Template:M summ Equity Derivatives 11.2

“...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.

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.