Options Exchange Adjustment - Equity Derivatives Provision

2002 ISDA Equity Derivatives Definitions A Jolly Contrarian owner’s manual™ Resources and navigation Resources About the Equity Derivatives Definitions | (full wikitext) | (nutshell wikitext) | Equity v credit derivatives showdown Hot topics Synthetic Prime Brokerage Anatomy | The Triple Cocktail | Cancellation and Payment | Calculation Agent TOC | 1 General Definitions | 2 Option Transactions | 3 Exercise of Options | 4 Forward Transactions | 5 Equity Swap Transactions | 6 Valuation | 7 Settlement | 8 Cash Settlement | 9 Physical Settlement | 10 Dividends | 11 Adjustments and Modifications | 12 Extraordinary Events · 12.8 Cancellation Amount · 12.9 Additional Disruption Events · 12.9 List of ADEs · 12.9(b) Consequences of ADEs | 13 Miscellaneous Index: Click ᐅ to expand: Equity Derivatives - Premium Synthetic Prime Brokerage Section 11.2(b) in a Nutshell™ Use at your own risk, campers! 11.2(b): Options Exchange Adjustment: If the Method of Adjustment is “Options Exchange Adjustment” then following adjustment to exchange-traded options the Calculation Agent will adjust any relevant variable under that Transaction that it thinks necessary to reflect the Options Exchange adjustment, effective as of the same date. If there aren’t any exchange-traded options options on the Shares, the Calculation Agent will adjust the Transaction as it thinks fit to account for the diluting or concentrative effect of any event that, would have led to an adjustment under the Options Exchange’s rules had options in the Shares in question been traded on it. view template Full text of Section 11.2(b) 11.2(b) If “Options Exchange Adjustment” is specified as the Method of Adjustment in the related Confirmation of a Share Transaction or Share Basket Transaction, then following each adjustment to the exercise, settlement, payment or other terms of options on any relevant Shares traded on any Options Exchange, the Calculation Agent will make the corresponding adjustments, if any, to any one or more of: (i) in respect of a Share Option Transaction or a Share Basket Option Transaction, the Strike Price, the Number of Options, the Option Entitlement, the Knock-in Price, the Knock-out, and the relevant Number of Shares; (ii) in respect of a Share Forward Transaction or a Share Basket Forward Transaction, the Forward Price, the Forward Floor Price, the Forward Cap Price, the Knock-in Price, the Knock-out Price, and the relevant Number of Shares; (iii) in respect of a Share Swap Transaction or a Share Basket Swap Transaction, the Initial Price, the Equity Notional Amount, the Knock-in Price, the Knock-out Price, and the relevant Number of Shares; and, in any case, any other variable relevant to the exercise, settlement, payment or other terms of that Transaction, as determined by the Calculation Agent, which adjustment will be effective as of the date determined by the Calculation Agent to be the effective date of the corresponding adjustment made by the Options Exchange. If options on the relevant Shares are not traded on the Options Exchange, the Calculation Agent will make such adjustment, if any, to any one or more of the relevant variables referred to above or any other variable relevant to the exercise, settlement, payment or other terms of the Transaction as the Calculation Agent determines appropriate, with reference to the rules of and precedents (if any) set by the Options Exchange, to account for the diluting or concentrative effect of any event that, in the determination of the Calculation Agent, would have given rise to an adjustment by the Options Exchange if such options were so traded. view template Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you. Sign up for our newsletter.

Content and comparisons

Section 11.2. Adjustments to Share Transactions and Share Basket Transactions

11.2(a). Method of Adjustment

11.2(b). Options Exchange Adjustment

11.2(c). Calculation Agent Adjustment

11.2(d). Options Exchange

11.2(e). Potential Adjustment Event

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Summary

Where there are no exchange-traded options

You do have to love ISDA’s crack drafting squad™, don’t you: for who else would take the time to consider what to do when you have selected Options Exchange Adjustment for Shares that don’t have any exchange-traded options. Look, folks, if there are no exchange-traded options on the underlying shares, then don’t select Options Exchange Adjustment as your Method of Adjustment for crying out loud.

If he were in a more patient mood, the JC might suppose that options may unexpectedly cease trading on exchange after a Transaction is executed, or may be temporarily suspended — and perhaps “an event having a concentrative or dilutive effect on the value of the shares” might be just the thing to cause a suspension or delisting. But even this is a recommendation to plump for Calculation Agent Adjustment under 11.2(b). You would think. I know, I know: but the Calculation Agent — usually the broker dealer counterparty to the transaction, of course —might rip my face off!

But, firstly, what choice have you got? If the options aren’t traded on exchange, what else are you doing to do: have a dealer poll? If they are traded on exchange, and the Calculation Agent makes a determination at variance from the one the Options Exchange makes, it will have to justify how it is acting “in good faith and a commercially reasonable manner”, being the standard required of it by Paragraph 1.40. Furthermore, if it is delta-one-hedging (as it will be, if you you are doing synthetic prime brokerage), its is market neutral and has no interest in delivering you a bad outcome, and indeed every incentive, under the commercial imperative to deliver you a good one.

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See also

“...an event having a diluting or concentrative effect...”

And what might these events be? Where you reference Options Exchange Adjustment, they are not specified, it being supposed that the Options Exchange’s say so, as an independent party in the middle of the action but with no dog in the fight, ought to be good enough for everyone not to argue about it. But that doesn’t help explain what this provision is meant to do. But the corresponding text under 11.2(c) (Calculation Agent Adjustment) helps. The events and circumstances we are talking about are these (not a comprehensive list):

• Things that might dilute share value: Any unilateral action by an issuer that would mean existing holders are given more “stuff”, in whatever form: share subdivisions, distributions, convertibles, exchangeables, Extraordinary Dividends. Note this excludes anything that would count as a Merger Event, that event being dealt with elsewhere.
• Things that might concentrate share value: Any unilateral action by an issuer requiring a holder to pony up, or give up, anything: calls over partially-paid shares, for example.
• Things that could do either: So any significant buy back by the Issuer of its own shares (especially if not at prevailing market value.

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