Template:M summ Equity Derivatives 12.9

Market Disruption Events vs Additional Disruption Events showdown

In a Nutshell™:

• Market Disruption Events (Section 6.3) handle difficulties in valuing ongoing Transactions in a disrupted market — where the parties are happy to carry on with the position, but their practical means of marking-to-market (and therefore margining) their exposures under the Transactions is hampered because of market dislocation;
• Additional Disruption Events (Section 12.9) handle your rights to early-terminate Transactions, usually because their ability to properly risk-manage their positions — i.e., hedge — is undermined by the market dislocation.

So the two are independent: one is where you want to carry on; one where you don’t. So you don't have to wait for a period of Exchange Disruption before invoking a Hedging Disruption, and conversely you could — in theory at any rate — designate an Exchange Disruption even if there were no Hedging Disruption in existence.

Now in point of fact, an Exchange Disruption — especially a long one — usually will count as a Hedging Disruption which might be why the Consequences of Disrupted Days wording in Section 6.6 seems to run out of enthusiasm for its own existence, as if ISDA’s crack drafting squad™ suddenly realised the whole world is futile and threw in the towel. After all, if there have been eight straight Disrupted Days, the likelihood that one or other party hasn’t canned the Transaction on the grounds of Hedging Disruption must be pretty low.

Additional Disruption Events dans une Nutshell™

The important Additional Disruption Events are the Triple Cocktail: Change in Law, Hedging Disruption and Increased Cost of Hedging. They have marginally different play-out rights:

• Change in Law: Either party can terminate on 2 Scheduled Trading Day’s notice, at the Cancellation Amount.
• Hedging Disruption: Hedging Party can terminate on 2 Scheduled Trading Day’s notice, at the Cancellation Amount.
• Increased Cost of Hedging: Hedging Party can present the other guy with a proposed Price Adjustment. Other guy, within 2 Scheduled Trading Days, either accepts the Price Adjustment in an amended trade, pays the PV of the Price Adjustment in full, or the Hedging Party can terminate the trade on the second Scheduled Trading Day, at the Cancellation Amount.

Okay, okay, I hear you — LOSB and ICOSB are important too. For those:

• Loss of Stock Borrow: Hedging Party gives 2 Scheduled Trading Day’s notice of the LOSB. Other guy can either lend the shares itself at the Maximum Stock Loan Rate or lower, or if it doesn’t the Hedging Party can terminate the trade at the Cancellation Amount.
• Increased Cost of Stock Borrow: Hedging Party can present the other guy with a proposed Price Adjustment. Other guy, within 2 Scheduled Trading Days, either accepts the Price Adjustment in an amended trade, pays the PV of the Price Adjustment in full, or lend the Hedging Party the necessary Shares, Failing this, the Hedging Party can terminate the trade on the second Scheduled Trading Day, at the Cancellation Amount.

Insolvency Filing and Failure to Deliver ... well — are they even applied in your confirm?