The GMRA Agreement: An Overview
The Global Master Repurchase Agreement (GMRA) is a foundational document in the world of financial transactions, particularly among institutions and traders engaged in repurchase agreements and securities lending. Its purpose is to provide a standardized legal framework through which parties can deal in repurchase agreement transactions, primarily in the repo and buyback markets in the European Union, North America, and elsewhere.
From an industry perspective, the GMRA seeks to reduce, in most cases, the real and perceived legal risks associated with a transfer of ownership interest in collateral . Its standardized form provides a significant measure of certainty and sophistication to the documentation of dual financing and security systems, as well as to liquidation and close-out transactions. Without the GMRA, market practices potentially would necessitate the drafting of customized documents that could alter the party-to-party relationship and expose parties to disparate results across jurisdictions.
The GMRA was originally drafted in 1992 and has been revised over the years in major ways in 2000, 2006, and 2011. It is now the standard form under which the vast majority of transactions are conducted risk-free under advice of law firms in key international money markets.
Essential Elements of the GMRA
While the GMRA is a general framework, or template, that can be used for a great many repurchase transactions, there are some key elements to be aware of, potentially including the following:
Bare Minimums – There are several provisions and contractual clauses that are standard and essential components of a GMRA. While a party drafting a GMRA may be tempted to eliminate such components (for example, to eliminate payment of interest), these components cannot be omitted without running the risk of unintentionally waiving an important benefit provided by the GMRA. Examples of such components include:
Term – One of the most important aspects of the GMRA is its term. The duration of the GMRA, or how long the GMRA will remain in effect, will have an important impact on the lifecycle of any repurchase transaction. GMRA are typically open-ended agreements that will remain in effect until an effective termination date is established by the parties. Once established, the agreed-upon termination date will mirror the term of the majority of repurchase agreements, and once reached, the GMRA will terminate with no further effect. The agreed-upon termination date must be recorded in writing; an email from the defaulting party is sufficient, and any provisions calling for a specific period of notice to the non-defaulting party will apply. The GMRA is meant to be an all-encompassing agreement: while the two sides of the agreement must negotiate and agree upon its terms, the GMRA replaces all prior documentation between the parties. Therefore, unlike agreements that use prior documentation as a basis of negotiation (like SIFMA), the GMRA cannot incorporate any self-contained transactions (like ISDA).
Memorandum and Acknowledgment – The purpose of the Memorandum and Acknowledgment is to provide evidence that the parties are not simply entering the GMRA at random, but have actually agreed to be bound by its terms. The Memorandum and Acknowledgment should be signed by an authorized party, like an agent, and the actual trading counterparties. The GMRA contains a covenant requiring that the original bearing the original signatures be held by each party, and a copy of the original be held by the agent.
Confirmation – There is a significant likelihood that the parties will enter into many separate transactions over the life of their agreement, given that the GMRA is meant to govern repurchase and reverse repurchase transactions on an ongoing basis. The Confirmation is a key component of the GMRA, as it is the document that effectively memorializes the terms of each particular transaction. In the absence of a confirmation, the Counterparty may be unable to enforce the provisions contained in the GMRA. The Confirmation must be in writing; emails exchanged between the parties may constitute written confirmation of a repurchase agreement, particularly if the counterparty provides a reasoned assertion of an agreement to enter into a particular transaction.
Role of the GMRA in Repo Transactions
The GMRA is the standard agreement used to document the terms of the repo transaction. The GMRA sets out the rights and obligations of both parties and it also provides a framework for properly managing risk and facilitating the repo transaction. It provides frameworks for transfer of title and custody; settlement of price, margin payments and margin calls; close-out; triggers events (e.g., default, illegality, Hedging/Close-out); the price sources; netting; close-out netting; payment netting; netting of security lending; and set-off for collateral for a mortgage loan.
The GMRA contains various formulae to assist the calculation of amounts owing by one party to the other and for payments in respect of interest, fees and taxes on an amount that is due.
Expressing its desire to facilitate an efficient market, ISDA has developed annexes to the GMRA to cover master netting, cross-product netting and regulatory netting. In March 1999, the Collateral Documents Working Group (a joint working group for the Bond Market Association and ISDA) published a set of collateral documents for repo transactions. These supplemental documents are referred to as the GMRA Collateral Annexes. Furthermore, ISDA revised in August 2000 the GMRA 1995 to cover the credit support annexes. These supplemental documents are referred to as the GMRA Credit Support Annexes.
The GMRA allows parties the flexibility to adapt each repurchase agreement to their needs and the current market conditions. Parties may vary the following from the GMRA: Parties can agree on which underlying law to apply to a transaction governed by the GMRA.
Enforceability issues may need to be addressed in relation to the validity and enforceability of netting, margining, close-out and similar provisions and the enforceability of collateralisation and security arrangements in each jurisdiction. Uncertainties exist surrounding close-out netting, payment netting under certain applicable laws, set-off and the validity of the administration of collateral arrangements (including master netting).
Advantages of Employing a GMRA
The GMRA is a useful mechanism for a number of reasons: the GMRA helps mitigate legal risk by incorporating the body of English law (which is well developed and recognized) with terms and practices already in use in the market. Its clear delivery mechanisms also mean that the parties know whether they have created an obligation enabling the delivery of an asset between them. The GMRA provides a framework within which parties can agree a flexible approach to the terms of a trade, including when that trade is agreed, which is important because of the speed with which transactions can move through the clearing or settlement systems. There is also a well-established market practice for putting in place an annex to the GMRA as a schedule for particular trades or trading groups, adding flexibility to the use of the GMRA and, because the GMRA enables the parties to sign a secondary document (usually by fax, email or paper), a transaction can be confirmed before a formal GMRA has been executed. The GMRA enables use of one document to cover the terms of the transaction (including the relevant industry standard definitions), linked documents, the manner of delivery or settlement, along with any product specific details. Its simplicity, while at the same time providing flexibility and legal certainty, foster liquid markets and contribute to enhancing overall market efficiency through the GMRA. The ISDA GMRA facilitates netting and close out netting, which enhances creditors’ ability to achieve portfolio netting and enables set-off with respect to collateral, without the need for court action in most jurisdictions. The netting benefits of the GMRA and the ability to have set off over collateral, means faster and more efficient ways of managing variation margin payments, as the parties can net off amounts due to each other, so removing the need for one party making payments to the other by way of variation margin. In addition, the GMRA enables the trade of securities to be settled on a contractually agreed basis, with its terms enforceable against any future bankruptcy or insolvency related claims by a party’s trustee or liquidator.
Legal Implications under a GMRA
When entering into a global GMRA, the parties will consider and negotiate many commercial aspects of the transaction such as margining, collateral, and any form of an early termination right for either party. However, the legal consequences of a GMRA and the relevant aspects for the parties will also need to be considered. While insolvency will have been considered and dealt with prior to entering into the GMRA, once the GMRA is entered into, there are various conditions and requirements that the parties must comply with to ensure that the GMRA continues to operate as it should. These are discussed briefly below.
The GMRA is typically entered into on an ISDA jurisdictional or local law basis, which means that there will be local law requirements that need to be met when disposing of collateral or perfecting its security interest. Separately, typical GMRA documentation (and by extension, GMRA jurisdictional opinions) will outline specific local jurisdictional matters that will need to be considered and adhered to (such as initial paper perfection , further action, and other primary security perfection requirements). When a party has issued a GMRA jurisdictional opinion, the party will be obliged to comply with the deliverables required by that jurisdictional opinion (as discussed above, and further considered in section 7 below).
In addition, local laws may require certain formalities to be complied with in connection with the transfer and perfection of security over the Collateral. For example, in some jurisdictions it is a mandatory requirement that collateral is physically deposited with the local custodian/SEC-registered depository (sometimes referred to as the "depository"), unless it can be proved that the local depository is not able to act for the benefit of a non-local entity (in which case local law may allow for deposited collateral to be held by another local security custodian).
In addition, where collateral is booked in and out of a different jurisdiction from the local jurisdictions, or where collateral is to be re-hypothecated, obligations on the borrower may need to be imposed.
Comparison with Other Affiliated Market Agreements
The GMRA agreement is very similar in most aspects to both the ISDA Master Agreement and GMRA form agreements used in the International Securities Market, including the ISMA, FMLC and NUVOL templates. There are differences in that the GMRA and ISMA are described as framework agreements as they provide for netting of exposures to a particular close out group and as such, are not unlimited in scope. The ISDA Master Agreement, on the other hand, can apply to any category of transaction, not just securities lending, repo and title transfer collateralized lending, and this is usually extended to include securities lending and repo transactions.
As a wider netting concept, that of ISDA, the ISDA Master Agreement is thereby known as an overarching template which may be included within GMRA to extend the netting concept to securities lending transactions (the combination of the GMRA and ISDA Master Agreement is sometimes referred to as Master Agreement). The ISDA and GMRA are sometimes similarly referred to as framework agreements. The ISDA Master Agreement allows for various gaps in its wording to be filled in with additional provisions and thereby fits with the framework-based concept. The GMRA’s choice of rights such as set-off remedy following default takes in practice some elements of the ISDA. The GMRA track record in terms of issues and litigation is considered to be much better than the ISDA.
New Developments and Amendments to the GMRA
In 2019, the International Capital Market Association (ICMA) published the 2019 version of its Global Master Repurchase Agreement (GMRA), which contains an enhanced default interest regime that will automatically apply to all new and amended GMRA agreements, provided that the parties have not expressly excluded it by clause 14(f). The new regime is intended to ensure that market participants are charged appropriate default interest fees based on an agreed rate plus an added spread, in order to compensate them for risks arising from an event of default by the counterparty. This automatic regime will reduce reliance on manual processes or drafting effort in connection with amendments aimed at changing the applicable rate in such situations.
The GMRA 2019 publication also contains new provisions permitting the transfer of rights, but not obligations, under a GMRA without the consent of the counterparty. This alleviates participants’ concerns that assigning their rights may have terminable impact on their position, relieving them of the need to request a consent to these assignments.
In June 2019, clearing members of the International Swaps and Derivatives Association (ISDA) voted to adopt a recommended status for ISDA Credit Support Annexes (CSAs) under the GMRA. Participants were concerned that parties could seek to circumvent ISDA CSAs by attempting to agree their own bespoke CSA to apply to a separate agreement. The new recommended status means that a CSA referencing a GMRA will now be treated as a standard form of ISDA CSA, rather than a bespoke or non-standard form. The recommended status will also provide a way to ensure regulatory capital neutrality for counterparties that treat ISDA CSAs differently depending on whether they are associated with a GMRA or a debt repurchase agreement, thereby avoiding unnecessary liquidity costs.
Meanwhile, the EU regulations implementing the Benchmark Regulation came into effect on Jan. 21, 2018. These regulations deal with the appropriate use of benchmarks and compel benchmark administrators to comply with a wide range of standards. Following a review of ISDA’s 2016 amendments, ISDA recently published further amendments to provide additional long fallback language. The GMRA committee continues to review benchmark transition mechanisms, including the possible incorporation of fallback language, with potential adoption by market participants in future amendments.
Conclusion and Future Perspectives
The primary benefit of the GMRA is that it is a standardised close-out regime for the global market, providing certainty and predictability for the central clearing and bilateral margining of repos and derivative transactions. In addition, the GMRA has had the follow-on effect of globalising documentation trends, with parties in markets in which the use of the GMRA was relatively limited, such as the Middle East, moving ever closer to the terms of the GMRA.
Looking ahead, future developments may be needed to address the regulatory and market developments of the international repo market, most notably, cross-border regulatory fragmentation . In order to preserve the globalised nature of the modern repo market, parties will need to implement a resolution for how GMRA agreements will work across different jurisdictions, while at the same time, they will also need to ensure that their internal risk management and recovery protocols are flexible enough to transition into a cross-border context. With changes afoot in regulation and market structure, it will be interesting to see the impact this has on the GMRA and its position as the key legal precedent for the international financial market.