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| {{fullanat2|eqderiv|12.9(a)(v)||12.9(b)(iii)|}} | | {{eqdmanual|12.9(a)(v)}} |
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| {{Nuts|Equity Derivatives|Hedging Disruption}}}}
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| ===Why the “why should I pay your hedging costs? I have no control over them” argument is bogus===
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| Because [[synthetic PB]] is just cash brokerage done with derivatives and you would wear them in a cash trade, is why.
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| *The [[broker]] owes [[best execution]]. That means it has to interrogate all venues and get the best possible price.
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| *Under [[best execution]] rules the client may instruct the broker to exclude certain venues and brokers.
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| *To comply with best execution, the broker must configure its [[order router]] to accommodate the client’s preferences.
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| *But excluding a venue impacts the quality of the available execution (whenever the excluded venue had the best price, you’d miss it).
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| *By not excluding the venue, therefore, you ''benefit'' from the venue being present (as long as it doesn’t fail) every order you place.
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| *Trades settle [[DVP]] so there is [[market risk]] in replacing the trade, not [[credit risk]].
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| *The market risk could be significant: failure of a venue will heavily impact [[liquidity]] and market [[volatility]] for a period.
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| *Asking the broker to underwrite a market loss when a venue or [[intermediate broker]] fails while getting the benefit its best pricing as long as it does not is asking for a free option on your own execution risk.
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| ===Pernickety amendments===
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| Expect to see some amendments to this clause, chiefly to appease [[Mediocre lawyer|fastidious counsel]]. For example:
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| * You may see some tinkering with “transaction(s) or asset(s) it deems necessary to hedge the equity price risk of entering into and performing its obligations with respect to the relevant Transaction” — perhaps to refer to “{{eqderivprov|Hedge Positions}}” instead of “transaction(s) or asset(s)”<ref>It is always sad to see an {{tag|ISDA}} drafting committee pass up the opportunity to use [[and/or]], by the way.</ref>, and to broaden equity price risk to “market risk ([[including but not limited to]] equity price risk, [[foreign exchange]] risk and [[interest rate]] risk)”
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| *Some counsel may wish to add to limb (B) “convert into the {{eqderivprov|Settlement Currency}}” and upgrade “remit the proceeds of ''[[and/or]] collateral posted with respect to'' any such {{eqderivprov|Hedge Positions}}”, just in case it might be thought that collateral didn’t count as proceeds of a hedge.
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| *The {{eqderivprov|Hedging Party}} may only be allowed to terminate any {{eqderivprov|transaction}} ''[[pro rata]]'' with the actual {{eqderivprov|Hedging Disruption}}
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| {{triplecocktail}}
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| {{seealso}}
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| *{{eqderivprov|Cancellation Amount}}
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| {{ref}}
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2002 ISDA Equity Derivatives Definitions
A Jolly Contrarian owner’s manual™
12.9(a)(v) in a Nutshell™
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The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack.
| 12.9(a)(v) in all its glory
- 12.9(a)(v) “Hedging Disruption” means that the Hedging Party is unable, after using commercially reasonable efforts, to (A) acquire, establish, re-establish, substitute, maintain, unwind or dispose of any transaction(s) or asset(s) it deems necessary to hedge the equity price risk of entering into and performing its obligations with respect to the relevant Transaction, or (B) realize, recover or remit the proceeds of any such transaction(s) or asset(s);
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Resources and Navigation
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Overview
This is what counts as a Hedging Disruption. To find out what happens when you have a Hedging Disruption, see the Consequences of Hedging Disruption at Section 12.9(b)(iii).
Summary
It isn’t brilliantly worded, but the spirit is clear: it is not just that your particular hedge that you actually had on went kaput, but that you could find any reasonably suitable replacement for it. You can’t be picky. Okay, the equities market might be locked up, but what about futures? I grant you, if the underlying market is disrupted, it’s likely the listed futures market will be too, but you never know. How about ADRs or GDRs?
Premium content
Here the free bit runs out. Subscribers click 👉 here. New readers sign up 👉 here and, for ½ a weekly 🍺 go full ninja about all these juicy topics 👇 |
- The JC’s famous Nutshell™ summary of this clause
- What of informal action by a regulator?
- The bogus “why should I pay your hedging costs? I have no control over them” argument
- Commentary on other pernickety amendments
See also
References