointment of any trustee, administrator, receiver or liquidator or analo-
gous officer of it or any material part of its property; or
(iv) The presentation or filing of a petition in respect of it (other than by the counterparty to this Agreement in respect of any
obligation under this Agreement) in any court or before any agency alleging or for the bankruptcy, winding-up or insolvency
of such party (or any analogous proceeding) or seeking any reorganisation, arrangement, composition, re-adjustment, admi-
nistration, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such petition (except
in the case of a petition for winding-up or any analogous proceeding, in respect of which no such 30 day period shall apply)
not having been stayed or dismissed within 30 days of its filing; or
(v) The appointment of a receiver, administrator, liquidator or trustee or analogous officer of such party or over all or any mate-rial part of such party’s property; or
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(vi) The convening of any meeting of its creditors for the purposes of considering a voluntary arrangement as referred to in se
tion 3 of the Insolvency Act 1986 (or any analogous proceeding);
(b) «Agency Transaction», the meaning specified in paragraph 1 of the Agency Annex;
(c) «Appropriate Market», the meaning specified in paragraph 10;
(d) «Base Currency», the currency indicated in Annex I hereto;
(e) «Business Day» -
(i) In relation to the settlement of any Transaction which is to be settled through Clearstream or Euroclear, a day on which
Clearstream or, as the case may be, Euroclear is open to settle business in the currency in which the Purchase Price and the
Repurchase Price are denominated;
(ii) In relation to the settlement of any Transaction which is to be settled through a settlement system other than Clearstream or
Euroclear, a day on which that settlement system is open to settle such Transaction;
(iii) In relation to any delivery of Securities not falling within (i) or (ii) above, a day on which banks are open for business in theplace where delivery of the relevant Securities is to be effected; and
(iv) In relation to any obligation to make a payment not falling within (i) or (ii) above, a day other than a Saturday or a Sunday
on which banks are open for business in the principal financial centre of the country of which the currency in which the
payment is denominated is the official currency and, if different, in the place where any account designated by the parties
for the making or receipt of the payment is situated (or, in the case of a payment in euro, a day on which TARGET operates);
(f) «Cash Margin», a cash sum paid to Buyer or Seller in accordance with paragraph 4;
(g) «Clearstream», Clearstream Banking, société anonyme, (previously Cedelbank) or any successor thereto;
(h) «Confirmation», the meaning specified in paragraph 3(b);
(i) «Contractual Currency», the meaning specified in paragraph 7(a);
(j) «Defaulting Party», the meaning specified in paragraph 10;
(k) «Default Market Value», the meaning specified in paragraph 10;
(l) «Default Notice», a written notice served by the non-Defaulting Party on the Defaulting Party under paragraph 10 stating that an
event shall be treated as an Event of Default for the purposes of this Agreement;
(m) «Default Valuation Notice», the meaning specified in paragraph 10;
(n) «Default Valuation Time», the meaning specified in paragraph 10;
(o) «Deliverable Securities», the meaning specified in paragraph 10;
(p) «Designated Office», with respect to a party, a branch or office of that party which is specified as such in Annex I hereto or such
other branch or office as may be agreed to by the parties;
(q) «Distributions», the meaning specified in sub-paragraph (w) below;
(r) «Equivalent Margin Securities», Securities equivalent to Securities previously transferred as Margin Securities;
(s) «Equivalent Securities», with respect to a Transaction, Securities equivalent to Purchased Securities under that Transaction. If
and to the extent that such Purchased Securities have been redeemed, the expression shall mean a sum of money equivalent to the proceeds of the redemption;
(t) Securities are «equivalent to» other Securities for the purposes of this Agreement if they are: (i) of the same issuer; (ii) part of the
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same issue; and (iii) of an identical type, nominal value, description and (except where otherwise stated) amount as those other
Securities, provided that -
(A) Securities will be equivalent to other Securities notwithstanding that those Securities have been redenominated into euro
or that the nominal value of those Securities has changed in connection with such redenomination; and
(B) Where Securities have been converted, subdivided or consolidated or have become the subject of a takeover or the holders
of Securities have become entitled to receive or acquire other Securities or other property or the Securities have become
subject to any similar event, the expression «equivalent to» shall mean Securities equivalent to (as defined in the provisions
of this definition preceding the proviso) the original Securities together with or replaced by a sum of money or Securities or
other property equivalent to (as so defined) that receivable by holders of such original Securities resulting from such event;
(u) «Euroclear», Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System or any succes-
sor thereto;
(v) «Event of Default», the meaning specified in paragraph 10;
(w) «Income», with respect to any Security at any time, all interest, dividends or other distributions thereon, but excluding distribu- tions which are a payment or repayment of principal in respect of the relevant securities («Distributions»);
(x) «Income Payment Date», with respect to any Securities, the date on which Income is paid in respect of such Securities or, in
the case of registered Securities, the date by reference to which particular registered holders are identified as being entitled to
payment of Income;
(y) «LIBOR», in relation to any sum in any currency, the one month London Inter Bank Offered Rate in respect of that currency as
quoted on page 3750 on the Bridge Telerate Service (or such other page as may replace page 3750 on that service) as of 11:00
a.m., London time, on the date on which it is to be determined;
(z) «Margin Ratio», with respect to a Transaction, the Market Value of the Purchased Securities at the time when the Transaction
was entered into divided by the Purchase Price (and so that, where a Transaction relates to Securities of different descriptions
and the Purchase Price is apportioned by the parties among Purchased Securities of each such description, a separate Margin
Ratio shall apply in respect of Securities of each such description), or such other proportion as the parties may agree with res-
pect to that Transaction;
(aa) «Margin Securities», in relation to a Margin Transfer, Securities reasonably acceptable to the party calling for such Margin
Transfer;
(bb) «Margin Transfer», any, or any combination of, the payment or repayment of Cash Margin and the transfer of Margin Securities
or Equivalent Margin Securities;
(cc) «Market Value», with respect to any Securities as of any time on any date, the price for such Securities at such time on such
date obtained from a generally recognised source agreed to by the parties (and where different prices are obtained for different
delivery dates, the price so obtainable for the earliest available such delivery date) (provided that the price of Securities thatare suspended shall (for the purposes of paragraph 4) be nil unless the parties otherwise agree and (for all other purposes)
shall be the price of those Securities as of close of business on the dealing day in the relevant market last preceding the date
of suspension) plus the aggregate amount of Income which, as of such date, has accrued but not yet been paid in respect of
the Securities to the extent not included in such price as of such date, and for these purposes any sum in a currency other than
the Contractual Currency for the Transaction in question shall be converted into such Contractual Currency at the Spot Rate
prevailing at the relevant time;
(dd) «Net Exposure», the meaning specified in paragraph 4(c);
(ee) The «Net Margin» provided to a party at any time, the excess (if any) at that time of (i) the sum of the amount of Cash Margin
paid to that party (including accrued interest on such Cash Margin which has not been paid to the other party) and the Market
Value of Margin Securities transferred to that party under paragraph 4(a) (excluding any Cash Margin which has been repaid to the other party and any Margin Securities in respect of which Equivalent Margin Securities have been transferred to the
other party) over (ii) the sum of the amount of Cash Margin paid to the other party (including accrued interest on such Cash
Margin which has not been paid by the other party) and the Market Value of Margin Securities transferred to the other party
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under paragraph 4(a) (excluding any Cash Margin which has been repaid by the other party and any Margin Securities in
respect of which Equivalent Margin Securities have been transferred by the other party) and for this purpose any amounts not
denominated in the Base Currency shall be converted into the Base Currency at the Spot Rate prevailing at the relevant time;
(ff) «Net Paying Securities», Securities which are of a kind such that, were they to be the subject of a Transaction to which para-
graph 5 applies, any payment made by Buyer under paragraph 5 would be one in respect of which either Buyer would or might
be required to make a withholding or deduction for or on account of taxes or duties or Seller might be required to make or
account for a payment for or on account of taxes or duties (in each case other than tax on overall net income) by reference to
such payment;
(gg) «Net Value», the meaning specified in paragraph 10;
(hh) «New Purchased Securities», the meaning specified in paragraph 8(a);
(ii) «Price Differential», with respect to any Transaction as of any date, the aggregate amount obtained by daily application of the
Pricing Rate for such Transaction to the Purchase Price for such Transaction (on a 360 day basis or 365 day basis in accordance
with the applicable ISMA convention, unless otherwise agreed between the parties for the Transaction), for the actual number
of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of calculation or, if earlier, the Repurchase Date;
(jj) «Pricing Rate», with respect to any Transaction, the per annum percentage rate for calculation of the Price Differential agreed to
by Buyer and Seller in relation to that Transaction;
(kk) «Purchase Date», with respect to any Transaction, the date on which Purchased Securities are to be sold by Seller to Buyer in
relation to that Transaction;
(ll) «Purchase Price», on the Purchase Date, the price at which Purchased Securities are sold or are to be sold by Seller to Buyer;
(mm) «Purchased Securities», with respect to any Transaction, the Securities sold or to be sold by Seller to Buyer under that Tran-
saction, and any New Purchased Securities transferred by Seller to Buyer under paragraph 8 in respect of that Transaction;
(nn) «Receivable Securities», the meaning specified in paragraph 10;
(oo) «Repurchase Date», with respect to any Transaction, the date on which Buyer is to sell Equivalent Securities to Seller in relation
to that Transaction;
(pp) «Repurchase Price», with respect to any Transaction and as of any date, the sum of the Purchase Price and the Price Differen-
tial as of such date;
(qq) «Special Default Notice», the meaning specified in paragraph 14;
(rr) «Spot Rate», where an amount in one currency is to be converted into a second currency on any date, unless the parties othe-
rwise agree, the spot rate of exchange quoted by Barclays Bank PLC in the London inter-bank market for the sale by it of suchsecond currency against a purchase by it of such first currency;
(ss) «TARGET», the Trans-European Automated Real-time Gross Settlement Express Transfer System;
(tt) «Term», with respect to any Transaction, the interval of time commencing with the Purchase Date and ending with the Repur-
chase Date;
(uu) «Termination», with respect to any Transaction, refers to the requirement with respect to such Transaction for Buyer to sell
Equivalent Securities against payment by Seller of the Repurchase Price in accordance with paragraph 3(f), and reference to a
Transaction having a «fixed term» or being «terminable upon demand» shall be construed accordingly;
(vv) «Transaction Costs», the meaning specified in paragraph 10;
(ww) «Transaction Exposure», with respect to any Transaction at any time during the period from the Purchase Date to the Repur-
chase Date (or, if later, the date on which Equivalent Securities are delivered to Seller or the Transaction is terminated under
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paragraph 10(g) or 10(h)), the difference between (i) the Repurchase Price at such time multiplied by the applicable Margin
Ratio (or, where the Transaction relates to Securities of more than one description to which different Margin Ratios apply, the
amount produced by multiplying the Repurchase Price attributable to Equivalent Securities of each such description by the
applicable Margin Ratio and aggregating the resulting amounts, the Repurchase Price being for this purpose attributed to
Equivalent Securities of each such description in the same proportions as those in which the Purchase Price was apportioned
among the Purchased Securities) and (ii) the Market Value of Equivalent Securities at such time. If (i) is greater than (ii), Buyer
has a Transaction Exposure for that Transaction equal to that excess. If (ii) is greater than (i), Seller has a Transaction Exposure
for that Transaction equal to that excess; and
(xx) Except in paragraphs 14(b)(i) and 18, references in this Agreement to «written» communications and communications «in wri-
ting» include communications made through any electronic system agreed between the parties which is capable of reproducing
such communication in hard copy form.
3. Initiation; Confirmation; Termination
(a) A Transaction may be entered into orally or in writing at the initiation of either Buyer or Seller.
(b) Upon agreeing to enter into a Transaction hereunder Buyer or Seller (or both), a shall have been agreed, shall promptly deliver to the other party written confirmation of such Transaction (a «Confirmation»). The Confirmation shall describe the Purchased
Securities (including CUSIP or ISIN or other identifying number or numbers, if any), identify Buyer and Seller and set forth -
(i) The Purchase Date;
(ii) The Purchase Price;
(iii) The Repurchase Date, unless the Transaction is to be terminable on demand (in which case the Confirmation shall state that
it is terminable on demand);
(iv) The Pricing Rate applicable to the Transaction;
(v) In respect of each party the details of the bank account[s] to which payments to be made hereunder are to be credited;
(vi) Where the Buy/Sell Back Annex applies, whether the Transaction is a Repurchase Transaction or a Buy/Sell Back Tran-
saction;
(vii) Where the Agency Annex applies, whether the Transaction is an Agency Transaction and, if so, the identity of the party
which is acting as agent and the name, code or identifier of the Principal; and
(viii) Any additional terms or conditions of the Transaction; and may be in the form of Annex II hereto or may be in any other form
to which the parties agree.
The Confirmation relating to a Transaction shall, together with this Agreement, constitute prima facie evidence of the terms
agreed between Buyer and Seller for that Transaction, unless objection is made with respect to the Confirmation promptly afterreceipt thereof. In the event of any conflict between the terms of such Confirmation and this Agreement, the Confirmation shall
prevail in respect of that Transaction and those terms only.
(c) On the Purchase Date for a Transaction, Seller shall transfer the Purchased Securities to Buyer or its agent against the payment
of the Purchase Price by Buyer.
(d) Termination of a Transaction will be effected, in the case of on demand Transactions, on the date specified for Termination in
such demand, and, in the case of fixed term Transactions, on the date fixed for Termination.
(e) In the case of on demand Transactions, demand for Termination shall be made by Buyer or Seller, by telephone or otherwise,
and shall provide for Termination to occur after not less than the minimum period as is customarily required for the settlement or
delivery of money or Equivalent Securities of the relevant kind.
(f) On the Repurchase Date, Buyer shall transfer to Seller or its agent Equivalent Securities against the payment of the Repurchase
Price by Seller (less any amount then payable and unpaid by Buyer to Seller pursuant to paragraph 5).
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applicable to the Original Transaction, be equal to the Market Value of such Securities on the Repricing Date;
(vi) The Repurchase Date, the Pricing Rate, the Margin Ratio and, subject as aforesaid, the other terms of the Repriced Transac-
tion shall be identical to those of the Original Transaction;
(vii) The obligations of the parties with respect to the delivery of the Purchased Securities and the payment of the Purchase
Price under the Repriced Transaction shall be set off against their obligations with respect to the delivery of Equivalent
Securities and payment of the Repurchase Price under the Original Transaction and accordingly only a net cash sum shall
be paid by one party to the other. Such net cash sum shall be paid within the period specified in sub-paragraph (g) above.
(k) The adjustment of a Transaction (the «Original Transaction») under this sub-paragraph shall be effected by the parties agreeing
that on the date on which the adjustment is to be made (the «Adjustment Date») the Original Transaction shall be terminated and
they shall enter into a new Transaction (the «Replacement Transaction») in accordance with the following provisions -
(i) The Original Transaction shall be terminated on the Adjustment Date on such terms as the parties shall agree on or before
the Adjustment Date;
(ii) The Purchased Securities under the Replacement Transaction shall be such Securities as the parties shall agree on orbefore the Adjustment Date (being Securities the aggregate Market Value of which at the Adjustment Date is substantially
equal to the Repurchase Price under the Original Transaction at the Adjustment Date multiplied by the Margin Ratio appli-
cable to the Original Transaction);
(iii) The Purchase Date under the Replacement Transaction shall be the Adjustment Date;
(iv) The other terms of the Replacement Transaction shall be such as the parties shall agree on or before the Adjustment Date;
and
(v) The obligations of the parties with respect to payment and delivery of Securities on the Adjustment Date under the Original
Transaction and the Replacement Transaction shall be settled in accordance with paragraph 6 within the minimum period
specified in sub-paragraph (g) above.
5. Income Payments
Unless otherwise agreed -
(i) Where the Term of a particular Transaction extends over an Income Payment Date in respect of any Securities subject to
that Transaction, Buyer shall on the date such Income is paid by the issuer transfer to or credit to the account of Seller an
amount equal to (and in the same currency as) the amount paid by the issuer;
(ii) Where Margin Securities are transferred from one party («the first party») to the other party («the second party») and an
Income Payment Date in respect of such Securities occurs before Equivalent Margin Securities are transferred by the se-
cond party to the first party, the second party shall on the date such Income is paid by the issuer transfer to or credit to the
account of the first party an amount equal to (and in the same currency as) the amount paid by the issuer;
and for the avoidance of doubt references in this paragraph to the amount of any Income paid by the issuer of any Securities
shall be to an amount paid without any withholding or deduction for or on account of taxes or duties notwithstanding that a
payment of such Income made in certain circumstances may be subject to such a withholding or deduction.
6. Payment and Transfer
(a) Unless otherwise agreed, all money paid hereunder shall be in immediately available freely convertible funds of the relevant
currency. All Securities to be transferred hereunder (i) shall be in suitable form for transfer and shall be accompanied by duly
executed instruments of transfer or assignment in blank (where required for transfer) and such other documentation as the
transferee may reasonably request, or (ii) shall be transferred through the book entry system of Euroclear or Clearstream, or
(iii) shall be transferred through any other agreed securities clearance system or (iv) shall be transferred by any other methodmutually acceptable to Seller and Buyer.
(b) Unless otherwise agreed, all money payable by one party to the other in respect of any Transaction shall be paid free and clear
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of, and without withholding or deduction for, any taxes or duties of whatsoever nature imposed, levied, collected, withheld or
assessed by any authority having power to tax, unless the withholding or deduction of such taxes or duties is required by law.
In that event, unless otherwise agreed, the paying party shall pay such additional amounts as will result in the net amounts re-
ceivable by the other party (after taking account of such withholding or deduction) being equal to such amounts as would have
been received by it had no such taxes or duties been required to be withheld or deducted.
(c) Unless otherwise agreed in writing between the parties, under each Transaction transfer of Purchased Securities by Seller and
payment of Purchase Price by Buyer against the transfer of such Purchased Securities shall be made simultaneously and trans-
fer of Equivalent Securities by Buyer and payment of Repurchase Price payable by Seller against the transfer of such Equivalent
Securities shall be made simultaneously.
(d) Subject to and without prejudice to the provisions of sub-paragraph 6(c), either party may from time to time in accordance with
market practice and in recognition of the practical difficulties in arranging simultaneous delivery of Securities and money waive
in relation to any Transaction its rights under this Agreement to receive simultaneous transfer and/or payment provided that
transfer and/or payment shall, notwithstanding such waiver, be made on the same day and provided also that no such waiver in
respect of one Transaction shall affect or bind it in respect of any other Transaction.
(e) The parties shall execute and deliver all necessary documents and take all necessary steps to procure that all right, title andinterest in any Purchased Securities, any Equivalent Securities, any Margin Securities and any Equivalent Margin Securities
shall pass to the party to which transfer is being made upon transfer of the same in accordance with this Agreement, free from
all liens, claims, charges and encumbrances.
(f) Notwithstanding the use of expressions such as «Repurchase Date», «Repurchase Price», «margin», «Net Margin», «Margin
Ratio» and «substitution», which are used to reflect terminology used in the market for transactions of the kind provided for in this
Agreement, all right, title and interest in and to Securities and money transferred or paid under this Agreement shall pass to the
transferee upon transfer or payment, the obligation of the party receiving Purchased Securities or Margin Securities being an
obligation to transfer Equivalent Securities or Equivalent Margin Securities.
(g) Time shall be of the essence in this Agreement.
(h) Subject to paragraph 10, all amounts in the same currency payable by each party to the other under any Transaction or otherwise
under this Agreement on the same date shall be combined in a single calculation of a net sum payable by one party to the other
and the obligation to pay that sum shall be the only obligation of either party in respect of those amounts.
(i) Subject to paragraph 10, all Securities of the same issue, denomination, currency and series, transferable by each party to the
other under any Transaction or hereunder on the same date shall be combined in a single calculation of a net quantity of Securi-
ties transferable by one party to the other and the obligation to transfer the net quantity of Securities shall be the only obligation
of either party in respect of the Securities so transferable and receivable.
(j) If the parties have specified in Annex I hereto that this paragraph 6(j) shall apply, each obligation of a party under this Agreement
(other than an obligation arising under paragraph 10) is subject to the condition precedent that none of those events specified
in paragraph 10(a) which are identified in Annex I hereto for the purposes of this paragraph 6(j) (being events which, upon the
serving of a Default Notice, would be an Event of Default with respect to the other party) shall have occurred and be continuingwith respect to the other party.
7. Contractual Currency
(a) All the payments made in respect of the Purchase Price or the Repurchase Price of any Transaction shall be made in the cur-
rency of the Purchase Price (the «Contractual Currency») save as provided in paragraph 10(c)(ii). Notwithstanding the foregoing,
the payee of any money may, at its option, accept tender thereof in any other currency, provided, however, that, to the extent
permitted by applicable law, the obligation of the payer to pay such money will be discharged only to the extent of the amount of
the Contractual Currency that such payee may, consistent with normal banking procedures, purchase with such other currency
(after deduction of any premium and costs of exchange) for delivery within the customary delivery period for spot transactions
in respect of the relevant currency.
(b) If for any reason the amount in the Contractual Currency received by a party, including amounts received after conversion of any
recovery under any judgment or order expressed in a currency other than the Contractual Currency, falls short of the amount in
the Contractual Currency due and payable, the party required to make the payment will, as a separate and independent obliga-
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tion, to the extent permitted by applicable law, immediately transfer such additional amount in the Contractual Currency as may
be necessary to compensate for the shortfall.
(c) If for any reason the amount in the Contractual Currency received by a party exceeds the amount of the Contractual Currency
due and payable, the party receiving the transfer will refund promptly the amount of such excess.
8. Substitution
(a) A Transaction may at any time between the Purchase Date and Repurchase Date, if Seller so requests and Buyer so agrees,
be varied by the transfer by Buyer to Seller of Securities equivalent to the Purchased Securities, or to such of the Purchased
Securities as shall be agreed, in exchange for the transfer by Seller to Buyer of other Securities of such amount and description
as shall be agreed («New Purchased Securities») (being Securities having a Market Value at the date of the variation at least
equal to the Market Value of the Equivalent Securities transferred to Seller).
(b) Any variation under sub-paragraph (a) above shall be effected, subject to paragraph 6 (d), by the simultaneous transfer of the
Equivalent Securities and New Purchased Securities concerned.
(c) A Transaction which is varied under sub-paragraph (a) above shall thereafter continue in effect as though the Purchased Secu-rities under that Transaction consisted of or included the New Purchased Securities instead of the Securities in respect of which
Equivalent Securities have been transferred to Seller.
(d) Where either party has transferred Margin Securities to the other party it may at any time before Equivalent Margin Securities
are transferred to it under paragraph 4 request the other party to transfer Equivalent Margin Securities to it in exchange for the
transfer to the other party of new Margin Securities having a Market Value at the time of transfer at least equal to that of such
Equivalent Margin Securities. If the other party agrees to the request, the exchange shall be effected, subject to paragraph 6(d),
by the simultaneous transfer of the Equivalent Margin Securities and new Margin Securities concerned. Where either or both
of such transfers is or are effected through a settlement system in circumstances which under the rules and procedures of that
settlement system give rise to a payment by or for the account of one party to or for the account of the other party, the parties
shall cause such payment or payments to be made outside that settlement system, for value the same day as the payment made
through that settlement system, as shall ensure that the exchange of Equivalent Margin Securities and new Margin Securities
effected under this sub-paragraph does not give rise to any net payment of cash by either party to the other.
9. Representations
Each party represents and warrants to the other that -
(a) It is duly authorised to execute and deliver this Agreement, to enter into the Transactions contemplated hereunder and to per-
form its obligations hereunder and thereunder and has taken all necessary action to authorise such execution, delivery and
performance;
(b) It will engage in this Agreement and the Transactions contemplated hereunder (other than Agency Transactions) as principal;
(c) The person signing this Agreement on its behalf is, and any person representing it in entering into a Transaction will be, dulyauthorised to do so on its behalf;
(d) It has obtained all authorisations of any governmental or regulatory body required in connection with this Agreement and the
Transactions contemplated hereunder and such authorisations are in full force and effect;
(e) The execution, delivery and performance of this Agreement and the Transactions contemplated hereunder will not violate any
law, ordinance, charter, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are
affected;
(f) It has satisfied itself and will continue to satisfy itself as to the tax implications of the Transactions contemplated hereunder;
(g) In connection with this Agreement and each Transaction -
(i) Unless there is a written agreement with the other party to the contrary, it isnot relying on any advice (whether written or
oral) of the other party, other than the representations expressly set out in this Agreement;
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(ii) It has made and will make its own decisions regarding the entering into of any Transaction based upon its own judgment and
upon advice from such professional advisers as it has deemed it necessary to consult;
(iii) It understands the terms, conditions and risks of each Transaction and is willing to assume (financially and otherwise) those
risks; and
(h) At the time of transfer to the other party of any Securities it will have the full and unqualified right to make such transfer and that
upon such transfer of Securities the other party will receive all right, title and interest in and to those Securities free of any lien,
claim, charge or encumbrance.
On the date on which any Transaction is entered into pursuant hereto, and on each day on which Securities, Equivalent Securi-
ties, Margin Securities or Equivalent Margin Securities are to be transferred under any Transaction, Buyer and Seller shall each
be deemed to repeat all the foregoing representations. For the avoidance of doubt and notwithstanding any arrangements which
Seller or Buyer may have with any third party, each party will be l iable as a principal for its obligations under this Agreement and
each Transaction.
10. Events of Default
(a) If any of the following events (each an «Event of Default») occurs in relation to either party (the «Defaulting Party», the other partybeing the «non-Defaulting Party») whether acting as Seller or Buyer -
(i) Buyer fails to pay the Purchase Price upon the applicable Purchase Date or Seller fails to pay the Repurchase Price upon
the applicable Repurchase Date, and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or
(ii) If the parties have specified in Annex I hereto that this sub-paragraph shall apply, Seller fails to deliver Purchased Securities
on the Purchase Date or Buyer fails to deliver Equivalent Securities on the Repurchase Date, and the non-Defaulting Party
serves a Default Notice on the Defaulting Party; or
(iii) Seller or Buyer fails to pay when due any sum payable under sub-paragraph (g) or (h) below, and the non-Defaulting Party
serves a Default Notice on the Defaulting Party; or
(iv) Seller or Buyer fails to comply with paragraph 4 and the non-Defaulting Party serves a Default Notice on the Defaulting
Party; or
(v) Seller or Buyer fails to comply with paragraph 5 and the non-Defaulting Party serves a Default Notice on the Defaulting
Party; or
(vi) An Act of Insolvency occurs with respect to Seller or Buyer and (except in the case of an Act of Insolvency which is the
presentation of a petition for winding-up or any analogous proceeding or the appointment of a liquidator or analogous officer
of the Defaulting Party in which case no such notice shall be required) the non-Defaulting Party serves a Default Notice on
the Defaulting Party; or
(vii) Any representations made by Seller or Buyer are incorrect or untrue in any material respect when made or repeated or
deemed to have been made or repeated, and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or
(viii) Seller or Buyer admits to the other that it is unable to, or intends not to, perform any of its obligations hereunder and/or in
respect of any Transaction and the non-Defaulting Party serves a Default Notice on the Defaulting Party; or
(ix) Seller or Buyer is suspended or expelled from membership of or participation in any securities exchange or association or
other self regulating organisation, or suspended from dealing in securities by any government agency, or any of the assets
of either Seller or Buyer or the assets of investors held by, or to the order of, Seller or Buyer are transferred or ordered to
be transferred to a trustee by a regulatory authority pursuant to any securities regulating legislation and the non-Defaulting
Party serves a Default Notice on the Defaulting Party; or
(x) Seller or Buyer fails to perform any other of its obligations hereunder and does not remedy such failure within 30 days after
notice is given by the non- Defaulting Party requiring it to do so, and the non-Defaulting Party serves a Default Notice on theDefaulting Party; then sub-paragraphs (b) to (f) below shall apply.
(b) The Repurchase Date for each Transaction hereunder shall be deemed immediately to occur and, subject to the following pro-
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visions, all Cash Margin (including interest accrued) shall be immediately repayable and Equivalent Margin Securities shall be
immediately deliverable (and so that, where this sub-paragraph applies, performance of the respective obligations of the parties
with respect to the delivery of Securities, the payment of the Repurchase Prices for any Equivalent Securities and the repayment
of any Cash Margin shall be effected only in accordance with the provisions of sub-paragraph (c) below).
(c) (i) The Default Market Values of the Equivalent Securities and any Equivalent Margin Securities to be transferred, the amount
of any Cash Margin (including the amount of interest accrued) to be transferred and the Repurchase Prices to be paid by
each party shall be established by the non-Defaulting Party for all Transactions as at the Repurchase Date; and
(ii) On the basis of the sums so established, an account shall be taken (as at the Repurchase Date) of what is due from each
party to the other under this Agreement (on the basis that each party’s claim against the other in respect of the transfer to it
of Equivalent Securities or Equivalent Margin Securities under this Agreement equals the Default Market Value therefor) and
the sums due from one party shall be set off against the sums due from the other and only the balance of the account shall be
payable (by the party having the claim valued at the lower amount pursuant to the foregoing) and such balance shall be due
and payable on the next following Business Day. For the purposes of this calculation, all sums not denominated in the Base
Currency shall be converted into the Base Currency on the relevant date at the Spot Rate prevailing at the relevant time.
(d) For the purposes of this Agreement, the «Default Market Value» of any Equivalent Securities or Equivalent Margin Securitiesshall be determined in accordance with sub-paragraph (e) below, and for this purpose -
(i) The «Appropriate Market» means, in relation to Securities of any description, the market which is the most appropriate
market for Securities of that description, as determined by the non-Defaulting Party;
(ii) The «Default Valuation Time» means, in relation to an Event of Default, the close of business in the Appropriate Market on
the fifth dealing day after the day on which that Event of Default occurs or, where that Event of Default is the occurrence of
an Act of Insolvency in respect of which under paragraph 10(a) no notice is required from the non-Defaulting Party in order
for such event to constitute an Event of Default, the close of business on the fifth dealing day after the day on which the
non-Defaulting Party first became aware of the occurrence of such Event of Default;
(iii) «Deliverable Securities» means Equivalent Securities or Equivalent Margin Securities to be delivered by the Defaulting
Party;
(iv) «Net Value» means at any time, in relation to any Deliverable Securities or Receivable Securities, the amount which, in the
reasonable opinion of the non-Defaulting Party, represents their fair market value, having regard to such pricing sources
and methods (which may include, without limitation, available prices for Securities with similar maturities, terms and credit
characteristics as the relevant Equivalent Securities or Equivalent Margin Securities) as the non-Defaulting Party considers
appropriate, less, in the case of Receivable Securities, or plus, in the case of Deliverable Securities, all Transaction Costs
which would be incurred in connection with the purchase or sale of such Securities;
(v) «Receivable Securities» means Equivalent Securities or Equivalent Margin Securities to be delivered to the Defaulting Party;
and
(vi) «Transaction Costs» in relation to any transaction contemplated in paragraph 10(d) or (e) means the reasonable costs, com-mission, fees and expenses (including any mark-up or mark-down) that would be incurred in connection with the purchase
of Deliverable Securities or sale of Receivable Securities, calculated on the assumption that the aggregate thereof is the
least that could reasonably be expected to be paid in order to carry out the transaction;
(e) (i) If between the occurrence of the relevant Event of Default and the Default Valuation Time the non-Defaulting Party gives to
the Defaulting Party a written notice (a «Default Valuation Notice») which –
(A) States that, since the occurrence of the relevant Event of Default, the non-Defaulting Party has sold, in the case of Re-
ceivable Securities, or purchased, in the case of Deliverable Securities, Securities which form part of the same issue
and are of an identical type and description as those Equivalent Securities or Equivalent Margin Securities, and that the
non-Defaulting Party elects to treat as the Default Market Value -
(aa) In the case of Receivable Securities, the net proceeds of such sale after deducting all reasonable costs, fees and
expenses incurred in connection therewith (provided that, where the Securities sold are not identical in amount to
the Equivalent Securities or Equivalent Margin Securities, the non-Defaulting Party may either (x) elect to treat such
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net proceeds of sale divided by the amount of Securities sold and multiplied by the amount of the Equivalent Secu-
rities or Equivalent Margin Securities as the Default Market Value or (y) elect to treat such net proceeds of sale of
the Equivalent Securities or Equivalent Margin Securities actually sold as the Default Market Value of that proportion
of the Equivalent Securities or Equivalent Margin Securities, and, in the case of (y), the Default Market Value of the
balance of the Equivalent Securities or Equivalent Margin Securities shall be determined separately in accordance
with the provisions of this paragraph 10(e) and accordingly may be the subject of a separate notice (or notices) under
this paragraph 10(e)(i)); or
(bb) In the case of Deliverable Securities, the aggregate cost of such purchase, including all reasonable costs, fees
and expenses incurred in connection therewith (provided that, where the Securities purchased are not identical in
amount to the Equivalent Securities or Equivalent Margin Securities, the non-Defaulting Party may either (x) elect to
treat such aggregate cost divided by the amount of Securities sold and multiplied by the amount of the Equivalent
Securities or Equivalent Margin Securities as the Default Market Value or (y) elect to treat the aggregate cost of pur-
chasing the Equivalent Securities or Equivalent Margin Securities actually purchased as the Default Market Value of
that proportion of the Equivalent Securities or Equivalent Margin Securities, and, in the case of (y), the Default Market
Value of the balance of the Equivalent Securities or Equivalent Margin Securities shall be determined separately in
accordance with the provisions of this paragraph 10(e) and accordingly may be the subject of a separate notice (or
notices) under this paragraph 10(e)(i));
(B) States that the non-Defaulting Party has received, in the case of Deliverable Securities, offer quotations or, in the case of
Receivable Securities, bid quotations in respect of Securities of the relevant description from two or more market makers
or regular dealers in the Appropriate Market in a commercially reasonable size (as determined by the non-Defaulting
Party) and specifies -
(aa) The price or prices quoted by each of them for, in the case of Deliverable Securities, the sale by the relevant market
marker or dealer of such Securities or, in the case of Receivable Securities, the purchase by the relevant market
maker or dealer of such Securities;
(bb) The Transaction Costs which would be incurred in connection with such a transaction; and
(cc) That the non-Defaulting Party elects to treat the price so quoted (or, where more than one price is so quoted, the
arithmetic mean of the prices so quoted), after deducting, in the case of Receivable Securities, or adding, in the case
of Deliverable Securities, such Transaction Costs, as the Default Market Value of the relevant Equivalent Securities
or Equivalent Margin Securities; or
(C) States –
(aa) That either (x) acting in good faith, the non-Defaulting Party has endeavoured but been unable to sell or purchase
Securities in accordance with sub-paragraph (i)(A) above or to obtain quotations in accordance with sub-paragraph
(i)(B) above (or both) or (y) the non-Defaulting Party has determined that it would not be commercially reasonable to
obtain such quotations, or that it would not be commercially reasonable to use any quotations which it has obtained
under sub-paragraph (i)(B) above; and
(bb) That the non-Defaulting Party has determined the Net Value of the relevant Equivalent Securities or Equivalent Mar-
gin Securities (which shall be specified) and that the non- Defaulting Party elects to treat such Net Value as the
Default Market Value of the relevant Equivalent Securities or Equivalent Margin Securities, then the Default Market
Value of the relevant Equivalent Securities or Equivalent Margin Securities shall be an amount equal to the Default
Market Value specified in accordance with (A), (B)(cc) or, as the case may be, (C)(bb) above.
(ii) If by the Default Valuation Time the non-Defaulting Party has not given a Default Valuation Notice, the Default Market Value
of the relevant Equivalent Securities or Equivalent Margin Securities shall be an amount equal to their Net Value at the
Default Valuation Time; provided that, if at the Default Valuation Time the non-Defaulting Party reasonably determines that,
owing to circumstances affecting the market in the Equivalent Securities or Equivalent Margin Securities in question, it is not
possible for the non-Defaulting Party to determine a Net Value of such Equivalent Securities or Equivalent Margin Securities
which is commercially reasonable, the Default Market Value of such Equivalent Securities or Equivalent Margin Securitiesshall be an amount equal to their Net Value as determined by the non-Defaulting Party as soon as reasonably practicable
after the Default Valuation Time.
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11. Tax Event
(a) This paragraph shall apply if either party notifies the other that -
(i) Any action taken by a taxing authority or brought in a court of competent jurisdiction (regardless of whether such action is
taken or brought with respect to a party to this Agreement); or
(ii) A change in the fiscal or regulatory regime (including, but not limited to, a change in law or in the general interpretation
of law but excluding any change in any rate of tax), has or will, in the notifying party’s reasonable opinion, have a material
adverse effect on that party in the context of a Transaction.
(b) If so requested by the other party, the notifying party will furnish the other with an opinion of a suitably qualified adviser that an
event referred to in sub-paragraph (a)(i) or (ii) above has occurred and affects the notifying party.
(c) Where this paragraph applies, the party giving the notice referred to in sub-paragraph (a) may, subject to sub-paragraph (d)
below, terminate the Transaction with effect from a date specified in the notice, not being earlier (unless so agreed by the other
party) than 30 days after the date of the notice, by nominating that date as the Repurchase Date.
(d) If the party receiving the notice referred to in sub-paragraph (a) so elects, it may override that notice by giving a counter-notice
to the other party. If a counter-notice is given, the party which gives the counter-notice will be deemed to have agreed to indem-
nify the other party against the adverse effect referred to in sub-paragraph (a) so far as relates to the relevant Transaction and
the original Repurchase Date will continue to apply.
(e) Where a Transaction is terminated as described in this paragraph, the party which has given the notice to terminate shall in-
demnify the other party against any reasonable legal and other professional expenses incurred by the other party by reason of
the termination, but the other party may not claim any sum by way of consequential loss or damage in respect of a termination
in accordance with this paragraph.
(f) This paragraph is without prejudice to paragraph 6(b) (obligation to pay additional amounts if withholding or deduction required);
but an obligation to pay such additional amounts may, where appropriate, be a circumstance which causes this paragraph to
apply.
12. Interest
To the extent permitted by applicable law, if any sum of money payable hereunder or under any Transaction is not paid when due,
interest shall accrue on the unpaid sum as a separate debt at the greater of the Pricing Rate for the Transaction to which such
sum relates (where such sum is referable to a Transaction) and LIBOR on a 360 day basis or 365 day basis in accordance with the
applicable ISMA convention, for the actual number of days during the period from and including the date on which payment was
due to, but excluding, the date of payment.
13. Single Agreement
Each party acknowledges that, and has entered into this Agreement and will enter into each Transaction hereunder in conside-ration of and in reliance upon the fact that all Transactions hereunder constitute a single business and contractual relationship
and are made in consideration of each other. Accordingly, each party agrees (i) to perform all of its obligations in respect of each
Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all
Transactions hereunder, and (ii) that payments, deliveries and other transfers made by either of them in respect of any Transaction
shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transac-
tions hereunder.
14. Notices and Other Communications
(a) Any notice or other communication to be given under this Agreement -
(i) Shall be in the English language, and except where expressly otherwise provided in this Agreement, shall be in writing;
(ii) May be given in any manner described in sub-paragraphs (b) and (c) below;
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(iii) Shall be sent to the party to whom it is to be given at the address or number, or in accordance with the electronic messaging
details, set out in Annex I hereto.
(b) Subject to sub-paragraph (c) below, any such notice or other communication shall be effective -
(i) If in writing and delivered in person or by courier, at the time when it is delivered;
(ii) If sent by telex, at the time when the recipient’s answerback is received;
(iii) If sent by facsimile transmission, at the time when the transmission is received by a responsible employee of the recipient
in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission
report generated by the sender’s facsimile machine);
(iv) If sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), at the time when that
mail is delivered or its delivery is attempted;
(v) If sent by electronic messaging system, at the time that electronic message is received; except that any notice or commu-
nication which is received, or delivery of which is attempted, after close of business on the date of receipt or attempteddelivery or on a day which is not a day on which commercial banks are open for business in the place where that notice or
other communication is to be given shall be treated as given at the opening of business on the next following day which is
such a day.
(c) If -
(i) There occurs in relation to either party an event which, upon the service of a Default Notice, would be an Event of Default;
and
(ii) The non-Defaulting Party, having made all practicable efforts to do so, including having attempted to use at least two of
the methods specified in sub-paragraph (b)(ii), (iii) or (v), has been unable to serve a Default Notice by one of the methods
specified in those sub-paragraphs (or such of those methods as are normally used by the non-Defaulting Party when com-
municating with the Defaulting Party), the non-Defaulting Party may sign a written notice (a «Special Default Notice») which
(aa) Specifies the relevant event referred to in paragraph 10(a) which has occurred in relation to the Defaulting Party;
(bb) States that the non-Defaulting Party, having made all practicable efforts to do so, including having attempted to use at
least two of the methods specified in sub-paragraph (b)(ii), (iii) or (v), has been unable to serve a Default Notice by one
of the methods specified in those sub-paragraphs (or such of those methods as are normally used by the non-Defaulting
Party when communicating with the Defaulting Party);
(cc) Specifies the date on which, and the time at which, the Special Default Notice is signed by the non-Defaulting Party; and
(dd) States that the event specified in accordance with sub-paragraph (aa) above shall be treated as an Event of Default
with effect from the date and time so specified. On the signature of a Special Default Notice the relevant event shallbe treated with effect from the date and time so specified as an Event of Default in relation to the Defaulting Party, and
accordingly references in paragraph 10 to a Default Notice shall be treated as including a Special Default Notice. A
Special Default Notice shall be given to the Defaulting Party as soon as practicable after it is signed.
(d) Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system details at
which notices or other communications are to be given to it.
15. Entire Agreement; Severability
This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for Transac-
tions. Each provision and agreement herein shall be treated as separate from any other provision or agreement herein and shall be
enforceable notwithstanding the unenforceability of any such other provision or agreement.
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ANNEX I
Supplemental Terms or Conditions
Paragraph references are to paragraphs in the Agreement.
1. The following elections shall apply -
[(a) Paragraph 1(c)(i). Buy/Sell Back Transactions [ may/ may not] be effected under this Agreement, and accordingly the Buy/
Sell Back Annex [ shall/ shall not] apply.]*
[(b) Paragraph 1(c)(ii). Transactions in Net Paying Securities [may/may not] be effected under this Agreement, and accordingly
the provisions of sub-paragraphs (i) and (ii) below [ shall/ shall not] apply.
(i) The phrase «other than equities and Net Paying Securities» shall be replaced by the phrase «other than equities».
(ii) In the Buy/Sell Back Annex the following words shall be added to the end of the definition of the expression «IR»: «and
for the avoidance of doubt the reference to the amount of Income for these purposes shall be to an amount paid withoutwithholding or deduction for or on account of taxes or duties notwithstanding that a payment of such Income made in
certain circumstances may be subject to such a withholding or deduction».]*
[(c) Paragraph 1(d). Agency Transactions [ may/ may not] be effected under this Agreement, and accordingly the Agency Annex
[ shall/ shall not] apply.]*
(d) Paragraph 2(d). The Base Currency shall be: _____.
(e) Paragraph 2(p). [list Buyer’s and Seller’s Designated Offices]
(f) Paragraph 2(cc). The pricing source for calculation of Market Value shall be: _____.
(g) Paragraph 2(rr). Spot rate to be: _____.
(h) Paragraph 3(b). [Seller/Buyer/both Seller and Buyer]* to deliver Confirmation.
(i) Paragraph 4(f). Interest rate on Cash Margin to be [ ]% for _____ currency.
[ ]% for _____ currency.
Interest to be payable [payment intervals and dates].
(j) Paragraph 4(g). Delivery period for margin calls to be: _____.
[(k) Paragraph 6(j). Paragraph 6(j) shall apply and the events specified in paragraph 10(a) identified for the purposes of paragraph6(j) shall be those set out in sub paragraphs [ ] of paragraph 10(a) of the Agreement.]*
The purpose of this [ letter]/ facsimile]/ telex], a «Confirmation» for the purposes of the Agreement, is to set forth the terms and
conditions of the above repurchase transaction entered into between us on the Contract Date referred to below. This Confirmation
supplements and forms part of, and is subject to, the Global Master Repurchase Agreement as entered into between us as of [ ] as the same may be amended from time to time (the «Agreement»). All provisions contained in the Agreement govern this Confirmation
except as expressly modified below. Words and phrases defined in the Agreement and used in this Confirmation shall have the same
meaning herein as in the Agreement.
1. Contract Date:
2. Purchased Securities [state type[s] and nominal value[s]]:
3. CUSIP, ISIN or other identifying number[s]:
4. Buyer:
5. Seller:
6. Purchase Date:
7. Purchase Price:
8. Contractual Currency:
[9. Repurchase Date]:*
[10. Terminable on demand]:*
11. Pricing Rate:
[12. Sell Back Price:]*
13. Buyer’s Bank Account[s] Details:
14. Seller’s Bank Account[s] Details:
[15. The Transaction is an Agency Transaction. [Name of Agent] is acting as agent for
[name or identifier of Principal]]:*
[16. Additional Terms]:*
Yours faithfully,
* Delete as appropriate
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GLOBAL MASTER SECURITIES LENDING AGREEMENT
AGREEMENT
BETWEEN:
(Party A) a company incorporated under the laws of acting through one or more Designated Offices; and
(Party B) a company incorporated under the laws of acting through one or more Designated Offices.
1. Applicability
1.1 From time to time the Parties acting through one or more Designated Offices may enter into transactions in which one party
(Lender) will transfer to the other (Borrower) securities and financial instruments (Securities) against the transfer of Collateral
(as defined in paragraph 2) with a simultaneous agreement by Borrower to transfer to Lender Securities equivalent to such
Securities on a fixed date or on demand against the transfer to Borrower by Lender of assets equivalent to such Collateral.
1.2 Each such transaction shall be referred to in this Agreement as a Loan and shall be governed by the terms of this Agreement,including the supplemental terms and conditions contained in the Schedule and any Addenda or Annexes attached hereto,
unless otherwise agreed in writing. In the event of any inconsistency between the provisions of an Addendum or Annex and
this Agreement, the provisions of such Addendum or Annex shall prevail unless the Parties otherwise agree.
1.3 Either Party may perform its obligations under this Agreement either directly or through a Nominee.
2. Interpretation
2.1 In this Agreement:
Act of Insolvency means in relation to either Party:
(a) Its making a general assignment for the benefit of, or entering into a reorganisation, arrangement, or composition with
creditors; or
(b) Its stating in writing that it is unable to pay its debts as they become due; or
(c) Its seeking, consenting to or acquiescing in the appointment of any trustee, administrator, receiver or liquidator or
analogous officer of it or any material part of its property; or
(d) The presentation or filing of a petition in respect of it (other than by the other Party to this Agreement in respect of
any obligation under this Agreement) in any court or before any agency alleging or for the bankruptcy, winding-up or
insolvency of such Party (or any analogous proceeding) or seeking any reorganisation, arrangement, composition,
re-adjustment, administration, liquidation, dissolution or similar relief under any present or future statute, law or
regulation, such petition not having been stayed or dismissed within 30 days of its filing (except in the case of apetition for winding-up or any analogous proceeding in respect of which no such 30 day period shall apply); or
(e) The appointment of a receiver, administrator, liquidator or trustee or analogous officer of such Party over all or any
material part of such Party’s property; or
(f) The convening of any meeting of its creditors for the purpose of considering a voluntary arrangement as referred to in
Section 3 of the Insolvency Act 1986 (or any analogous proceeding);
Agency Annex means the Annex to this Agreement published by the International Securities Lending Association and
providing for Lender to act as agent for a third party in respect of one or more Loans;
Alternative Collateral means Collateral having a Market Value equal to the Collateral delivered pursuant to paragraph 5and provided by way of substitution in accordance with the provisions of paragraph 5.3;
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provided that the price of Securities, Equivalent Securities, Collateral or Equivalent Collateral that are suspended or
that cannot legally be transferred or that are transferred or required to be transferred to a government, trustee or
third party (whether by reason of nationalisation, expropriation or otherwise) shall for all purposes be a commercially
reasonable price agreed between the Parties, or absent agreement, be a price provided by a third party dealer agreed
between the Parties, or if the Parties do not agree a third party dealer then a price based on quotations provided by
the Reference Dealers. If more than three quotations are provided, the Market Value will be the arithmetic mean of
the prices, without regard to the quotations having the highest and lowest prices. If three quotations are provided,
the Market Value will be the quotation remaining after disregarding the highest and lowest quotations. For this
purpose, if more than one quotation has the same highest or lowest price, then one of such quotations shall be
disregarded. If fewer than three quotations are provided, the Market Value of the relevant Securities, Equivalent
Securities, Collateral or Equivalent Collateral shall be determined by the Party making the determination of Market
Value acting reasonably;
(b) In relation to a Letter of Credit the face or stated amount of such Letter of Credit; and
(c) In relation to Cash Collateral the amount of the currency concerned;
Nominee means a nominee or agent appointed by either Party to accept delivery of, hold or deliver Securities, EquivalentSecurities, Collateral and/or Equivalent Collateral or to receive or make payments on its behalf;
Non-Cash Collateral means Collateral other than Cash Collateral;
Non-Defaulting Party has the meaning given in paragraph 10;
Notification Time means the time specified in paragraph 1.5 of the Schedule;
Parties means Lender and Borrower and Party shall be construed accordingly;
Posted Collateral has the meaning given in paragraph 5.4;
Reference Dealers means, in relation to any Securities, Equivalent Securities, Collateral or Equivalent Collateral, four
leading dealers in the relevant securities selected by the Party making the determination of Market Value in good faith;
Required Collateral Value has the meaning given in paragraph 5.4;
Sales Tax means value added tax and any other Tax of a similar nature (including, without limitation, any sales tax of any
relevant jurisdiction);
Settlement Date means the date upon which Securities are due to be transferred to Borrower in accordance with this
Agreement;
Stamp Tax means any stamp, transfer, registration, documentation or similar Tax; and
Tax means any present or future tax, levy, impost, duty, charge, assessment or fee of any nature (including interest,
penalties and additions thereto) imposed by any government or other taxing authority in respect of any transaction
effected pursuant to or contemplated by, or any payment under or in respect of, this Agreement.
2.2 Headings
All headings appear for convenience only and shall not affect the interpretation of this Agreement.
2.3 Market terminology
Notwithstanding the use of expressions such as “borrow”, “lend”, “Collateral”, “Margin” etc. which are used to reflect
terminology used in the market for transactions of the kind provided for in this Agreement, title to Securities “borrowed” or“lent” and “Collateral” provided in accordance with this Agreement shall pass from one Party to another as provided for in
this Agreement, the Party obtaining such title being obliged to deliver Equivalent Securities or Equivalent Collateral as the
case may be.
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2.4 Currency conversions
Subject to paragraph 11, for the purposes of determining any prices, sums or values (including Market Value and Required
Collateral Value) prices, sums or values stated in currencies other than the Base Currency shall be converted into the Base
Currency at the latest available spot rate of exchange quoted by a bank selected by Lender (or if an Event of Default has
occurred in relation to Lender, by Borrower) in the London inter-bank market for the purchase of the Base Currency with
the currency concerned on the day on which the calculation is to be made or, if that day is not a Business Day, the spot
rate of exchange quoted at Close of Business on the immediately preceding Business Day on which such a quotation was
available.
2.5 The Parties confirm that introduction of and/or substitution (in place of an existing currency) of a new currency as the
lawful currency of a country shall not have the effect of altering, or discharging, or excusing performance under, any
term of the Agreement or any Loan thereunder, nor give a Party the right unilaterally to alter or terminate the Agreement
or any Loan thereunder. Securities will for the purposes of this Agreement be regarded as equivalent to other securities
notwithstanding that as a result of such introduction and/or substitution those securities have been redenominated into the
new currency or the nominal value of the securities has changed in connection with such redenomination.
2.6 Modifications etc. to legislation
Any reference in this Agreement to an act, regulation or other legislation shall include a reference to any statutory
modification or re-enactment thereof for the time being in force.
3. Loans of Securities
Lender will lend Securities to Borrower, and Borrower will borrow Securities from Lender in accordance with the terms and
conditions of this Agreement. The terms of each Loan shall be agreed prior to the commencement of the relevant Loan either
orally or in writing (including any agreed form of electronic communication) and confirmed in such form and on such basis as
shall be agreed between the Parties. Unless otherwise agreed, any confirmation produced by a Party shall not supersede or
prevail over the prior oral, written or electronic communication (as the case may be)
4. Delivery
4.1 Delivery of Securities on commencement of Loan
Lender shall procure the Delivery of Securities to Borrower or deliver such Securities in accordance with this Agreement
and the terms of the relevant Loan.
4.2 Requirements to effect Delivery
The Parties shall execute and deliver all necessary documents and give all necessary instructions to procure that all right,
title and interest in:
(a) Any Securities borrowed pursuant to paragraph 3;
(b) Any Equivalent Securities delivered pursuant to paragraph 8;
(c) Any Collateral delivered pursuant to paragraph 5;
(d) Any Equivalent Collateral delivered pursuant to paragraphs 5 or 8;
shall pass from one Party to the other subject to the terms and conditions set out in this Agreement, on delivery of the
same in accordance with this Agreement with full title guarantee, free from all liens, charges and encumbrances. In the
case of Securities, Collateral, Equivalent Securities or Equivalent Collateral title to which is registered in a computer-based
system which provides for the recording and transfer of title to the same by way of book entries, delivery and transfer of
title shall take place in accordance with the rules and procedures of such system as in force from time to time. The Partyacquiring such right, title and interest shall have no obligation to return or deliver any of the assets so acquired but, in so
far as any Securities are borrowed by or any Collateral is delivered to such Party, such Party shall be obliged, subject to
the terms of this Agreement, to deliver Equivalent Securities or Equivalent Collateral as appropriate.
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4.3 Deliveries to be simultaneous unless otherwise agreed
Where under the terms of this Agreement a Party is not obliged to make a Delivery unless simultaneously a Delivery
is made to it, subject to and without prejudice to its rights under paragraph 8.6, such Party may from time to time in
accordance with market practice and in recognition of the practical difficulties in arranging simultaneous delivery of
Securities, Collateral and cash transfers, waive its right under this Agreement in respect of simultaneous delivery and/
or payment provided that no such waiver (whether by course of conduct or otherwise) in respect of one transaction shall
bind it in respect of any other transaction.
4.4 Deliveries of Income
In respect of Income being paid in relation to any Loaned Securities or Collateral, Borrower (in the case of Income being
paid in respect of Loaned Securities) and Lender (in the case of Income being paid in respect of Collateral) shall provide
to the other Party, as the case may be, any endorsements or assignments as shall be customary and appropriate to effect,
in accordance with paragraph 6, the payment or delivery of money or property in respect of such Income to Lender,
irrespective of whether Borrower received such endorsements or assignments in respect of any Loaned Securities, or to
Borrower, irrespective of whether Lender received such endorsements or assignments in respect of any Collateral.
5. Collateral
5.1 Delivery of Collateral on commencement of Loan
Subject to the other provisions of this paragraph 5, Borrower undertakes to deliver to or deposit with Lender (or in
accordance with Lender’s instructions) Collateral simultaneously with Delivery of the Securities to which the Loan relates
and in any event no later than Close of Business on the Settlement Date.
5.2 Deliveries through securities settlement systems generating automatic payments
Unless otherwise agreed between the Parties, where any Securities, Equivalent Securities, Collateral or Equivalent
Collateral (in the form of securities) are transferred through a book entry transfer or settlement system which automatically
generates a payment or delivery, or obligation to pay or deliver, against the transfer of such securities, then:
(a) Such automatically generated payment, delivery or obligation shall be treated as a payment or delivery by the
transferee to the transferor, and except to the extent that it is applied to discharge an obligation of the transferee to
effect payment or delivery, such payment or delivery, or obligation to pay or deliver, shall be deemed to be a transfer
of Collateral or delivery of Equivalent Collateral, as the case may be, made by the transferee until such time as the
Collateral or Equivalent Collateral is substituted with other Collateral or Equivalent Collateral if an obligation to deliver
other Collateral or deliver Equivalent Collateral existed immediately prior to the transfer of Securities, Equivalent
Securities, Collateral or Equivalent Collateral; and
(b) The Party receiving such substituted Collateral or Equivalent Collateral, or if no obligation to deliver other Collateral or
redeliver Equivalent Collateral existed immediately prior to the transfer of Securities, Equivalent Securities, Collateral
or Equivalent Collateral, the Party receiving the deemed transfer of Collateral or Delivery of Equivalent Collateral, as the case may be, shall cause to be made to the other Party for value the same day either, where such transfer is a
payment, an irrevocable payment in the amount of such transfer or, where such transfer is a Delivery, an irrevocable
Delivery of securities (or other property, as the case may be) equivalent to such property.
5.3 Substitutions of Collateral
Borrower may from time to time call for the repayment of Cash Collateral or the Delivery of Collateral equivalent to any
Collateral delivered to Lender prior to the date on which the same would otherwise have been repayable or deliverable
provided that at or prior to the time of such repayment or Delivery Borrower shall have delivered Alternative Collateral
acceptable to Lender and Borrower is in compliance with paragraph 5.4 or paragraph 5.5, as applicable.
5.4 Marking to Market of Collateral during the currency of a Loan on aggregated basis
Unless paragraph 1.3 of the Schedule indicates that paragraph 5.5 shall apply in lieu of this paragraph 5.4, or unless
otherwise agreed between the Parties:
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(a) The aggregate Market Value of the Collateral delivered to or deposited with Lender (excluding any Equivalent
Collateral repaid or delivered under paragraphs 5.4(b) or 5.5(b) (as the case may be)) (Posted Collateral) in respect of
all Loans outstanding under this Agreement shall equal the aggregate of the Market Value of Securities equivalent to
the Loaned Securities and the applicable Margin (the Required Collateral Value) in respect of such Loans;
(b) If at any time on any Business Day the aggregate Market Value of the Posted Collateral in respect of all Loans
outstanding under this Agreement together with: (i) all amounts due and payable by the Lender under this Agreement
but which are unpaid; and (ii) if agreed between the parties and if the Income Record Date has occurred in respect
of any Non-Cash Collateral, the amount or Market Value of Income payable in respect of such Non-Cash Collateral
exceeds the aggregate of the Required Collateral Values in respect of such Loans together with: (i) all amounts due
and payable by the Borrower under this Agreement but which are unpaid; and (ii) if agreed between the parties and
if the Income Record Date has occurred in respect of any securities equivalent to Loaned Securities, the amount or
Market Value of Income payable in respect of such Equivalent Securities, Lender shall (on demand) repay and/or
deliver, as the case may be, to Borrower such Equivalent Collateral as will eliminate the excess;
(c) If at any time on any Business Day the aggregate Market Value of the Posted Collateral in respect of all Loans
outstanding under this Agreement together with: (i) all amounts due and payable by the Lender under this Agreement
but which are unpaid; and (ii) if agreed between the parties and if the Income Record Date has occurred in respect ofany Non-Cash Collateral, the amount or Market Value of Income payable in respect of such Non-Cash Collateral falls
below the aggregate of Required Collateral Values in respect of all such Loans together with: (i) all amounts due and
payable by the Borrower under this Agreement but which are unpaid; and (ii) if agreed between the parties and if the
Income Record Date has occurred in respect of Securities equivalent to any Loaned Securities, the amount or Market
Value of Income payable in respect of such Equivalent Securities, Borrower shall (on demand) provide such further
Collateral to Lender as will eliminate the deficiency;
(d) Where a Party acts as both Lender and Borrower under this Agreement, the provisions of paragraphs 5.4(b) and 5.4(c)
shall apply separately (and without duplication) in respect of Loans entered into by that Party as Lender and Loans
entered into by that Party as Borrower.
5.5 Marking to Market of Collateral during the currency of a Loan on a Loan by Loan basis
If paragraph 1.3 of the Schedule indicates this paragraph 5.5 shall apply in lieu of paragraph 5.4, the Posted Collateral
in respect of any Loan shall bear from day to day and at any time the same proportion to the Market Value of Securities
equivalent to the Loaned Securities as the Posted Collateral bore at the commencement of such Loan. Accordingly:
(a) The Market Value of the Posted Collateral to be delivered or deposited while the Loan continues shall be equal to the
Required Collateral Value;
(b) If at any time on any Business Day the Market Value of the Posted Collateral in respect of any Loan together with: (i)
all amounts due and payable by the Lender in respect of that Loan but which are unpaid; and (ii) if agreed between
the parties and if the Income Record Date has occurred in respect of any Non-Cash Collateral, the amount or Market
Value of Income payable in respect of such Non-Cash Collateral exceeds the Required Collateral Value in respect of
such Loan together with: (i) all amounts due and payable by the Borrower in respect of that Loan; and (ii) if agreedbetween the parties and if the Income Record Date has occurred in respect of Securities equivalent to any Loaned
Securities, the amount or Market Value of Income payable in respect of such Equivalent Securities, Lender shall
(on demand) repay and/or deliver, as the case may be, to Borrower such Equivalent Collateral as will eliminate the
excess; and
(c) If at any time on any Business Day the Market Value of the Posted Collateral together with: (i) all amounts due any
payable by the Lender in respect of that Loan; and (ii) if agreed between the parties and if the Income Record Date
has occurred in respect of any Non-Cash Collateral, the amount or Market Value of Income payable in respect of such
Non-Cash Collateral falls below the Required Collateral Value together with: (i) all amounts due and payable by the
Borrower in respect of that Loan; and (ii) if agreed between the parties and if the Income Record Date has occurred in
respect of Securities equivalent to any Loaned Securities, the amount or Market Value of Income payable in respect
of such Equivalent Securities, Borrower shall (on demand) provide such further Collateral to Lender as will eliminate the deficiency.
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5.6 Requirements to deliver excess Collateral
Where paragraph 5.4 applies, unless paragraph 1.4 of the Schedule indicates that this paragraph 5.6 does not apply, if a
Party (the first Party) would, but for this paragraph 5.6, be required under paragraph 5.4 to provide further Collateral or
deliver Equivalent Collateral in circumstances where the other Party (the second Party) would, but for this paragraph 5.6,
also be required to or provide Collateral or deliver Equivalent Collateral under paragraph 5.4, then the Market Value of the
Collateral or Equivalent Collateral deliverable by the first Party (X) shall be set off against the Market Value of the Collateral
or Equivalent Collateral deliverable by the second Party (Y) and the only obligation of the Parties under paragraph 5.4 shall
be, where X exceeds Y, an obligation of the first Party, or where Y exceeds X, an obligation of the second Party to repay
and/or (as the case may be) deliver Equivalent Collateral or to deliver further Collateral having a Market Value equal to the
difference between X and Y.
5.7 Where Equivalent Collateral is repaid or delivered (as the case may be) or further Collateral is provided by a Party under
paragraph 5.6, the Parties shall agree to which Loan or Loans such repayment, delivery or further provision is to be
attributed and failing agreement it shall be attributed, as determined by the Party making such repayment, delivery or
further provision to the earliest outstanding Loan and, in the case of a repayment or delivery up to the point at which the
Market Value of Collateral in respect of such Loan equals the Required Collateral Value in respect of such Loan, and then
to the next earliest outstanding Loan up to the similar point and so on.
5.8 Timing of repayments of excess Collateral or deliveries of further Collateral
Where any Equivalent Collateral falls to be repaid or delivered (as the case may be) or further Collateral is to be provided
under this paragraph 5, unless otherwise provided or agreed between the Parties, if the relevant demand is received by
the Notification Time specified in paragraph 1.5 of the Schedule, then the delivery shall be made not later than the Close of
Business on the same Business Day; if a demand is received after the Notification Time, then the relevant delivery shall be
made not later than the Close of Business on the next Business Day after the date such demand is received.
5.9 Substitutions and extensions of Letters of Credit
Where Collateral is a Letter of Credit, Lender may by notice to Borrower require that Borrower, on the third Business
Day following the date of delivery of such notice (or by such other time as the Parties may agree), substitute Collateral
consisting of cash or other Collateral acceptable to Lender for the Letter of Credit. Prior to the expiration of any Letter
of Credit supporting Borrower’s obligations hereunder, Borrower shall, no later than 10.30 a.m. UK time on the second
Business Day prior to the date such Letter of Credit expires (or by such other time as the Parties may agree), obtain an
extension of the expiration of such Letter of Credit or replace such Letter of Credit by providing Lender with a substitute
Letter of Credit in an amount at least equal to the amount of the Letter of Credit for which it is substituted.
6. Distributions and Corporate Actions
6.1 In this paragraph 6, references to an amount of Income received by any Party in respect of any Loaned Securities or
Non-Cash Collateral shall be to an amount received from the issuer after any applicable withholding or deduction for or on
account of Tax.
6.2 Manufactured payments in respect of Loaned Securities
Where the term of a Loan extends over an Income Record Date in respect of any Loaned Securities, Borrower shall, on
the date such Income is paid by the issuer, or on such other date as the Parties may from time to time agree, pay or deliver
to Lender such sum of money or property as is agreed between the Parties or, failing such agreement, a sum of money
or property equivalent to (and in the same currency as) the type and amount of such Income that would be received by
Lender in respect of such Loaned Securities assuming such Securities were not loaned to Borrower and were retained by
Lender on the Income Record Date.
6.3 Manufactured payments in respect of Non-Cash Collateral
Where Non-Cash Collateral is delivered by Borrower to Lender and an Income Record Date in respect of such Non-CashCollateral occurs before Equivalent Collateral is delivered by Lender to Borrower, Lender shall on the date such Income
is paid, or on such other date as the Parties may from time to time agree, pay or deliver to Borrower a sum of money or
property as is agreed between the Parties or, failing such agreement, a sum of money or property equivalent to (and in the
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same currency as) the type and amount of such Income that would be received by Lender in respect of such Non-Cash
Collateral assuming Lender:
(a) Retained the Non-Cash Collateral on the Income Record Date; and
(b) Is not entitled to any credit, benefit or other relief in respect of Tax under any Applicable Law.
6.4 Indemnity for failure to redeliver Equivalent Non-Cash Collateral
Unless paragraph 1.6 of the Schedule indicates that this paragraph does not apply, where:
(a) Prior to any Income Record Date in relation to Non-Cash Collateral, Borrower has in accordance with paragraph 5.3
called for the Delivery of Equivalent Non-Cash Collateral;
(b) Borrower has given notice of such call to Lender so as to be effective, at the latest, five hours before the Close
of Business on the last Business Day on which Lender would customarily be required to initiate settlement of the
Non-Cash Collateral to enable settlement to take place on the Business Day immediately preceding the relevant
Income Record Date;
(c) Borrower has provided reasonable details to Lender of the Non-Cash Collateral, the relevant Income Record Date and
the proposed Alternative Collateral;
(d) Lender, acting reasonably, has determined that such Alternative Collateral is acceptable to it and Borrower shall have
delivered or delivers such Alternative Collateral to Lender; and
(e) Lender has failed to make reasonable efforts to transfer Equivalent Non-Cash Collateral to Borrower prior to such
Income Record Date,
Lender shall indemnify Borrower in respect of any cost, loss or damage (excluding any indirect or consequential loss or
damage or any amount otherwise compensated by Lender, including pursuant to paragraphs 6.3 and/or 9.3) suffered by
Borrower that it would not have suffered had the relevant Equivalent Non-Cash Collateral been transferred to Borrower
prior to such Income Record Date.
6.5 Income in the form of Securities
Where Income, in the form of securities, is paid in relation to any Loaned Securities or Collateral, such securities shall be
added to such Loaned Securities or Collateral (and shall constitute Loaned Securities or Collateral, as the case may be,
and be part of the relevant Loan) and will not be delivered to Lender, in the case of Loaned Securities, or to Borrower, in
the case of Collateral, until the end of the relevant Loan, provided that the Lender or Borrower (as the case may be) fulfils
its obligations under paragraph 5.4 or 5.5 (as applicable) with respect to the additional Loaned Securities or Collateral, as
the case may be.
6.6 Exercise of voting rights
Where any voting rights fall to be exercised in relation to any Loaned Securities or Collateral, neither Borrower, in the
case of Equivalent Securities, nor Lender, in the case of Equivalent Collateral, shall have any obligation to arrange for
voting rights of that kind to be exercised in accordance with the instructions of the other Party in relation to the Securities
borrowed by it or transferred to it by way of Collateral, as the case may be, unless otherwise agreed between the Parties.
6.7 Corporate actions
Where, in respect of any Loaned Securities or any Collateral, any rights relating to conversion, sub-division, consolidation,
pre-emption, rights arising under a takeover offer, rights to receive securities or a certificate which may at a future date be
exchanged for securities or other rights, including those requiring election by the holder for the time being of such Securities or
Collateral, become exercisable prior to the delivery of Equivalent Securities or Equivalent Collateral, then Lender or Borrower,as the case may be, may, within a reasonable time before the latest time for the exercise of the right or option give written
notice to the other Party that on delivery of Equivalent Securities or Equivalent Collateral, as the case may be, it wishes to
receive Equivalent Securities or Equivalent Collateral in such form as will arise if the right is exercised or, in the case of a right
which may be exercised in more than one manner, is exercised as is specified in such written notice.
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7. Rates applicable to Loaned Securities and Cash Collateral
7.1 Rates in respect of Loaned Securities
In respect of each Loan, Borrower shall pay to Lender, in the manner prescribed in sub-paragraph 7.3, sums calculated
by applying such rate as shall be agreed between the Parties from time to time to the daily Market Value of the Loaned
Securities.
7.2 Rates in respect of Cash Collateral
Where Cash Collateral is deposited with Lender in respect of any Loan, Lender shall pay to Borrower, in the manner
prescribed in paragraph 7.3, sums calculated by applying such rates as shall be agreed between the Parties from time to
time to the amount of such Cash Collateral. Any such payment due to Borrower may be set-off against any payment due to
Lender pursuant to paragraph 7.1.
7.3 Payment of rates
In respect of each Loan, the payments referred to in paragraph 7.1 and 7.2 shall accrue daily in respect of the periodcommencing on and inclusive of the Settlement Date and terminating on and exclusive of the Business Day upon which
Equivalent Securities are delivered or Cash Collateral is repaid. Unless otherwise agreed, the sums so accruing in respect
of each calendar month shall be paid in arrears by the relevant Party not later than the Business Day which is the tenth
Business Day after the last Business Day of the calendar month to which such payments relate or such other date as the
Parties shall from time to time agree.
8. Delivery of Equivalent Securities
8.1 Lender’s right to terminate a Loan
Subject to paragraph 11 and the terms of the relevant Loan, Lender shall be entitled to terminate a Loan and to call for the
delivery of all or any Equivalent Securities at any time by giving notice on any Business Day of not less than the standard
settlement time for such Equivalent Securities on the exchange or in the clearing organisation through which the Loaned
Securities were originally delivered. Borrower shall deliver such Equivalent Securities not later than the expiry of such
notice in accordance with Lender’s instructions.
8.2 Borrower’s right to terminate a Loan
Subject to the terms of the relevant Loan, Borrower shall be entitled at any time to terminate a Loan and to deliver all and
any Equivalent Securities due and outstanding to Lender in accordance with Lender’s instructions and Lender shall accept
such delivery.
8.3 Delivery of Equivalent Securities on termination of a Loan
Borrower shall procure the Delivery of Equivalent Securities to Lender or deliver Equivalent Securities in accordance with this Agreement and the terms of the relevant Loan on termination of the Loan. For the avoidance of doubt any reference in
this Agreement or in any other agreement or communication between the Parties (howsoever expressed) to an obligation
to deliver or account for or act in relation to Loaned Securities shall accordingly be construed as a reference to an
obligation to deliver or account for or act in relation to Equivalent Securities.
8.4 Delivery of Equivalent Collateral on termination of a Loan
On the date and time that Equivalent Securities are required to be delivered by Borrower on the termination of a Loan,
Lender shall simultaneously (subject to paragraph 5.4 if applicable) repay to Borrower any Cash Collateral or, as the case
may be, deliver Collateral equivalent to the Collateral provided by Borrower pursuant to paragraph 5 in respect of such
Loan. For the avoidance of doubt any reference in this Agreement or in any other agreement or communication between
the Parties (however expressed) to an obligation to deliver or account for or act in relation to Collateral shall accordinglybe construed as a reference to an obligation to deliver or account for or act in relation to Equivalent Collateral.
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8.5 Delivery of Letters of Credit
Where a Letter of Credit is provided by way of Collateral, the obligation to deliver Equivalent Collateral is satisfied by
Lender delivering for cancellation the Letter of Credit so provided, or where the Letter of Credit is provided in respect of
more than one Loan, by Lender consenting to a reduction in the value of the Letter of Credit.
8.6 Delivery obligations to be reciprocal
Neither Party shall be obliged to make delivery (or make a payment as the case may be) to the other unless it is satisfied
that the other Party will make such delivery (or make an appropriate payment as the case may be) to it. If it is not so
satisfied (whether because an Event of Default has occurred in respect of the other Party or otherwise) it shall notify
the other Party and unless that other Party has made arrangements which are sufficient to assure full delivery (or the
appropriate payment as the case may be) to the notifying Party, the notifying Party shall (provided it is itself in a position,
and willing, to perform its own obligations) be entitled to withhold delivery (or payment, as the case may be) to the other
Party until such arrangements to assure full delivery (or the appropriate payment as the case may be) are made.
9. Failure to Deliver
9.1 Borrower’s failure to deliver Equivalent Securities
If Borrower fails to deliver Equivalent Securities in accordance with paragraph 8.3 Lender may:
(a) Elect to continue the Loan (which, for the avoidance of doubt, shall continue to be taken into account for the purposes
of paragraph 5.4 or 5.5 as applicable); or
(b) At any time while such failure continues, by written notice to Borrower declare that that Loan (but only that Loan)
shall be terminated immediately in accordance with paragraph 11.2 as if (i) an Event of Default had occurred in
relation to the Borrower, (ii) references to the Termination Date were to the date on which notice was given under this
sub-paragraph, and (iii) the Loan were the only Loan outstanding. For the avoidance of doubt, any such failure shall
not constitute an Event of Default (including under paragraph 10.1(i)) unless the Parties otherwise agree.
9.2 Lender’s failure to deliver Equivalent Collateral
If Lender fails to deliver Equivalent Collateral comprising Non-Cash Collateral in accordance with paragraph 8.4 or 8.5,
Borrower may:
(a) Elect to continue the Loan (which, for the avoidance of doubt, shall continue to be taken into account for the purposes
of paragraph 5.4 or 5.5 as applicable); or
(a) At any time while such failure continues, by written notice to Lender declare that that Loan (but only that Loan)
shall be terminated immediately in accordance with paragraph 11.2 as if (i) an Event of Default had occurred in
relation to the Lender, (ii) references to the Termination Date were to the date on which notice was given under this
sub-paragraph, and (iii) the Loan were the only Loan outstanding. For the avoidance of doubt, any such failure shallnot constitute an Event of Default (including under paragraph 10.1(i)) unless the Parties otherwise agree.
9.3 Failure by either Party to deliver
Where a Party (the Transferor ) fails to deliver Equivalent Securities or Equivalent Collateral by the time required under this
Agreement or within such other period as may be agreed between the Transferor and the other Party (the Transferee ) and
the Transferee:
(a) Incurs interest, overdraft or similar costs and expenses; or
(b) Incurs costs and expenses as a direct result of a Buy-in exercised against it by a third party,
then the Transferor agrees to pay within one Business Day of a demand from the Transferee and hold harmless the Transferee
with respect to all reasonable costs and expenses listed in sub-paragraphs (a) and (b) above properly incurred which arise
directly from such failure other than (i) such costs and expenses which arise from the negligence or wilful default of the
Transferee and (ii) any indirect or consequential losses.
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10. Events of Default
10.1 Each of the following events occurring and continuing in relation to either Party (the Defaulting Party , the other Party
being the Non-Defaulting Party ) shall be an Event of Default but only (subject to sub-paragraph 10.1(d)) where the
Non-Defaulting Party serves written notice on the Defaulting Party:
(a) Borrower or Lender failing to pay or repay Cash Collateral or to deliver Collateral on commencement of the Loan
under paragraph 5.1 or to deliver further Collateral under paragraph 5.4 or 5.5;
(b) Lender or Borrower failing to comply with its obligations under paragraph 6.2 or 6.3 upon the due date and not
remedying such failure within three Business Days after the Non-Defaulting Party serves written notice requiring it to
remedy such failure;
(c) Lender or Borrower failing to pay any sum due under paragraph 9.1(b), 9.2(b) or 9.3 upon the due date;
(d) An Act of Insolvency occurring with respect to Lender or Borrower, provided that, where the Parties have specified
in paragraph 5 of the Schedule that Automatic Early Termination shall apply, an Act of Insolvency which is the
presentation of a petition for winding up or any analogous proceeding or the appointment of a liquidator or analogousofficer of the Defaulting Party shall not require the Non-Defaulting Party to serve written notice on the Defaulting
Party (Automatic Early Termination);
(e) Any warranty made by Lender or Borrower in paragraph 13 or paragraphs 14(a) to 14(d) being incorrect or untrue in
any material respect when made or repeated or deemed to have been made or repeated;
(f) Lender or Borrower admitting to the other that it is unable to, or it intends not to, perform any of its obligations under
this Agreement and/or in respect of any Loan where such failure to perform would with the service of notice or lapse
of time constitute an Event of Default;
(g) All or any material part of the assets of Lender or Borrower being transferred or ordered to be transferred to a trustee
(or a person exercising similar functions) by a regulatory authority pursuant to any legislation;
(h) Lender (if applicable) or Borrower being declared in default or being suspended or expelled from membership of
or participation in, any securities exchange or suspended or prohibited from dealing in securities by any regulatory
authority, in each case on the grounds that it has failed to meet any requirements relating to financial resources or
credit rating; or
(i) Lender or Borrower failing to perform any other of its obligations under this Agreement and not remedying such
failure within 30 days after the Non-Defaulting Party serves written notice requiring it to remedy such failure.
10.2 Each Party shall notify the other (in writing) if an Event of Default or an event which, with the passage of time and/or upon
the serving of a written notice as referred to above, would be an Event of Default, occurs in relation to it.
10.3 The provisions of this Agreement constitute a complete statement of the remedies available to each Party in respect ofany Event of Default.
10.4 Subject to paragraphs 9 and 11, neither Party may claim any sum by way of consequential loss or damage in the event of
failure by the other Party to perform any of its obligations under this Agreement.
11. Consequences of an Event of Default
11.1 If an Event of Default occurs in relation to either Party then paragraphs 11.2 to 11.7 below shall apply.
11.2 The Parties’ delivery and payment obligations (and any other obligations they have under this Agreement) shall be
accelerated so as to require performance thereof at the time such Event of Default occurs (the date of which shall be the
Termination Date) so that performance of such delivery and payment obligations shall be effected only in accordance with the following provisions.
(a) The Default Market Value of the Equivalent Securities and Equivalent Non-Cash Collateral to be delivered and the
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amount of any Cash Collateral (including sums accrued) to be repaid and any other cash (including interest accrued)
to be paid by each Party shall be established by the Non-Defaulting Party in accordance with paragraph 11.4 and
deemed as at the Termination Date.
(b) On the basis of the sums so established, an account shall be taken (as at the Termination Date) of what is due from
each Party to the other under this Agreement (on the basis that each Party’s claim against the other in respect of
delivery of Equivalent Securities or Equivalent Non-Cash Collateral equal to the Default Market Value thereof) and
the sums due from one Party shall be set off against the sums due from the other and only the balance of the account
shall be payable (by the Party having the claim valued at the lower amount pursuant to the foregoing) and such
balance shall be payable on the next following Business Day after such account has been taken and such sums have
been set off in accordance with this paragraph. For the purposes of this calculation, any sum not denominated in
the Base Currency shall be converted into the Base Currency at the Spot Rate prevailing at such dates and times
determined by the Non-Defaulting Party acting reasonably.
(c) If the balance under sub-paragraph (b) above is payable by the Non-Defaulting Party and the Non-Defaulting Party
had delivered to the Defaulting Party a Letter of Credit, the Defaulting Party shall draw on the Letter of Credit to the
extent of the balance due and shall subsequently deliver for cancellation the Letter of Credit so provided.
(d) If the balance under sub-paragraph (b) above is payable by the Defaulting Party and the Defaulting Party had
delivered to the Non-Defaulting Party a Letter of Credit, the Non-Defaulting Party shall draw on the Letter of Credit to
the extent of the balance due and shall subsequently deliver for cancellation the Letter of Credit so provided.
(e) In all other circumstances, where a Letter of Credit has been provided to a Party, such Party shall deliver for
cancellation the Letter of Credit so provided.
11.3 For the purposes of this Agreement, the Default Market Value of any Equivalent Collateral in the form of a Letter of
Credit shall be zero and of any Equivalent Securities or any other Equivalent Non-Cash Collateral shall be determined in
accordance with paragraphs 11.4 to 11.6 below, and for this purpose:
(a) TheAppropriate Market
means, in relation to securities of any description, the market which is the most appropriate
market for securities of that description, as determined by the Non-Defaulting Party;
(b) The Default Valuation Time means, in relation to an Event of Default, the close of business in the Appropriate
Market on the fifth dealing day after the day on which that Event of Default occurs or, where that Event of Default
is the occurrence of an Act of Insolvency in respect of which under paragraph 10.1(d) no notice is required from
the Non-Defaulting Party in order for such event to constitute an Event of Default, the close of business on the fifth
dealing day after the day on which the Non-Defaulting Party first became aware of the occurrence of such Event of
Default;
(c) Deliverable Securities means Equivalent Securities or Equivalent Non-Cash Collateral to be delivered by the
Defaulting Party;
(d) Net Value means at any time, in relation to any Deliverable Securities or Receivable Securities, the amount which, in the reasonable opinion of the Non-Defaulting Party, represents their fair market value, having regard to such pricing
sources and methods (which may include, without limitation, available prices for securities with similar maturities,
terms and credit characteristics as the relevant Equivalent Securities or Equivalent Collateral) as the Non-Defaulting
Party considers appropriate, less, in the case of Receivable Securities, or plus, in the case of Deliverable Securities,
all Transaction Costs incurred or reasonably anticipated in connection with the purchase or sale of such securities;
(e) Receivable Securities means Equivalent Securities or Equivalent Non-Cash Collateral to be delivered to the
Defaulting Party; and
(f) Transaction Costs in relation to any transaction contemplated in paragraph 11.4 or 11.5 means the reasonable costs,
commissions (including internal commissions), fees and expenses (including any mark-up or mark-down or premium
paid for guaranteed delivery) incurred or reasonably anticipated in connection with the purchase of DeliverableSecurities or sale of Receivable Securities, calculated on the assumption that the aggregate thereof is the least that
could reasonably be expected to be paid in order to carry out the transaction.
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11.4 If between the Termination Date and the Default Valuation Time:
(a) The Non-Defaulting Party has sold, in the case of Receivable Securities, or purchased, in the case of Deliverable
Securities, securities which form part of the same issue and are of an identical type and description as those
Equivalent Securities or that Equivalent Collateral, (and regardless as to whether or not such sales or purchases have
settled) the Non-Defaulting Party may elect to treat as the Default Market Value:
(i) In the case of Receivable Securities, the net proceeds of such sale after deducting all Transaction Costs;
provided that, where the securities sold are not identical in amount to the Equivalent Securities or Equivalent
Collateral, the Non-Defaulting Party may, acting in good faith, either (A) elect to treat such net proceeds
of sale divided by the amount of securities sold and multiplied by the amount of the Equivalent Securities
or Equivalent Collateral as the Default Market Value or (B) elect to treat such net proceeds of sale of the
Equivalent Securities or Equivalent Collateral actually sold as the Default Market Value of that proportion
of the Equivalent Securities or Equivalent Collateral, and, in the case of (B), the Default Market Value of the
balance of the Equivalent Securities or Equivalent Collateral shall be determined separately in accordance
with the provisions of this paragraph 11.4; or
(ii) In the case of Deliverable Securities, the aggregate cost of such purchase, including all Transaction Costs;provided that, where the securities purchased are not identical in amount to the Equivalent Securities
or Equivalent Collateral, the Non-Defaulting Party may, acting in good faith, either (A) elect to treat such
aggregate cost divided by the amount of securities purchased and multiplied by the amount of the Equivalent
Securities or Equivalent Collateral as the Default Market Value or (B) elect to treat the aggregate cost of
purchasing the Equivalent Securities or Equivalent Collateral actually purchased as the Default Market
Value of that proportion of the Equivalent Securities or Equivalent Collateral, and, in the case of (B), the
Default Market Value of the balance of the Equivalent Securities or Equivalent Collateral shall be determined
separately in accordance with the provisions of this paragraph 11.4;
(b) The Non-Defaulting Party has received, in the case of Deliverable Securities, offer quotations or, in the case of
Receivable Securities, bid quotations in respect of securities of the relevant description from two or more market
makers or regular dealers in the Appropriate Market in a commercially reasonable size (as determined by the
Non-Defaulting Party) the Non-Defaulting Party may elect to treat as the Default Market Value of the relevant
Equivalent Securities or Equivalent Collateral:
(i) The price quoted (or where more than one price is so quoted, the arithmetic mean of the prices so quoted)
by each of them for, in the case of Deliverable Securities, the sale by the relevant market marker or dealer of
such securities or, in the case of Receivable Securities, the purchase by the relevant market maker or dealer
of such securities, provided that such price or prices quoted may be adjusted in a commercially reasonable
manner by the Non-Defaulting Party to reflect accrued but unpaid coupons not reflected in the price or prices
quoted in respect of such Securities;
(ii) After deducting, in the case of Receivable Securities or adding in the case of Deliverable Securities the
Transaction Costs which would be incurred or reasonably anticipated in connection with such transaction.
11.5 If, acting in good faith, either (A) the Non-Defaulting Party has endeavoured but been unable to sell or purchase securities
in accordance with paragraph 11.4(a) above or to obtain quotations in accordance with paragraph 11.4(b) above (or both)
or (B) the Non-Defaulting Party has determined that it would not be commercially reasonable to sell or purchase securities
at the prices bid or offered or to obtain such quotations, or that it would not be commercially reasonable to use any
quotations which it has obtained under paragraph 11.4(b) above the Non-Defaulting Party may determine the Net Value
of the relevant Equivalent Securities or Equivalent Collateral (which shall be specified) and the Non-Defaulting Party may
elect to treat such Net Value as the Default Market Value of the relevant Equivalent Securities or Equivalent Collateral.
11.6 To the extent that the Non-Defaulting Party has not determined the Default Market Value in accordance with paragraph
11.4, the Default Market Value of the relevant Equivalent Securities or Equivalent Collateral shall be an amount equal to their
Net Value at the Default Valuation Time; provided that, if at the Default Valuation Time the Non-Defaulting Party reasonably
determines that, owing to circumstances affecting the market in the Equivalent Securities or Equivalent Collateral in question,it is not reasonably practicable for the Non-Defaulting Party to determine a Net Value of such Equivalent Securities or
Equivalent Collateral which is commercially reasonable (by reason of lack of tradable prices or otherwise), the Default Market
Value of such Equivalent Securities or Equivalent Collateral shall be an amount equal to their Net Value as determined by the
Non-Defaulting Party as soon as reasonably practicable after the Default Valuation Time.
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Other costs, expenses and interest payable in consequence of an Event of Default
11.7 The Defaulting Party shall be liable to the Non-Defaulting Party for the amount of all reasonable legal and other
professional expenses incurred by the Non-Defaulting Party in connection with or as a consequence of an Event of
Default, together with interest thereon at such rate as is agreed by the Parties and specified in paragraph 10 of the
Schedule or, failing such agreement, the overnight London Inter Bank Offered Rate as quoted on a reputable financial
information service (LIBOR) as at 11.00 a.m., London time, on the date on which it is to be determined or, in the case of an
expense attributable to a particular transaction and, where the Parties have previously agreed a rate of interest for the
transaction, that rate of interest if it is greater than LIBOR. Interest will accrue daily on a compound basis.
Set-off
11.8 Any amount payable to one Party (the Payee) by the other Party (the Payer) under paragraph 11.2(b) may, at the option
of the Non-Defaulting Party, be reduced by its set-off against any amount payable (whether at such time or in the future
or upon the occurrence of a contingency) by the Payee to the Payer (irrespective of the currency, place of payment
or booking office of the obligation) under any other agreement between the Payee and the Payer or instrument or
undertaking issued or executed by one Party to, or in favour of, the other Party. If an obligation is unascertained,
the Non-Defaulting Party may in good faith estimate that obligation and set off in respect of the estimate, subject toaccounting to the other Party when the obligation is ascertained. Nothing in this paragraph shall be effective to create
a charge or other security interest. This paragraph shall be without prejudice and in addition to any right of set-off,
combination of accounts, lien or other right to which any Party is at any time otherwise entitled (whether by operation of
law, contract or otherwise).
12. Taxes
Withholding, gross-up and provision of information
12.1 All payments under this Agreement shall be made without any deduction or withholding for or on account of any Tax
unless such deduction or withholding is required by any Applicable Law.
12.2 Except as otherwise agreed, if the paying Party is so required to deduct or withhold, then that Party (Payer) shall:
(a) Promptly notify the other Party (Recipient) of such requirement;
(b) Pay or otherwise account for the full amount required to be deducted or withheld to the relevant authority;
(c) Upon written demand of Recipient, forward to Recipient documentation reasonably acceptable to Recipient,
evidencing such payment to such authorities; and
(d) Other than in respect of any payment made by Lender to Borrower under paragraph 6.3, pay to Recipient, in addition
to the payment to which Recipient is otherwise entitled under this Agreement, such additional amount as is necessary
to ensure that the amount actually received by Recipient (after taking account of such withholding or deduction) will
equal the amount Recipient would have received had no such deduction or withholding been required; provided Payerwill not be required to pay any additional amount to Recipient under this sub-paragraph (d) to the extent it would not
be required to be paid but for the failure by Recipient to comply with or perform any obligation under paragraph 12.3.
12.3 Each Party agrees that it will upon written demand of the other Party deliver to such other Party (or to any government
or other taxing authority as such other Party directs), any form or document and provide such other cooperation or
assistance as may (in either case) reasonably be required in order to allow such other Party to make a payment under
this Agreement without any deduction or withholding for or on account of any Tax or with such deduction or withholding
at a reduced rate (so long as the completion, execution or submission of such form or document, or the provision of such
cooperation or assistance, would not materially prejudice the legal or commercial position of the Party in receipt of such
demand). Any such form or document shall be accurate and completed in a manner reasonably satisfactory to such other
Party and shall be executed and delivered with any reasonably required certification by such date as is agreed between
the Parties or, failing such agreement, as soon as reasonably practicable.
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Stamp Tax
12.4 Unless otherwise agreed, Borrower hereby undertakes promptly to pay and account for any Stamp Tax chargeable in
connection with any transaction effected pursuant to or contemplated by this Agreement (other than any Stamp Tax that
would not be chargeable but for Lender’s failure to comply with its obligations under this Agreement).
12.5 Borrower shall indemnify and keep indemnified Lender against any liability arising as a result of Borrower’s failure to
comply with its obligations under paragraph 12.4.
Sales Tax
12.6 All sums payable by one Party to another under this Agreement are exclusive of any Sales Tax chargeable on any supply
to which such sums relate and an amount equal to such Sales Tax shall in each case be paid by the Party making such
payment on receipt of an appropriate Sales Tax invoice.
Retrospective changes in law
12.7 Unless otherwise agreed, amounts payable by one Party to another under this Agreement shall be determined byreference to Applicable Law as at the date of the relevant payment and no adjustment shall be made to amounts paid
under this Agreement as a result of:
(a) Any retrospective change in Applicable Law which is announced or enacted after the date of the relevant payment; or
(b) Any decision of a court of competent jurisdiction which is made after the date of the relevant payment (other than
where such decision results from an action taken with respect to this Agreement or amounts paid or payable under
this Agreement).
13. Lender’s Warranties
Each Party hereby warrants and undertakes to the other on a continuing basis to the intent that such warranties shall survive
the completion of any transaction contemplated herein that, where acting as a Lender:
(a) It is duly authorised and empowered to perform its duties and obligations under this Agreement;
(b) It is not restricted under the terms of its constitution or in any other manner from lending Securities in accordance with
this Agreement or from otherwise performing its obligations hereunder;
(c) It is absolutely entitled to pass full legal and beneficial ownership of all Securities provided by it hereunder to Borrower
free from all liens, charges and encumbrances; and
(d) It is acting as principal in respect of this Agreement, other than in respect of an Agency Loan.
14. Borrower’s Warranties
Each Party hereby warrants and undertakes to the other on a continuing basis to the intent that such warranties shall survive
the completion of any transaction contemplated herein that, where acting as a Borrower:
(a) It has all necessary licences and approvals, and is duly authorised and empowered, to perform its duties and obligations
under this Agreement and will do nothing prejudicial to the continuation of such authorisation, licences or approvals;
(b) It is not restricted under the terms of its constitution or in any other manner from borrowing Securities in accordance with
this Agreement or from otherwise performing its obligations hereunder;
(c) It is absolutely entitled to pass full legal and beneficial ownership of all Collateral provided by it hereunder to Lender free
from all liens, charges and encumbrances;
(d) It is acting as principal in respect of this Agreement; and
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(e) It is not entering into a Loan for the primary purpose of obtaining or exercising voting rights in respect of the Loaned
Securities.
15. Interest on Outstanding Payments
In the event of either Party failing to remit sums in accordance with this Agreement such Party hereby undertakes to pay to
the other Party upon demand interest (before as well as after judgment) on the net balance due and outstanding, for the period
commencing on and inclusive of the original due date for payment to (but excluding) the date of actual payment, in the same
currency as the principal sum and at the rate referred to in paragraph 11.7. Interest will accrue daily on a compound basis
and will be calculated according to the actual number of days elapsed. No interest shall be payable under this paragraph
in respect of any day on which one Party endeavours to make a payment to the other Party but the other Party is unable to
receive it.
16.Termination of this Agreement
Each Party shall have the right to terminate this Agreement by giving not less than 15 Business Days’ notice in writing to the
other Party (which notice shall specify the date of termination) subject to an obligation to ensure that all Loans which have
been entered into but not discharged at the time such notice is given are duly discharged in accordance with this Agreement.
17. Single Agreement
Each Party acknowledges that, and has entered into this Agreement and will enter into each Loan in consideration of and in
reliance upon the fact that, all Loans constitute a single business and contractual relationship and are made in consideration
of each other. Accordingly, each Party agrees:
(a) To perform all of its obligations in respect of each Loan, and that a default in the performance of any such obligations shall
constitute a default by it in respect of all Loans, subject always to the other provisions of the Agreement; and
(b) That payments, deliveries and other transfers made by either of them in respect of any Loan shall be deemed to have been
made in consideration of payments, deliveries and other transfers in respect of any other Loan.
18. Severance
If any provision of this Agreement is declared by any judicial or other competent authority to be void or otherwise
unenforceable, that provision shall be severed from the Agreement and the remaining provisions of this Agreement shall
remain in full force and effect. The Agreement shall, however, thereafter be amended by the Parties in such reasonable
manner so as to achieve as far as possible, without illegality, the intention of the Parties with respect to that severed
provision.
12. Specific Performance
Each Party agrees that in relation to legal proceedings it will not seek specific performance of the other Party’s obligation to
deliver Securities, Equivalent Securities, Collateral or Equivalent Collateral but without prejudice to any other rights it mayhave.
20. Notices
20.1 Any notice or other communication in respect of this Agreement may be given in any manner set forth below to the
address or number or in accordance with the electronic messaging system details set out in paragraph 5 of the Schedule
and will be deemed effective as indicated:
(a) If in writing and delivered in person or by courier, on the date it is delivered;
(b) If sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient
in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender’s facsimile machine);
(c) If sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date that
mail is delivered or its delivery is attempted; or
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(d) If sent by electronic messaging system, on the date that electronic message is received,
unless the date of that delivery (or attempted delivery) or the receipt, as applicable, is not a Business Day or that
communication is delivered (or attempted) or received, as applicable, after the Close of Business on a Business Day, in
which case that communication shall be deemed given and effective on the first following day that is a Business Day.
20.2 Either Party may by notice to the other change the address or facsimile number or electronic messaging system details
at which notices or other communications are to be given to it.
21. Assignment
21.1 Subject to paragraph 21.2, neither Party may charge, assign or otherwise deal with all or any of its rights or obligations
hereunder without the prior consent of the other Party.
21.2 Paragraph 21.1 shall not preclude a party from charging, assigning or otherwise dealing with all or any part of its interest
in any sum payable to it under paragraph 11.2(b) or 11.7.
22. Non-Waiver
No failure or delay by either Party (whether by course of conduct or otherwise) to exercise any right, power or privilege
hereunder shall operate as a waiver thereof nor shall any single or partial exercise of any right, power or privilege preclude
any other or further exercise thereof or the exercise of any other right, power or privilege as herein provided.
23. Governing Law and Jurisdiction
23.1 This Agreement and any non-contractual obligations arising out of or in connection with this Agreement shall be
governed by, and shall be construed in accordance with, English law.
23.2 The courts of England have exclusive jurisdiction to hear and decide any suit, action or proceedings, and to settle any
disputes or any non-contractual obligation which may arise out of or in connection with this Agreement (respectively,
Proceedings and Disputes) and, for these purposes, each Party irrevocably submits to the jurisdiction of the courts of
England.
23.3 Each Party irrevocably waives any objection which it might at any time have to the courts of England being nominated
as the forum to hear and decide any Proceedings and to settle any Disputes and agrees not to claim that the courts of
England are not a convenient or appropriate forum.
23.4 Each Party hereby respectively appoints the person identified in paragraph 7 of the Schedule pertaining to the relevant
Party as its agent to receive on its behalf service of process in the courts of England. If such an agent ceases to be an
agent of a Party, the relevant Party shall promptly appoint, and notify the other Party of the identity of its new agent in
England.
24. Time
Time shall be of the essence of the Agreement.
25. Recording
The Parties agree that each may record all telephone conversations between them.
26. Waiver of Immunity
Each Party hereby waives all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, attachment (both
before and after judgement) and execution to which it might otherwise be entitled in any action or proceeding in the courts of
England or of any other country or jurisdiction relating in any way to this Agreement and agrees that it will not raise, claim orcause to be pleaded any such immunity at or in respect of any such action or proceeding.
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27. Miscellaneous
27.1 This Agreement constitutes the entire agreement and understanding of the Parties with respect to its subject matter and
supersedes all oral communication and prior writings with respect thereto.
27.2 The Party (the Relevant Party ) who has prepared the text of this Agreement for execution (as indicated in paragraph 9 of
the Schedule) warrants and undertakes to the other Party that such text conforms exactly to the text of the standard form
Global Master Securities Lending Agreement (2009 version) posted by the International Securities Lending Association
on its website except as notified by the Relevant Party to the other Party in writing prior to the execution of this
Agreement.
27.3 Unless otherwise provided for in this Agreement, no amendment in respect of this Agreement will be effective unless in
writing (including a writing evidenced by a facsimile transmission) and executed by each of the Parties or confirmed by
an exchange of telexes or electronic messages on an electronic messaging system.
27.4 The Parties agree that where paragraph 11 of the Schedule indicates that this paragraph 27.4 applies, this Agreement
shall apply to all loans which are outstanding as at the date of this Agreement and which are subject to the securities
lending agreement or agreements specified in paragraph 11 of the Schedule, and such Loans shall be treated as if theyhad been entered into under this Agreement, and the terms of such loans are amended accordingly with effect from the
date of this Agreement.
27.5 The Parties agree that where paragraph 12 of the Schedule indicates that this paragraph 27.5 applies, each may use the
services of a third party vendor to automate the processing of Loans under this Agreement and that any data relating to
such Loans received from the other Party may be disclosed to such third party vendors.
27.6 The obligations of the Parties under this Agreement will survive the termination of any Loan.
27.7 The warranties contained in paragraphs 13, 14 and 27.2 and in the Agency Annex will survive termination of this
Agreement for so long as any obligations of either of the Parties pursuant to this Agreement remain outstanding.
27.8 Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are
cumulative and not exclusive of any rights, powers, remedies and privileges provided by law.
27.9 This Agreement (and each amendment in respect of it) may be executed and delivered in counterparts (including by
facsimile transmission), each of which will be deemed an original.
27.10 A person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to
enforce any terms of this Agreement, but this does not affect any right or remedy of a third party which exists or is
available apart from that Act.
EXECUTED by the PARTIES
SIGNED by )
)
duly authorised for and )
on behalf of )
SIGNED by )
)
duly authorised for and )
on behalf of )
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AGENCY ANNEX
1. Transactions entered into as agent
1.1 Power for Lender to enter into Loans as agent
Subject to the following provisions of this paragraph, Lender may enter into Loans as agent (in such capacity, the Agent )
for a third person (a Principal ), whether as custodian or investment manager or otherwise (a Loan so entered into being
referred to in this paragraph as an Agency Loan ).
If the Lender has indicated in paragraph 8 of the Schedule that it may act as Agent, it must identify each Loan in respect
of which it acts as Agent as an Agency Loan at the time it is entered into. If the Lender has indicated in paragraph 8 of the
Schedule that it will always act as Agent, it need not identify each Loan as an Agency Loan.
1.2 [Pooled Principal transactions
The Lender may enter into an Agency Loan on behalf of more than [one] Principal and accordingly the addendum hereto
for pooled principal transactions shall apply.]*
1.3 Conditions for Agency Loan
A Lender may enter into an Agency Loan if, but only if:
(a) It provides to Borrower, prior to effecting any Agency Loan, such information in its possession necessary to complete
all required fields in the format generally used in the industry, or as otherwise agreed by Agent and Borrower (Agreed
Format ), and will use its best efforts to provide to Borrower any optional information that may be requested by the
Borrower for the purpose of identifying such Principal (all such information being the Principal Information ). Agent
represents and warrants that the Principal Information is true and accurate to the best of its knowledge and has been
provided to it by Principal;
(b) It enters into that Loan on behalf of a single Principal whose identity is disclosed to Borrower (whether by name or by
reference to a code or identifier which the Parties have agreed will be used to refer to a specified Principal) either at
the time when it enters into the Loan or before the Close of Business on the next Business Day after the date on which
Loaned Securities are transferred to the Borrower in the Agreed Format or as otherwise agreed between the Parties;
and
(c) It has at the time when the Loan is entered into actual authority to enter into the Loan and to perform on behalf of that
Principal all of that Principal’s obligations under the agreement referred to in paragraph 1.5(b) below.
Agent agrees that it will not effect any Loan with Borrower on behalf of any Principal unless Borrower has notified
Agent of Borrower’s approval of such Principal, and has not notified Agent that it has withdrawn such approval (such
Principal, an Approved Principal ), with both such notifications in the Agreed Format.
Borrower acknowledges that Agent shall not have any obligation to provide it with confidential information regarding the financial status of its Principals; Agent agrees, however, that it will assist Borrower in obtaining from Agent’s
Principals such information regarding the financial status of such Principals as Borrower may reasonably request.
1.4 Notification by Agent of certain events affecting any Principal
Agent undertakes that, if it enters as agent into an Agency Loan, forthwith upon becoming aware:
(a) Of any event which constitutes an Act of Insolvency with respect to the relevant Principal; or
(b) Of any breach of any of the warranties given in paragraph 1.6 below or of any event or circumstance which results in
any such warranty being untrue if repeated by reference to the then current facts,
It will inform Borrower of that fact and will, if so required by Borrower, furnish it with such additional information as it
may reasonably request to the extent that such information is readily obtainable by Agent.
* Delete as appropriate
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ADDENDUM FOR POOLED PRINCIPAL AGENCY LOANS
1. Scope
This addendum applies where the Agent wishes to enter into an Agency Loan on behalf of more than one Principal. The Agen-
cy Annex shall apply to such a Loan subject to the modifications and additional terms and conditions contained in paragraph 2
to 7 below.
2. Interpretation
2.1 In this addendum:
(a) Collateral Transfer has the meaning given in paragraph 5.1 below;
(b) If at any time on any Business Day the aggregate Market Value of Posted Collateral in respect of all Agency Loans
outstanding with a Principal under the Agreement exceeds the aggregate of the Required Collateral Value in respect
of such Agency Loans, Borrower has a Net Loan Exposure to that Principal equal to that excess; if at any time on
any Business Day the aggregate Market Value of Posted Collateral in respect of all Agency Loans outstanding under
the Agreement with a Principal falls below the aggregate of the Required Collateral Value in respect of such AgencyLoans, that Principal has a Net Loan Exposure to Borrower for such Agency Loans equal to that deficiency;
(c) Pooled Principal has the meaning given in paragraph 6(a) below; and
(d) Pooled Loan has the meaning given in paragraph 6(a) below.
3. Modifications to the agency annex
3.1 Paragraph 1.3(b) of the Agency Annex is deleted and replaced by the following:
“It enters into that Loan on behalf of one or more Principals and at or before the time when it enters into the Loan it
discloses to Borrower the identity and the jurisdiction of incorporation, organisation or establishment of each such
Principal (and such disclosure may be made either directly or by reference to a code or identifier which the Parties have
agreed will be used to refer to a specified Principal);”.
3.2 Paragraph 1.3(c) of the Agency Annex is deleted and replaced by the following:
“It has at the time when the Loan is entered into actual authority to enter into the Loan on behalf of each Principal and to
perform on behalf of each Principal all of that Principal’s obligations under the Agreement”.
4. Allocation of agency loans
4.1 The Agent undertakes that if, at the time of entering into an Agency Loan, the Agent has not allocated the Loan to a
Principal, it will allocate the Loan before the Settlement Date for that Agency Loan either to a single Principal or to
several Principals, each of whom shall be responsible for only that part of the Agency Loan which has been allocated toit. Promptly following such allocation, the Agent shall notify Borrower of the Principal or Principals (whether by name or
reference to a code or identifier which the Parties have agreed will be used to refer to a specified Principal) to which that
Loan or part of that Loan has been allocated.
4.2 Upon allocation of a Loan in accordance with paragraph 4.1 above or otherwise, with effect from the date on which the
Loan was entered into:
(a) Where the allocation is to a single Principal, the Loan shall be deemed to have been entered into between Borrower
and that Principal; and
(B) Where the allocation is to two or more Principals, a separate Loan shall be deemed to have been entered into
between Borrower and each such Principal with respect to the appropriate proportion of the Loan.
4.3 If the Agent shall fail to perform its obligations under paragraph 4.2 above then for the purposes of assessing any damage
suffered by Borrower (but for no other purpose) it shall be assumed that, if the Loan concerned (to the extent not allocated)
had been allocated in accordance with that paragraph, all the terms of the Loan would have been duly performed.
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5. Allocation of collateral
5.1 Unless the Agent expressly allocates (a) a deposit or delivery of Posted Collateral or (b) a repayment of Cash Collateral or
a redelivery of Equivalent Collateral (each a Collateral Transfer ) before such time, the Agent shall, at the time of making or
receiving that Collateral Transfer, be deemed to have allocated any Collateral Transfer in accordance with paragraph 6.3
below.
5.2 (a) If the Agent has made a Collateral Transfer on behalf of more than one Pooled Principal, that Collateral Transfer shall
be allocated in proportion to Borrower’s Net Loan Exposure in respect of each Pooled Principal at the Agent’s close of
business on the Business Day before the Collateral Transfer is made; and
(b) If the Agent has received a Collateral Transfer on behalf of more than one Pooled Principal, that Collateral Transfer shall
be allocated in proportion to each Pooled Principal’s Net Loan Exposure in respect of Borrower at the Agent’s close of
business on the Business Day before the Collateral Transfer is made.
(c) Sub-paragraphs (a) and (b) shall not apply in respect of any Collateral Transfer which is effected or deemed to have
been effected under paragraph 6.3 below.
6. Pooled principals: rebalancing of margin
6.1 Where the Agent acts on behalf of more than one Principal, the Parties may agree that, as regards all (but not some only)
outstanding Agency Loans with those Principals, or with such of those Principals as they may agree ( Pooled Principals ,
such Agency Loans being Pooled Loans ), any Collateral Transfers are to be made on an aggregate net basis.
6.2 Paragraphs 6.3 to 6.5 below shall have effect for the purpose of ensuring that Posted Collateral is, so far as is practicable,
transferred and held uniformly, as between the respective Pooled Principals, in respect of all Pooled Loans for the time
being outstanding under the Agreement.
6.3 At or as soon as practicable after the Agent’s close of business on each Business Day on which Pooled Loans are
outstanding (or at such other times as the Parties may from time to time agree) there shall be effected such Collateral
Transfers as shall ensure that immediately thereafter:
(a) In respect of all Pooled Principals which have a Net Loan Exposure to Borrower, the amount of Collateral then
deliverable or Cash Collateral then payable by Borrower to each such Pooled Principal is equal to such proportion of
the aggregate amount of Collateral then deliverable or Cash Collateral then payable, to all such Pooled Principals as
corresponds to the proportion which the Net Loan Exposure of the relevant Pooled Principal bears to the aggregate of
the Net Loan Exposures of all Pooled Principals to Borrower; and
(b) In respect of all Pooled Principals to which Borrower has a Net Loan Exposure, the aggregate amount of Equivalent
Collateral then deliverable or repayable by each such Pooled Principal to Borrower is equal to such proportion of the
aggregate amount of Equivalent Collateral then deliverable or repayable by all such Pooled Principals as corresponds
to the proportion which the Net Loan Exposure of Borrower to the relevant Pooled Principal bears to the aggregate of
the Net Loan Exposures of Borrower to all Pooled Principals.
6.4 Collateral Transfers effected under paragraph 6.3 shall be effected (and if not so effected shall be deemed to have been
so effected) by appropriations made by the Agent and shall be reflected by entries in accounting and other records
maintained by the Agent. Accordingly, it shall not be necessary for payments of cash or deliveries of Securities to be
made through any settlement system for the purpose of such Collateral Transfers. Without limiting the generality of the
foregoing, the Agent is hereby authorised and instructed by Borrower to do all such things on behalf of Borrower as
may be necessary or expedient to effect and record the receipt on behalf of Borrower of cash and Securities from, and
the delivery on behalf of Borrower of cash and Securities to, Pooled Principals in the course or for the purposes of any
Collateral Transfer effected under that paragraph.
6.5 Promptly following the Collateral Transfers effected under paragraph 6.3 above, and as at the Agent’s close of business on
any Business Day, the Agent shall prepare a statement showing in respect of each Pooled Principal the amount of cashCollateral which has been paid, and the amount of non-cash Collateral of each description which have been transferred,
by or to that Pooled Principal immediately after those Collateral Transfers. If Borrower so requests, the Agent shall deliver
to Borrower a copy of the statement so prepared in a format and to a timetable generally used in the market.
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