Potential Adjustment Event - Equity Derivatives Provision

Template:Eqderivanat Section 11.2. Adjustments to Share Transactions and Share Basket Transactions

11.2(a). Method of Adjustment

11.2(b). Options Exchange Adjustment

11.2(c). Calculation Agent Adjustment

11.2(d). Options Exchange

11.2(e). Potential Adjustment Event

Corporate adjustments that may dilute or concentrate the theoretical value of the Shares.

Retrospective adjustments

Now what might happen under a total return swap if such a 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 an Extraordinary Dividend to all holders of record on 1 March. It pays this dividend on 1 December.

First thing: just because the 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 Termination Date in the 2006 ISDA Definitions.

So the question is which is the material date the date on which the 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)?

See also

• Extraordinary Dividend