Equity Notional Reset - Equity Derivatives Provision: Difference between revisions

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{{eqderivsnap|5.10}}
{{eqderivsnap|5.10}}
====Commentary====
===Commentary===
The Equity Notional Reset is a feature for automatically restriking the Equity Notional Amount on a periodic basis to the preveiling value of the Equity Notional Amount.  It has the effect of converting posted collateral - which for financial institutions may suffer a punitive capital treatment - into absolutely paid amounts.
 
The swap will reset automatically on each [[Cash Settlement Payment Date - Equity Derivatives Provision|Cash Settlement Payment Date]], (i.e., usually a {{eqderivprov|Settlement Cycle}} after each {{eqderivprov|Valuation Date}}).
 
====Example====
'''Let's say''':
*a swap is struck with an initial {{eqderivprov|Equity Notional Amount}} of £10m
*the swap is now out of the money to Party A by £1mm.
*Party A has therefore posted £1mm in collateral to Party B.
 
An Equity Notional Reset would operate as follows:
*The {{eqderivprov|Equity Notional Amount}} would be reset at £9mm (the calculation being original {{eqderivprov|Equity Notional Amount}} + {{eqderivprov|Equity Amount}}, which in this case would be £10mm + £-1mm = £9mm)
*In consideration for this reduction in the Equity Notional Amount, Party A would become liable to pay an exchange amount of £1mm.
*at the same time Party B's exposure to Party B would be reduced to nil, meaning Party B would be oblished to return £1mm of equivalent credit support.
*The return of credit support would be netted off against the exchange amount due, meaning no cashflow would take place.
 
'''Result''': instead of the swap being out of the money by £1mm and collaterased by that amount, the restruck swap has a MTM of 0 and neither party holds any collateral.
 
===User Guide===
Adapted from the User Guide:
Adapted from the User Guide:


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