The GMRA agreement of 2011 was a significant development in the world of financial derivatives. GMRA stands for Global Master Repurchase Agreement and is a standardized legal document that governs the repurchase of financial securities in the event of a default. It was originally drafted in 1992 by the International Securities Market Association (ISMA) and the International Capital Markets Association (ICMA) and has since been updated several times, with the most recent version being in 2011.
The GMRA agreement of 2011 was a response to the financial crisis of 2008 and aimed to provide greater clarity and transparency in the repurchase market. One of the key changes in the 2011 version was the introduction of new provisions for close-out netting. Close-out netting is the process of offsetting the obligations of two parties in the event of a default, which reduces counterparty risk and makes the market more resilient to financial shocks.
Another important change was the inclusion of new provisions for cross-default and cross-affiliate default. Cross-default is when a default on one contract triggers a default on another, while cross-affiliate default is when a default by one entity triggers a default by another entity in the same group. These provisions help to ensure that a default in one part of a company does not spread to other parts of the organization, which can help to prevent systemic risk.
The GMRA agreement of 2011 also included new provisions for the use of collateral in the repurchase market. Collateral is a form of security that is used to ensure that the party selling the securities will repurchase them at a later date. The new provisions required that all collateral be marked-to-market on a daily basis, which means that the value of the collateral is adjusted to reflect market conditions. This helps to ensure that the collateral is sufficient to cover the obligations of both parties in the event of a default.
Overall, the GMRA agreement of 2011 was a significant development in the repurchase market. It aimed to improve transparency, reduce counterparty risk, and increase the resilience of the market to financial shocks. While there have been criticisms of the agreement, particularly around the complexity of the legal language, it has undoubtedly helped to create a more stable and secure market for financial derivatives.