Hedging Disruption - Equity Derivatives Provision: Difference between revisions

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{{fullanat2|eqderiv|12.9(a)(v)||12.9(b)(iii)|}}
{{fullanat2|eqderiv|12.9(a)(v)||12.9(b)(iii)|}}
{{Nuts|Equity Derivatives|Hedging Disruption}}
{{Nuts|Equity Derivatives|Hedging Disruption}}
====Pernickety amendments====
 
===Why the "why should I pay your hedging costs - I have no control over that" argument is bogus===
Because synthetic PB is just cash brokerage done with derivatives and you would totally wear them in a cash trade, is why.In physical brokerage, the client would ''always'' pick up that difference.
*The [[broker]] owes you [[best execution]]. that means it has to interrogate all venues and get you the best possible price.
*Under [[best execution]] rules the client is free to instruct the broker to exclude certain venues and brokers.
*The broker will be able to configure its [[order router]] to accommodate the client's preferences.
*But excluding a venue impacts the quality of the available execution (whenever that venue had the best price, you’d miss it).
*By not excluding the venue, therefore, you ''benefit'' from the venue being present (as long as it doesn’t fail) every order you place.
*Trades settle [[DVP]] so the risk is market risk in replacing the trade, not credit risk.
*That said, the market risk could be significant: failure of a venue will heavily impact [[liquidity]] and market [[volatility]] for a period.
*Asking the broker to underwrite that market loss when a venue does fail while getting the benefit its pricing whenever it does not is asking for a free option on the your own execution risk.
===Pernickety amendments===
Expect to see some amendments to this clause, chiefly to appease [[Mediocre lawyer|fastidious counsel]]. For example:
Expect to see some amendments to this clause, chiefly to appease [[Mediocre lawyer|fastidious counsel]]. For example:
* You may see some tinkering with “transaction(s) or asset(s) it deems necessary to hedge the equity price risk of entering into and performing its obligations with respect to the relevant Transaction” — perhaps to refer to “{{eqderivprov|Hedge Positions}}” instead of “transaction(s) or asset(s)”<ref>It is always sad to see an {{tag|ISDA}} drafting committee pass up the opportunity to use [[and/or]], by the way.</ref>, and to broaden equity price risk to “market risk ([[including but not limited to]] equity price risk, [[foreign exchange]] risk and [[interest rate]] risk)”
* You may see some tinkering with “transaction(s) or asset(s) it deems necessary to hedge the equity price risk of entering into and performing its obligations with respect to the relevant Transaction” — perhaps to refer to “{{eqderivprov|Hedge Positions}}” instead of “transaction(s) or asset(s)”<ref>It is always sad to see an {{tag|ISDA}} drafting committee pass up the opportunity to use [[and/or]], by the way.</ref>, and to broaden equity price risk to “market risk ([[including but not limited to]] equity price risk, [[foreign exchange]] risk and [[interest rate]] risk)”

Revision as of 11:59, 2 August 2017

Equity Derivatives Anatomy™


12.9(a)(v) “Hedging Disruption” means that the Hedging Party is unable, after using commercially reasonable efforts, to (A) acquire, establish, re-establish, substitute, maintain, unwind or dispose of any transaction(s) or asset(s) it deems necessary to hedge the equity price risk of entering into and performing its obligations with respect to the relevant Transaction, or (B) realize, recover or remit the proceeds of any such transaction(s) or asset(s);

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12.9(b)(iii) If “Hedging Disruption” is specified in the related Confirmation to be applicable to a Transaction, then upon the occurrence of such an event the Hedging Party may elect, while the Hedging Disruption is continuing, to terminate the Transaction, upon at least two Scheduled Trading Days’ notice to the Non-Hedging Party specifying the date of such termination, in which event the Determining Party will determine the Cancellation Amount payable by one party to the other.

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Hedging Disruption in a Nutshell™ (Equity Derivatives edition)

12.9(a)(v) “Hedging Disruption” means that the Hedging Party cannot reasonably acquire, hold, replace or unwind any transactions hedging its equity price risk, or realise, recover or pay the proceeds of any hedging transactions.

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Why the "why should I pay your hedging costs - I have no control over that" argument is bogus

Because synthetic PB is just cash brokerage done with derivatives and you would totally wear them in a cash trade, is why.In physical brokerage, the client would always pick up that difference.

  • The broker owes you best execution. that means it has to interrogate all venues and get you the best possible price.
  • Under best execution rules the client is free to instruct the broker to exclude certain venues and brokers.
  • The broker will be able to configure its order router to accommodate the client's preferences.
  • But excluding a venue impacts the quality of the available execution (whenever that venue had the best price, you’d miss it).
  • By not excluding the venue, therefore, you benefit from the venue being present (as long as it doesn’t fail) every order you place.
  • Trades settle DVP so the risk is market risk in replacing the trade, not credit risk.
  • That said, the market risk could be significant: failure of a venue will heavily impact liquidity and market volatility for a period.
  • Asking the broker to underwrite that market loss when a venue does fail while getting the benefit its pricing whenever it does not is asking for a free option on the your own execution risk.

Pernickety amendments

Expect to see some amendments to this clause, chiefly to appease fastidious counsel. For example:

  • You may see some tinkering with “transaction(s) or asset(s) it deems necessary to hedge the equity price risk of entering into and performing its obligations with respect to the relevant Transaction” — perhaps to refer to “Hedge Positions” instead of “transaction(s) or asset(s)”[1], and to broaden equity price risk to “market risk (including but not limited to equity price risk, foreign exchange risk and interest rate risk)”
  • Some counsel may wish to add to limb (B) “convert into the Settlement Currency” and upgrade “remit the proceeds of and/or collateral posted with respect to any such Hedge Positions”, just in case it might be thought that collateral didn’t count as proceeds of a hedge.
  • The Hedging Party may only be allowed to terminate any transaction pro rata with the actual Hedging Disruption


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See also


Consequences of Hedging Disruption

Consequences of an Additional Disruption Event in particular 12.9(b)(iii) and, where Loss of Stock Borrow intersects with Hedging Disruption, 12.9(b)(vii):

Template:Eqderivsnap Template:Eqderivsnap Template:Eqderivanatomy

  1. ↑ It is always sad to see an ISDA drafting committee pass up the opportunity to use and/or, by the way.
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