1. Paul Landless and Emir Nurmansyah
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
Paul Landless and Emir Nurmansyah
22 November 2012
Indonesian GMRA Annex

2. Introduction
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
Part A: Framework & Transaction Initiation
Part B: Margin & Income Payments
Part C: Events of Default & Close-out
Part D: Boilerplates
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

3. Part A: Framework & Transaction Initiation
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

4. Introduction to GMRA Master Agreement
What are Master Agreements?
Standard contractual terms apply
Why are they used?
Formalities
Transactions agreed orally over telephone
Uncertainty
Entire agreement clauses
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

5. Common Architecture Documentation Architecture
Master Agreement produced by trade association
GMRA Annex (Annex I)
Customised Annexes for particular markets or products
Confirmations
Forms a single agreement
No cherry picking
Forms the basis for close-out netting
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

6. The Repo Master Agreement
Standard form principal agreement is Global Master Repurchase Agreement (GMRA)
Framework agreement used to carry out any number of individual repo transactions
Documentation issued by SIFMA and ICMA
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

7. Annexes to the GMRA
The GMRA is designed for use in particular situations where:
UK regulatory requirements and UK tax
Issuer of the transferred securities may pay the coupon gross
Seller and Buyer act as principals
Agency Annex
The GMRA may be adapted for use in other situations (e.g. buy/sell-back transactions)
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

8. Examples of GMRA Annexes
Annex I – Supplemental Terms and Conditions
Annex II – Confirmation
Agency Annex
Buy/Sell-back Annex
Equities Annex
Indonesia Country Annex
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

9. The Confirmation
Commercial terms of an individual transaction or "trade"
Standard form in Annex II
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

10. Details of the Confirmations
Date of the relevant GMRA
Date of the transaction
Type and nominal value of the securities transferred
Identifying numbers for the securities
Name of the buyer and the seller and bank account details
Purchase date
Additional terms may also be incorporated
Purchase price
Currency of the contract
Repurchase date (or, if the repo is terminable on demand, a statement to this effect)
Repo rate
Sell-back price (if the transaction is a sell/buy-back)
Agency transaction; if so, name of party acting as agent and as principal
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

11. Negotiating a GMRA Annex
Buy/Sell-Back Annex applicable?
Net-paying Securities to be covered under the agreement?
Agency Transactions permitted?
Base Currency
Designated Offices
Pricing Source
Spot Rates
Delivery of Confirmations
Interest Rate on Cash Margin
Interest Payment Intervals
Delivery Period for Margin Calls
Delivery and payment condition precedent applicable?
Event of default for fails on a per trade basis applicable?
Addresses for communication
Agent for service of process
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

12. GMRA Annex – Key Provisions, Market Standards and Relevant Legal Issues
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

13. Overview - Terms under GMRA Annex (1)
Standard Terms common to all transactions, e.g.:
Representations and Warranties
Events of Default
Other matters to be agreed between the parties, e.g.:
Base Currency for the Transactions
Each Party's Address for Service
Name of any Process Agent
Supplemental Provisions
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

14. Overview - Terms under GMRA Annex (2)
Initiation
Confirmation
Termination
Margin Maintenance
Income Payments
Payment and Transfer
Contractual Currency
Substitutions
Representations and Warranties
Events of Default
Tax Events
Interest
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

15. Parties to the GMRA
Each party enters individual transactions though designated offices and authorised individuals
Designated offices
Authorised individuals
Regulatory authority
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

16. Applicability Paragraph 1 Buyer on one transaction, Seller on another
Buy/sell-back transactions between the parties
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

17. Initiation; Confirmation; Termination
Paragraph 3
(a): A transaction may be entered into orally or in writing at the initiation of either the seller or the buyer
(b): Obligation to deliver written confirmation
(c): Purchase Date
(d)&(e):Termination
“On demand” transactions
(f): Transfer of Equivalent Securities against payment of the Repurchase Price (Paragraph 2(pp))
Pricing Rate (Paragraph 2(jj))
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

18. Part B: Margin Maintenance & Income Payments
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

19. Margin maintenance (1) Paragraph 4 Concepts: (1) Exposure
Party with “Net Exposure” in respect of other party may require other party to make Margin Transfer equal to Net Exposure
Net Exposure determined with reference to Transaction Exposure
Transaction Exposure = diff between Repurchase Price x Margin Ratio and market value of equivalent securities
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

20. Margin maintenance – Example 1
On Purchase Date:
Exposure
- Purchased Securities: $ Cash: $100
- Exposure = Exposure: 0
Purchase Price: $100
Seller
Buyer
Purchased Securities: $100 market value
Buyer
Seller
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

21. Margin maintenance – Example 2
Exposure mid-way through transaction
- Purchased Securities: ↑ $ Repurchase Price: ↑ $120
- Exposure = Exposure: $30
Margin call
- Purchased Securities: $ Repurchase Price: $120
- Exposure = Cash (Cash Margin): $30
- Exposure: 0
Buyer
Seller
Buyer
Seller
$30 Cash Margin
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

22. Margin maintenance (2) (2) Initial Margin (3) Haircut
Fixed proportion or ratio of collateralisation for one party
(3) Haircut
Discount to actual market value of a security
Purchased Securities or Margin Securities (for 2011 GMRA)
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

23. Margin maintenance – Example 3
Initial Margin (GMRA 1995 & 2000):
10% in favour of Buyer: OR
10% in favour of Seller:
Buyer
Purchase Price: $100
Seller
Purchased Securities: $110 market value
Purchase Price: $110
Buyer
Seller
Purchased Securities: $100 market value
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

24. Margin maintenance (3) – Margin Call
Maintenance of Margin
Margin Call (Paras 4(a)-(h))
Paragraph 4(a)-(b): Margin calls / Margin call notices
Paragraph 4(c): Net Exposure (Exposure, Haircuts and Initial Margin)
Paragraph 4(d): Composition of margin transfers
Paragraph 4(e)&(f): Cash Margin
Paragraph 4(g): Delivery period for margin
Paragraph 4(h)&(i): Alternative methods of margining
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

25. Margin Maintenance (4) - Repricing & Adjustment
Parties can agree that Net Exposure may instead be eliminated by repricing (Para 4(j)), adjustment (Para 4(k)) or a combination:
(2) Repricing (Paragraph 4(j))
Repurchase Date under original transaction deemed to occur
Parties deemed to enter into a new transaction
Net sum is payable (diff between Repurchase Price under original transaction and Purchase Price under new transaction which is based on market value of securities on Repricing Date)
(3) Adjustment (Paragraph 4(k))
Similar to repricing
Net amount of securities delivered on Adjustment Date
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

26. Income Payments Paragraph 5
Purpose – economic nature vs legal relationship
“Manufactured income payments”
Buyer to credit the seller's account with income on the securities during the term of the repo
“Income” on securities provided as margin / collateral
Voting rights and corporate actions?
Relevant Legal Issues
Recharacterisation issues
Power of attorney required?
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

27. Payment and Transfer (1)
Paragraph 6
Payment and transfers (Para 6(a))
Method for transferring securities
Gross-up (Para 6(b))
Gross-up unless otherwise agreed
Para 11 – Tax Events
Delivery versus payment (Para 6(c) & (d))
May waive simultaneous transfer/payment but must be on same day
Outright title transfer (Para 6(e)&(f))
Absolute title transfer of title to all securities and money
Indonesia Annex: paragraph 6
Formalities for the transfer of Indonesian securities / bonds?
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

28. Payment and Transfer (2)
Time of the essence (Para 6(g))
Close-out provisions and EODs
Settlement netting provisions (Paragraph 6(h) & (i))
Settlement netting vs close-out netting
Cash payments
Deliver of Securities
Paragraph 6(j): Suspension of obligations
Optional
No Potential EOD
Currently the subject of litigation in English courts
Indonesian legal position?
Recharacterisation-related issues re transfer of “Margin Securities”?
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

29. Contractual Currency Paragraph 7 Contractual Currency (Para 7(a))
Base Currency (Paragraph 2(d))
Indonesian rupiah FX Issues
Foreign exchange restrictions
Reporting obligations
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

30. Substitution Paragraph 8
Seller’s right to substitute equivalent securities for the securities transferred
Equivalent Margin Securities /Equivalent Securities (Paragraphs 2(r)&(s))
Buyer’s consent required (Para 8(a))
Buyer re-transfers the original securities back to Seller (or an agreed portion of them) (Para 8(b) & (d))
Seller transfers the substitute securities (Para 8(b) & (d))
At least market value as at the date of the re-transfer (Para 8(a) & (d))
Timing of valuation
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

31. Part C: Events of Default & Close-out
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

32. Representations and Warranties (1)
Paragraph 9(a) – (h)
Breach or representations and warranties an EOD
The representations and warranties are repeated on
The date on which any transaction is entered into
On each day on which the securities are transferred
Due authorisation (Para 9(a))
Acting as principal (Para 9(b))
Governmental and regulatory authorisations (Para 9(d))
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

33. Representations and Warranties (2)
No breach of law, constitution or agreement (Para 9(e))
Non-reliance and acceptance of risks (Para 9(g))
Ability to transfer securities free of encumbrances (Para 9(h))
Indonesia Annex
No events of default
No litigation or arbitration
Capacity
Portfolio management purpose
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

34. Events of Default (1) Paragraph 10(a)
Events of Default and Close-out Netting
Events of Default following service of Default Notice
Exception: Act of Insolvency (Paragraph 2(a))
Revocation of business license?
2011 GMRA changes to Default Notice
Grace Periods?
Business Day (Paragraph 2(e))
“Mini close-out” provisions (Para 10(g) & (h))
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

35. Events of Default (2) Events of Default (Para 10(a))
Failure to pay Purchase Price or Repurchase Price (Para 10(a)(i))
Failure to deliver securities (optional) (Para 10(a)(ii))
Failure to comply with margin maintenance provisions (Para 10(a)(iv))
Failure to pay manufactured payments (Para 10(a)(iii))
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

36. Events of Default (3) Act of Insolvency (Para 10(a)(vi))
Indonesia Annex:
Business licence revocation: liquidation
Bankruptcy and Suspension of Tagment
Consent, approval and acquiescence of above
Business licence revocation: new 10(a)(xi)
Breach of representations in any material respect (Para 10(a)(vii))
Regulatory action against party (Para 10(a)(ix))
“Sweep up” clause – breach of any other obligations – 30 day grace period (Para 10(a)(x))
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

37. “Mini close-out” Provisions
“Mini close-out” (Paras 10(g) and (h))
Failure by Seller to deliver securities on Purchase Date (Para 10(g))
Failure by Buyer to deliver securities on Repurchase Date (Para 10(h))
Termination of transaction
Determination default market value of securities and repurchase price
Set-off
Timing
Indonesia Annex: Articles 1425 – 1435 of Code
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

38. Consequences for counterparty upon Event of Default
Default Notice
Notification of EOD or Potential EOD
Required for all events except presentation of winding up petition or appointment of a liquidator
Practical difficulties of serving notice
Special default notice procedure
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

39. What happens on a default? – what will you seek to recover?
Value of positions
Recovery of expenses
Your hedging costs
No liability for consequential loss
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

40. Close-out netting – Example (1)
Transaction 1
Purchase Date:
3 months later:
- Purchased Securities: ↓$ Repurchase Price: ↑$110
Purchase Price: $100
Party B
Party A
Purchased Securities: $100
Party A
Party B
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

41. Close-out netting – Example (2)
Transaction 2
Purchase Date:
3 months later:
- Purchased Securities: ↑$ Repurchase Price: ↑$105
Purchase Price: $100
Party A
Party B
Purchased Securities: $100
Party B
Party A
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

42. Close-out netting – Example (3)
Event of Default occurs:
Step 1: Acceleration of obligations
Repurchase Price: $110 T1
Party A
Party B
Purchased Securities: $90
Repurchase Price: $105 T2
Party B
Party A
Purchased Securities: $120
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

43. Close-out netting – Example (4)
Step 2: Conversion of delivery obligations into cash obligations
Repurchase Price: $110 T1
Party A
Party B
DMV: $90
Repurchase Price: $105 T2
Party B
Party A
DMV: $120
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

44. Close-out netting – Example (5)
Step 3: Netting
Single net close-out balance
$20 T1
Party A
Party B
$15 T2
Party B
Party A
$35
Party B
T1 + T2
Party A
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

45. What happens on a default? – close-out netting
Paragraphs 10(b)-(f) & (i)-(k)
Repurchase Date accelerated
Cash margin repayable and equivalent margin securities deliverable
Non-defaulting party establishes “Default Market Value” of securities, the amount of cash margin to be transferred and the repurchase prices payable
Amounts set off to produce single net amount payable by one party to the other
Limits on rights to set-off & net?
Preferential Transfers under Indonesian Bankruptcy Law?
Automatic Early Termination?
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

46. Part D: Boilerplates & Other General Provisions
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

47. Tax Event Paragraph 11 Material adverse effect on that transaction
Action by tax authority or change in fiscal or regulatory regime
Affected party may give notice to terminate
The notice must specify a date for close-out (at least 30 days after the date of notice)
Other party may serve counter-notice to prevent such termination
The counter-notice will constitute the other party's agreement to indemnify the first party against the adverse effect
If no counter-notice, termination will go ahead and the first party will indemnify the other party against any reasonable legal and other professional expenses incurred by the other party
Stamp Duty Issues?
Sale of Indonesian shares or bonds
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

48. Interest Paragraph 12 Interest is payable on late payments
The rate of interest is the greater of the repo rate specified in the confirmation and LIBOR
2011 GMRA: “Applicable Rate”
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

49. Governing law Paragraph 17 Indonesia Annex
Arbitration Clause: Annex I election
BAPMI / BANI / SIAC / other
Waiver of immunity
22 November 2012
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues

50. Buy/Sell back vs Repo: Key differences
Documentation
Simple: structured as two separate transactions (spot purchase and forward sale) not under a master agreement
More complex: sale and repurchase structured as one transaction under a master agreement
Close-out netting
Not available due to absence of master agreement
All transactions under a master agreement can be terminated if an Event of Default occurs under any one transaction
If Party A defaults on any one transaction, Party B must wait for other transactions with Party A to mature
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

51. Buy/Sell back vs Repo: Key differences
Margining
Typically not margined
Securities regularly valued or marked-to-market and margin called for accordingly
Documentation provides for non-compliance and release of excess margin
Insolvency Risk
Risk that a party becomes insolvent after initial purchase but before forward sale
Reduced exposure due to operation of close-out netting
Solvent party could be unsecured creditor as regards all sums owing to it from the insolvent party
Solvent party will be unsecured creditor only as regards the net balance owing to it from the insolvent party
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

52. Buy/Sell back vs Repo: Key differences
Insolvency Risk
“Cherry picking” a possibility in some jurisdictions
Accounting treatment
Treated as outright sale
Seller retains securities on its balance sheet
Securities leave Seller’s balance sheet
Coupon accrues for benefit of the Seller
Securities appear on Buyer’s balance sheet
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

53. Buy/Sell back vs Repo: Key differences
Regulatory capital treatment
Increased requirement based on gross exposure to counterparty due to lack of close-out netting and margin
Reduced requirement based on net exposure to counterparty as obligations can be netted and/or margined
Distributions
Buyer keeps income when distributed
Buyer promptly pays equivalent sum to Seller (“manufactured dividend”)
Accounted for in sellback price paid at maturity
Convention only – no contractual obligation on Buyer to pay distributions to Seller
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

54. Questions?
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

55. Your Contacts
Paget Dare Bryan
Partner 28th Floor
Jardine House
One Connaught Place
Central
Hong Kong SAR T F E
Paul Landless
Counsel Clifford Chance 12 Marine Boulevard 25th Floor Tower 3
Marina Bay Financial Centre
Singapore Singapore T F E
Terry Yang
Senior Associate 28th Floor
Jardine House
One Connaught Place
Central
Hong Kong SAR T F E
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

56. Your Contacts
Philip Payne
Foreign Of Counsel Graha CIMB Niaga 24th Floor
Jl. Jend. Sudirman Kav. 58
Jakarta 12190 T
F , 5121, 5122,5392 E
Emir Nurmansyah
Partner
Graha CIMB Niaga 24th Floor
Jl. Jend. Sudirman Kav. 58
Jakarta 12190 T
F , 5121, 5122,5392 E
GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues
22 November 2012

57. We have been active in the Asia Pacific region for more than 50 years:
A premier law firm in Asia Pacific with deep ties to leading local players
We have been active in the Asia Pacific region for more than 50 years:
with eight offices across the region and more than 400 lawyers in Bangkok, Beijing, Hong Kong, Perth, Shanghai, Singapore, Sydney and Tokyo
practising English, US, Hong Kong, Japanese, Singapore, Thai and Australian law and providing local law advice in all offices, where the regulatory framework permits, and working with local lawyers in other jurisdictions
receiving one of the first Qualifying Foreign Law Practice licences issued by the Singapore Government, allowing us to provide Singapore law advice
with a joint marketing and cooperation arrangement with VILAF-Hong Duc in Vietnam
creating strong working relationships with local law firms in Malaysia, Indonesia, the Philippines, South Korea and elsewhere in Asia Pacific
providing a multilingual service to reflect the nature of the region.
Our lawyers advise a diverse client base including domestic and multi-national corporates, banks and other financial institutions, governments and other regulatory bodies, and international partnerships.
22 November 2011

59. GMRA Mechanics: Key Provisions, Market Standards and Relevant Legal Issues