Exercise of Options - Equity Derivatives Provision

2002 ISDA Equity Derivatives Definitions A Jolly Contrarian owner’s manual™ 3 in a Nutshell™ 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. You can even ask questions! Ask about it here. 3 in all its glory Article 3 Exercise of Options Section 3.1. General Terms Relating to Exercise. 3.1(a) Exercise Period. “Exercise Period” means, unless otherwise specified in the related Confirmation, (i) in respect of an American Option, all Scheduled Trading Days from, and including, the Commencement Date to, and including, the Expiration Date between 9:00 a.m. and the Latest Exercise Time, (ii) in respect of a Bermuda Option, each Potential Exercise Date between 9:00 a.m. and the Latest Exercise Time and the Expiration Date between 9:00 a.m. and the Latest Exercise Time, and (iii) in respect of a European Option, the Expiration Date between 9:00 a.m. and the Expiration Time. All times specified in this paragraph shall be, unless otherwise specified in the related Confirmation, local time in the location specified in the related Confirmation for receipt by Seller of notices relating to the Transaction or, where an agent is designated by Seller for the purpose of receiving notice of exercise (“Seller’s Agent”), local time in the specified location of Seller’s Agent or, where no such location is specified in the related Confirmation, local time in the jurisdiction of the Exchange. 3.1(b) Exercise Date. “Exercise Date” means, in respect of an Option Transaction, the Scheduled Trading Day during the Exercise Period on which such Option is, or is deemed to be, exercised. 3.1(c) Potential Exercise Date. “Potential Exercise Date” means, in respect of a Bermuda Option, each date specified as such in the related Confirmation (or, if such date is not a Scheduled Trading Day, the next following Scheduled Trading Day), unless such date is a Disrupted Day due to the occurrence of an event giving rise to a Disrupted Day prior to the Latest Exercise Time on such date. If such date is a Disrupted Day due to the occurrence of such an event, then the Potential Exercise Date shall be the first succeeding Scheduled Trading Day that is not a Disrupted Day, unless each of the eight Scheduled Trading Days immediately following the original date that, but for the occurrence of a Disrupted Day, would have been the Potential Exercise Date is a Disrupted Day. In that case, that eighth Scheduled Trading Day shall be deemed to be the Potential Exercise Date, notwithstanding the fact that such day is a Disrupted Day. Notwithstanding the foregoing, if an Option Transaction is exercised on a Scheduled Trading Day that would have been a Potential Exercise Date prior to the occurrence of an event giving rise to a Disrupted Day, such Scheduled Trading Day shall be deemed to be the Potential Exercise Date for the purpose of determining whether an Exercise Date has occurred during the Exercise Period. 3.1(d) Latest Exercise Time. “Latest Exercise Time” means, in respect of an Option Transaction, the time specified as such in the related Confirmation, provided that on the Expiration Date the Latest Exercise Time shall be the Expiration Time. If no such time is specified, the Latest Exercise Time shall be the Expiration Time. 3.1(e) Expiration Time. “Expiration Time” means, in respect of an Option Transaction, the time specified as such in the related Confirmation. If no such time is specified, the Expiration Time shall be the Valuation Time. 3.1(f) Expiration Date. “Expiration Date” means, in respect of an Option Transaction, the date specified as such in the related Confirmation (or, if such date is not a Scheduled Trading Day, the next following Scheduled Trading Day), unless such date is a Disrupted Day due to the occurrence of an event giving rise to a Disrupted Day prior to the Latest Exercise Time on such date. If such date is a Disrupted Day due to the occurrence of such an event, then the Expiration Date shall be the first succeeding Scheduled Trading Day that is not a Disrupted Day, unless each of the eight Scheduled Trading Days immediately following the original date that, but for the occurrence of a Disrupted Day, would have been the Expiration Date is a Disrupted Day. In that case, that eighth Scheduled Trading Day shall be deemed to be the Expiration Date, notwithstanding the fact that such day is a Disrupted Day. Notwithstanding the foregoing, if an Option Transaction is exercised on a Scheduled Trading Day that would have been an Expiration Date but for the occurrence of an event giving rise to a Disrupted Day, such Scheduled Trading Day shall be deemed to be the Expiration Date for the purpose of determining whether an Exercise Date has occurred during the Exercise Period. Section 3.2. Procedure for Exercise. Except when Automatic Exercise applies, Buyer must give irrevocable notice (which will be oral telephonic notice if practicable, and otherwise written notice) during the Exercise Period to Seller, or, if applicable, Seller’s Agent, of its exercise of an Option. In the case of an American Option, if the notice of exercise is given after the Latest Exercise Time on a Scheduled Trading Day, then that notice will be deemed given on the next following Scheduled Trading Day, if any, in the Exercise Period. In the case of an American Option or a Bermuda Option to which Multiple Exercise is applicable, Buyer must specify in the notice the number of Options being exercised on the relevant Exercise Date. Buyer will execute and deliver to Seller, or, if applicable, Seller’s Agent, a written confirmation confirming the substance of any telephonic notice within one Scheduled Trading Day of that notice. Without limiting the obligation of Buyer to provide such written confirmation, failure by Buyer to provide it will not affect the validity of the telephonic notice. Section 3.3. Multiple Exercise. 3.3(a) If “Multiple Exercise” is specified to be applicable to an American Option or a Bermuda Option, Buyer may exercise all or less than all the unexercised Options on one or more Scheduled Trading Days during the Exercise Period but (except as set forth below) on any such Scheduled Trading Day may not exercise less than the Minimum Number of Options or more than the Maximum Number of Options and, if a number is specified as the “Integral Multiple” in the related Confirmation, the number of exercised Options must be equal to, or be an integral multiple of, the number so specified. Except as set forth below, any attempt to exercise on any such Scheduled Trading Day: (i) more than the Maximum Number of Options will be deemed to be an exercise of the Maximum Number of Options (the number of Options exceeding the Maximum Number of Options being deemed to remain unexercised); (ii) less than the Minimum Number of Options will be ineffective; and (iii) an amount of Options not equal to or an integral multiple of the Integral Multiple will be deemed to be an exercise of a number of Options equal to the next lowest integral multiple of the Integral Multiple (the number of Options exceeding that number being deemed to remain unexercised). 3.3(b) Notwithstanding the foregoing, on any such Scheduled Trading Day Buyer may exercise any number of Options that does not exceed the Maximum Number of Options if it exercises all the Options remaining unexercised. On the Expiration Date, Buyer may exercise any number of Options remaining unexercised. 3.3(c) “Minimum Number of Options” means, in respect of an Option Transaction to which Multiple Exercise is applicable, the number specified as such in the related Confirmation. 3.3(d) “Maximum Number of Options” means, in respect of an Option Transaction to which Multiple Exercise is applicable, the number specified as such in the related Confirmation. Section 3.4. Automatic Exercise. If “Automatic Exercise” is specified to be applicable to an Option Transaction, then each Option not previously exercised under that Option Transaction will be deemed to be automatically exercised: 3.4(a) where “Cash Settlement” is applicable, at the Expiration Time on the Expiration Date unless Buyer notifies Seller or, if applicable, Seller’s Agent (by telephone or in writing) prior to the Expiration Time on the Expiration Date that it does not wish Automatic Exercise to occur, in which case Automatic Exercise will not apply; and 3.4(b) where “Physical Settlement” is applicable, at the Expiration Time on the Expiration Date if at such time the Option is In-the-Money, as determined by the Calculation Agent, unless Buyer notifies Seller or, if applicable, Seller’s Agent (by telephone or in writing) prior to the Expiration Time on the Expiration Date that it does not wish Automatic Exercise to occur, in which case Automatic Exercise will not apply. 3.4(c) “In-the-Money” means (i) in respect of a Call, that (A) the Reference Price is equal to or greater than the price for a Share at which any Related Exchange would automatically exercise a Physically-settled option with the Strike Price relating to such Share, or (B) if no options relating to such Share are listed on any Related Exchange or no Related Exchange is specified in the related Confirmation, the Reference Price is greater than the Strike Price; and (ii) in respect of a Put, that (A) the Reference Price is equal to or less than the price for a Share at which any Related Exchange would automatically exercise a Physically-settled option with the Strike Price relating to such Share, or (B) if no options relating to such Share are listed on any Related Exchange or no Related Exchange is specified in the related Confirmation, the Reference Price is less than the Strike Price. 3.4(d) “Reference Price” means the price per Share or amount per Basket determined as provided in the related Confirmation as of the Expiration Time on the Expiration Date or, if no means of determining such price or amount are so provided, in respect of a Share Option Transaction, the Relevant Price of the Share (for which purpose the Valuation Time and the Valuation Date will be the Expiration Time and the Expiration Date, respectively) and, in respect of a Share Basket Option Transaction, the sum of the values calculated as of the Expiration Time on the Expiration Date for the Shares of each Issuer as the product of the Relevant Price of such Share (for which purpose the Valuation Time and the Valuation Date will be the Expiration Time and the Expiration Date, respectively) and the relevant Number of Shares comprised in the Basket. edit 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 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 Premium version of this page

Overview

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We have consolidated our commentary on Section 3 into four main pages:

• Section 3.1, being “General Terms Relating to Exercise”
• Section 3.2, being “Procedure for Exercise” (or, for the colloquially-minded, “exercise procedure”).
• Section 3.3, about Multiple Exercise, which only applies really to American and Bermuda Options, since they are the only ones you could conceivably exercise on different dates;
• Section 3.4, being about Automatic Exercise, a provision that ought not to create much fuss or confusion, being as it is, automatic.

Article 3 Exercise of Options

Section 3.1. General Terms Relating to Exercise

3.1(a) Exercise Period
3.1(b) Exercise Date
3.1(c) Potential Exercise Date
3.1(d) Latest Exercise Time
3.1(e) Expiration Time
3.1(f) Expiration Date

Section 3.3. Multiple Exercise

“Multiple Exercise” crops up in a number of places in the extended ISDA Universe. The canonical definition is “Multiple Exercise” in the 2021 ISDA Interest Rate Derivatives Definitions, but it also shows up in the 2002 ISDA Equity Derivatives Definitions (Multiple Exercise) and the ISDA EU Emissions Annex (Multiple Exercise), in each case getting to the same point, but in marginally different language.

Summary

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Expiration Time

As will be obvious when you stop to think about it, an Expiration Time is only germane for Option Transactions, which are prone to expire in a way that Equity Swap Transactions terminate (if indeed they even do that, he says, thinking wistfully of the synthetic equity swaps world.

Section 3.2

All good mechanical stuff for legal eagle completists and those who have trouble sleeping. If you get into a dispute about this provision, you are truly beyond hope.

Section 3.3

“...may not exercise less than the Minimum Number of Options”? Oh, ISDA’s crack drafting squad™, how could you?

It’s fewer.

Eheu.

Section 3.4

One where Stockholm syndrome has us almost loving the monster. There is a bitter beauty in these pointless, craggy ornaments.

What this one does is ensure that, if you have selected Automatic Exercise, that your options will be exercised, without the need for you to do anything if they are at, or in, the money. But don’t that that stop the ’squad going epic with it. This is Iwo Jima-league courage under fire.

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• The JC’s famous Nutshell™ summary of this clause

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See also

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• Exercise of Options generally under Section 3.
• Crack drafting squad
• Stockholm syndrome
• Rebel Yell which isn’t really much about options (more licences, actually) but you should check it out anyway.