SASLA Releases a 2016 Annex to the Global Master Securities Lending Agreement:
How does it differ to the 2010 Annex?
In June 2016 the South African Securities Lending Association (SASLA) published a new version of the Annex to the Global Master Securities Lending Agreement (GMSLA) for use by South African parties. The Annex is an update of the older 2010 version. The 2016 version primarily deals with new legislation that has come into being since 2010, namely the Financial Markets Act, amendments to the Securities Transfer Tax Act and includes references in the Act of Insolvency provisions to a business rescue practitioner in line with the Companies Act 2008.
Outline of the main changes in the 2016 Annex
The 2010 version of the Annex provided for a cession in securitatem debiti of securities with an option to cede securities either with or without statutory flagging (being the entry into the relevant securities register). Part of the reason the 2010 Annex had provided for the option to cede securities without statutory flagging was that in terms of the Securities Services Act there was no ability to flag the securities at account level, and thus the administrative burden of flagging securities individually was something most parties wanted to avoid. With the promulgation of the Financial Markets Act (which supersedes the Securities Services Act), came the welcome introduction of the ability to flag all securities held in an account, by simply flagging at account level. In addition, the Financial Markets Act is clear that in order to perform a valid cession in securitatem debiti, statutory flagging must be done. As a result, the 2016 SASLA Annex has deleted the option of performing a cession in securitatem debiti without statutory flagging.
The 2010 Annex provided for other methods of ceding in securitatem debiti, uncertificated collateral securities. This has been removed in the new Annex, in recognition of the fact that uncertificated collateral securities may only be ceded if done in line with a cession in securitatem debiti under the Financial Markets Act.
References have also been updated from the sections of the Securities Services Act to the new Financial Markets Act. Additional definitions from the Financial Markets Act have also been incorporated (e.g. “nominee”; “authorized user” and “entry”, to name some).
Under the 2010 Annex, the borrower granted the lender the ability to on-pledge or on-cede any collateral, in securitatem debiti (to the extent permitted by SA law). This right has been removed from the 2016 Annex, as section 39 of the Financial Markets Act must be followed in terms of how certain types of assets can be on-ceded or on-pledged. In addition, section 38 of the Financial Markets Act now makes it possible to transfer collateral securities outright in title, meaning legal and beneficial ownership in collateral passes (along with the right to use the collateral) to the secured party. This means that parties who would like the right of use of collateral securities that have been transferred to them are likely to request a transfer under section 38.
Under the 2010 Annex, if an event of default occurs with respect to the borrower, or the lender otherwise becomes entitled to the collateral, it was stated that the lender would be able to take the “relevant value” of the collateral in order to off-set or eliminate the borrower’s indebtedness to the lender. It was however not clear how the collateral should be valued. In order to clarify this, the 2016 SASLA Annex stipulates that collateral should be valued applying the “Default Market Value”, as defined in the GMSLA.
The 2010 Annex provided that in the instance of a conflict between the master terms of the agreement and the Annex, the Annex would prevail. The 2016 Annex provides further that in the event of a conflict between a confirmation and the Annex, the confirmation will prevail.
In the 2016 Annex, reference to the “order of judicial management” is replaced with the “order of business rescue” under the “Act of Insolvency” definition. In addition, the term “analogous officer” in the 2010 Annex is amended to include a curator, statutory manager or business rescue practitioner. An Act of Insolvency event of default under the 2016 Annex is also triggered by the start of business rescue proceedings; a party being declared “financially distressed” or an application being made for a voluntary winding up in terms of the Companies Act.
The 2016 Annex includes a new provision to clarify the process for manufactured payments on non-cash collateral. The standard terms of the GMSLA provides that if a lender has received non-cash collateral and he holds it over an income payment date, then the lender must pay to the borrower such income that would have been received by the lender assuming the lender retained the non-cash collateral on income payment date, and that lender is not entitled to any credit, benefit or other relief in respect of tax under applicable law. The 2016 Annex amends this provision by stating that if the lender holds non-cash collateral over income payment date, then he must pay whatever amount the borrower would have received if that non-cash collateral had not been transferred to the lender and had been retained by the borrower over income payment date. This amendment avoids any possible tax implications on the manufactured payment that the lender pays to borrower by ensuring that the borrower is put in the economic position he would have been had he retained the non-cash collateral over income payment date.
The jurisdiction clause has been updated to reference the Gauteng Local Division, Johannesburg, of the High Court of South Africa; as opposed to the old name of the South Gauteng High Court of South Africa.
The 2010 Annex included a provision where the parties stated their intention that each loan would terminate and equivalent securities would be delivered to the lender within a 12-month period. This ensured that the loan portion of the transaction qualified as a “Lending Arrangement” and was exempt from securities transfer tax in terms of the act. This still exists in the 2016 Annex, but is drafted with specific reference to the requirements of the Securities Transfer Tax Act, 2007. In addition there is an indemnity clause, whereby the borrower indemnifies the lender against any securities transfer tax or other tax liability for the loan if for any reason the loan does not constitute a Lending Arrangement under the act.
The 2016 Annex includes an additional provision where borrower and lender ensure that the delivery of non-cash collateral will be done in terms of the requirements for a “Collateral Arrangement” under the recent amendment to the Securities Transfer Tax Act, to ensure no securities transfer tax is levied on the transfer of non-cash collateral. In order to qualify as a “Collateral Arrangement”, equivalent non-cash collateral must be recalled by borrower and delivered by lender to borrower within 12 months. There is an indemnity clause whereby the lender indemnifies the borrower against any securities transfer tax or other tax liability that may be applied if the lender fails to deliver equivalent non-cash collateral back to the borrower when the borrower recalls it within a 12-month period. Each party undertakes that they are responsible for paying their own securities transfer tax or other tax arising as a result of non-cash collateral, if for any reason such collateral does not fall within the definition of a “Collateral Arrangement”.
DeriviDoc offers an in-depth course on the Global Master Securities Lending Agreement where the SASLA Annex is also covered in detail:
The 2010 Global Master Securities Lending Agreement
Melissa van der Merwe (DeriviDoc Director)
12 August 2016