Background
The GMRA and GMSLA have long been established as the standard international master agreements used for documenting repurchase transactions and securities lending transactions under English law.
The annexes supplement the GMRA and GMSLA and provide the opportunity for market participants to customize their GMRA and GMSLA transactions to include digital asset collateral under market standardized templates.
The introduction of annexes tailored to digital assets, and the resulting consistency of approach when doing deals relating to such assets, will allow market participants to transact with confidence and certainty. This in turn will provide a stable foundation for the growth of this asset class across the repurchase and securities lending space.
This article explores the key features of the Digital Asset Annex to the GMRA.
GMRA Digital Asset Annex – assets covered
The Digital Asset Annex sets out categories of securities that are to be included within the definition of eligible “Securities” under the GMRA and as such able to be used as collateral under a repurchase transaction. These include:
1. Asset-backed digital assets
This type of asset includes a cryptographically secured digital representation of value or contractual rights, which:
(i) is transferred, stored or traded electronically – aimed at capturing those assets on distributed ledger technology platforms; or
(ii) represents ownership of or contractual rights to an asset which is a traditional physical or dematerialized security – aimed at capturing tokenized traditional assets.
2. Platform transferred securities
This type of asset includes a physical or dematerialized security which is held in a format capable of being transferred in a cryptographically secure manner.
The Digital Asset Annex also introduces an update to any references to “cash” or “currency” under the GMRA, specifying that these terms also include “Digital Cash”. Digital Cash includes central bank digital currency, tokenized deposits, electronic money and other cryptographically secured representations of value denominated in a fiat currency, with the spot rate for such Digital Cash determined by reference to the applicable fiat currency. The intention appears to be to exclude stablecoins and other digital assets which are intended to track the value of a fiat currency but which may have the potential for tracking errors.
GMRA Digital Asset Annex – key updates and Intraday Transactions
As expected, the Digital Asset Annex provides necessary supplements to the GMRA relating to terminable transactions and events of default, in each case required when dealing with transactions on a platform used for the holding, transfer, payment and/or settlement of digital assets.
A key feature addressed by the Digital Asset Annex is the shorter settlement times implicit in transacting with digital assets. The Digital Asset Annex notes that the minimum period customarily required for the settlement of certain securities covered by the Digital Asset Annex may differ from the minimum times applicable to traditional physical or dematerialized securities.
The Digital Asset Annex introduces several new definitions to address the operational viability of transacting with digital assets and supplements the GMRA by introducing the concept of an “Intraday Transaction” and associated intraday settlements at specifically referenced times.
The concept of an Intraday Transaction permits the parties to transfer the applicable purchased securities, pay the purchase price and, later the same day, pay the repurchase price and transfer the applicable equivalent securities. The Digital Asset Annex goes on to provide for the calculation of any interest related to an Intraday Transaction on the basis of hours (as opposed to days).
These updates represent a significant departure from traditional repo transactions, which have historically been constrained by settlement delays, and a welcome development which will optimize the use of this asset class going forward.
What’s next?
The introduction of the Digital Asset Annex is evidence of the ever-increasing institutional acceptance of digital assets, and is expected to be the catalyst for significant growth in the adoption of this asset class under repurchase and securities lending transactions.
If you would like help on structuring your digital asset transactions or incorporating the Digital Asset Annex within your existing repurchase or securities lending platforms, please do not hesitate to reach out to the authors or your Reed Smith On Chain contact.
Client Alert 2024-183
