Template:M summ Equity Derivatives 13

Non-reliance

ISDA’s crack drafting squad™’s very own, verbose, take on standard termsheet boilerplate. There is a standard Non-Reliance provision in the Schedule to the ISDA Master Agreement — why they didn’t put it in the 2002 ISDA itself you may stoop to wonder — so query why ISDA has thought to include this. After all, if it is in the Schedule it is redundant here; if the parties have negotiated it out of their Schedule — they won’t have — then what prospect is there that they will agree it here, specifically for Equity Derivatives?

Hedging activities

An enormous wodge of text which states the bleeding obvious. It is well-meaningly intended to disarm paranoid tax lawyers who worry that an equity derivative (especially a delta-one synthetic prime brokerage transaction) might look like a wheeze to do the taxman out of stamp duty or other transaction tax attaching to a cash equity trade. This acknowledgment is meant to encourage the taxman not to recharacterise the derivative as a cash equity order in disguise.

It has a Hamlet’s mum feel about it, but you will see it applied in the synthetic PB space. Though it would be an odd hedge about which these characteristics did not apply.

In the actual 2002 ISDA Equity Derivatives Definitions, “Hedge Positions” is really used only for that “what me guv no i never” acknowledgement about Hedging Activities in Section 13.2(a). However, many users co-opt it more fully into their master confirmations.

Now. Would a Hedge Position include any FX transactions required to convert positions and proceeds of hedge disposal into the Settlement Currency? You may find assiduous fellows that would find it prudent to clarify. Not this one, however: FX risk seems to this commentator to be a natural consequence of Section 13.2(b), so no such anality required.

Whither the Hedging Party?

A more careful draftsperson might have mentioned that the Hedging Party might not necessarily be one of the counterparties, but might be an affiliate, and this wording might have more clearly captured that.

A lover of fair, large and liberal interpretations of tiresome legal agreements might wonder whether it would be much of a stretch to extend reference to the “arrangements (howsoever described) by a party in order to hedge” to include affiliates and hedging agents of course. Especially where, as they will, they will pass the costs of those hedges on to the direct party (since — ahh — otherwise they wouldn’t be hedges.