Template:M summ Equity Derivatives 11.2: Difference between revisions

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===Retrospective adjustments===
Now what might happen under a [[total return swap]] if such a {{eqderivprov|Potential Adjustment Event}} happens retrospectively, after a Transaction has been terminated (or has matured)? This does happen from time to time. For example:
 
:''A total return swap transaction is traded on 1 January. It matures and is settled on 1 June. On 1 September, following an accounting error coming to light, the Issuer declares a bonus share issue to all holders of record on 1 March. which it pays out on 1 December.
 
First thing: just because the {{isdaprov|Transaction}} has passed its term, doesn't mean it winks out of existence, white rabbits and no returns. Payment obligations which were due under the term remain due and payable afterward - see the commentary to {{isdadefsprov|Termination Date}} in the [[2006 ISDA Definitions]].
 
So the question is ''which is the material date'' the date on which the {{eqderivprov|Potential Adjustment Event}} happened (in the above, 1 September, outside the term of the trade), the date on which it was settled (1 December, also outside the term of the trade) or the date on which was deemed to be effective (being 1 March, during the transaction)?

Revision as of 19:34, 3 August 2023

“...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.

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