Primebrokers Securities Ltd (recs & m'gers app'td) (in liq) v Fortis Clearing Sydney Pty Ltd [2009] VSC 364

Primebrokers Securities Ltd (recs & m'gers app'td) (in liq) v Fortis Clearing Sydney Pty Ltd [2009] VSC 364 - VSC 2009 case summary — Zoe

[48]

Securities lending refers to the practice by which securities are transferred from one party (the lender) to another party (the borrower), with the borrower contractually obliged to redeliver to the lender at a later time securities which are equivalent in number and type. Securities lending is an important element of modern financial markets, playing a substantial role in promoting market liquidity and providing stability to securities settlement systems. Although the practice can be traced back to the 19th century, an active market for securities lending did not emerge until the 1960s. The market developed principally to accommodate two growing needs: first, to avoid settlement failure (stock market transactions had to be settled within a short period) and, secondly, to accommodate short selling (the practice of selling shares that the seller does not currently own in the hope of buying them in at a lower price and in the meantime acquiring shares to complete the sale). Securities lending was also spurred by more sophisticated forms of trading strategies, often involving derivatives, which require borrowed stock. For example, traders in equity options, indexed futures, equity return swaps and convertible bonds began selling short to either hedge their positions or exploit arbitrage opportunities.

The modern securities lending market can, broadly speaking, be divided into two markets, one that is defined by the motive of the borrower (the "securities driven" market) and the other by the motive of the lender (the "cash driven" market). In the first category, which is the more common type of transaction, a borrower seeks access to specific securities, usually to cover exposure to a short position. In the second category, a lender of securities seeks access to cash, often for purposes of equity financing at interest rates which are better than the uncollateralised borrowing rate.

Securities lending is typically structured in one of three ways: securities loan transactions, repurchase agreements and sell-buyback arrangements. While the legal forms of the transactions differ, the commercial purposes are the same. In a securities loan transaction in the securities driven market the lender transfers specific securities to the borrower who must return "equivalent securities" to the lender either on demand, on the occurrence of a defined event or at the end of an agreed term. The borrower: (1) obtains an outright transfer of title to the securities, which may then be sold or on-lent; (2) pays a fee for the use of the securities, calculated by reference to the value of the lent securities; and (3) provides collateral to the lender in the form of cash, other securities or other assets (eg government bonds, certificates of deposit, bank letters of credit), title to which passes to the lender. The value of the collateral exceeds the value of the borrowed securities, the difference in percentage terms being referred to as the "margin". At the conclusion of the transaction there is an exchange of "equivalent securities" for "equivalent collateral". In the event of default provision is made for placing a money value on each party's obligations, setting one off against the other, and, if there is a net balance, for payment of the balance. A securities loan in the cash driven market follows the same structure but with important differences. First, the collateral is always provided in the form of cash. Secondly, the amount of cash collateral is less than the value of the lent securities. And thirdly, the lender pays a fee, much like interest, calculated by using a discounted interest rate. By reason of these differences commentators and securities lending participants colloquially refer to the securities rather than the cash as the collateral.

[56]

7.1 [Borrower's obligation to redeliver Equivalent Securities] The Borrower undertakes to redeliver Equivalent Securities in accordance with this Agreement and the terms of the relevant Borrowing Request.

7.2 [Lender may call for redelivery of Equivalent Securities] Subject to clause 8 and the terms of the relevant Borrowing Request, the Lender may call for the redelivery 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 or the equivalent time on the exchange or in the clearing organisation through which the relevant borrowed Securities were originally delivered. The Borrower shall as hereinafter provided redeliver such Equivalent Securities not later than the expiry of such notice in accordance with the Lender's instructions.

7.3 [Lender may terminate loan if Borrower defaults] If the Borrower does not redeliver Equivalent Securities in accordance with such call, the Lender may elect to continue the loan of Securities; provided that, if the Lender does not elect to continue the loan, the Lender may by written notice to the Borrower elect to terminate the relevant loan. Upon the expiry of such notice the provisions of clauses 8.2 to 8.5 shall apply as if upon the expiry of such notice an Event of Default had occurred in relation to the Borrower (who shall thus be the Defaulting Party for the purposes of this Agreement) and as if the relevant loan were the only loan outstanding.

7.4 [Consequences of exercise of "buy-in" against Lender, as a result of Borrower] In the event that, as a result of the failure of the Borrower to redeliver Equivalent Securities to the Lender in accordance with this Agreement, a "buy-in" is exercised against the Lender, then, provided that reasonable notice has been given to the Borrower of the likelihood of such a "buy-in", the Borrower shall account to the Lender for the total costs and expenses reasonably incurred by the Lender as a result of such "buy-in".

7.5 [Right of Borrower to terminate loan early] Subject to the terms of the relevant Borrowing Request, the Borrower shall be entitled at any time to terminate a particular loan of Securities and to redeliver all and any Equivalent Securities due and outstanding to the Lender in accordance with the Lender's instructions.

[59]

8.1 [Requirement for simultaneous delivery] On the date and time that Equivalent Securities are required to be redelivered by the Borrower in accordance with the provisions of this Agreement the Lender shall simultaneously redeliver the Equivalent Collateral and repay any Cash Collateral held (in respect of the Equivalent Securities to be redelivered) to the Borrower. 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 simultaneously. 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.

8.2 [Netting following occurrence of Event of Default] If an Event of Default occurs in relation to either Party, 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 "Performance Date" for the purposes of this clause), and in such event:

(a) the Relevant Value of the Securities to be delivered (or payment to be made, as the case may be) by each Party shall be established in accordance with clause 8.3; and

(b) on the basis of the Relevant Values so established, an account shall be taken (as at the Performance Date) of what is due from each Party to the other and (on the basis that each Party's claim against the other in respect of delivery of Equivalent Securities or Equivalent Collateral or any cash payment equals the Relevant Value thereof) 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 Performance Date.[5]

8.3 [Relevant Value] for the purposes of clause 8.2 the Relevant Value:

(a) of any cash payment obligation shall equal its par value (disregarding any amount taken into account under (b) or (c) below);

(b) of any Securities to be delivered by the Defaulting Party shall, subject to clause 8.4(b) and (c) below, equal the Offer Value thereof; and

(c) of any Securities to be delivered by the Defaulting Party shall, subject to clause 8.4(b) and (c) below, equal the Bid Value thereof.

8.4 [Bid Value/Offer Value]

(a) For the purposes of clause 8.3, but subject to (b) and (c) below, the Bid Value and Offer Value of any Securities shall be calculated as at the Close of Business in the most appropriate market for Securities of the relevant description (as determined by the Non-Defaulting Party) on the first Business Day following the Performance Date, or, if the relevant Event of Default occurs outside the normal business hours of such market, on the second Business Day following the Performance Date (the "Default Valuation Time").

At a glance

Court

Decision date

Before

Source

Judgment (112 paragraphs)

Parties

Cases Cited (6)