Hedging Disruption - Equity Derivatives Provision: Difference between revisions

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{{eqderivanat|12.9(a)(v)}}
{{eqderivanat|12.9(a)(v)}}
===Regulator informal action===
{{triplecocktail regulator action}}
Does a [[regulator]]’s direction to ditch a hedge mean a {{eqderivprov|Hedging Party}} is “unable to commercially reasonably maintain” its [[hedge]]?
 
As long as there is no regulatory-approved alternative means of hedging (you know, [[futures]], for example), then the [[JC]] says '''yes'''. The aspiration to maintain good relations with a body having power to regulate your operations, let alone a plausible apprehension of sanction (be it a monetary penalty, adverse publicity or the regulator barring you from operating in its market or just taking a dim view of your outfit) — provided it is sincere — is a [[reasonable]] commercial consideration which would prevent you from maintaining that hedge.
 
===Why the “why should I pay your hedging costs? I have no control over them” argument is bogus===
Because [[synthetic PB]] is just cash brokerage done with derivatives and you would wear them in a cash trade, is why.
*The [[broker]] owes [[best execution]]. That means it has to interrogate all venues and get the best possible price.
*Under [[best execution]] rules the client may instruct the broker to exclude certain venues and brokers.
*To comply with best execution, the broker must configure its [[order router]] to accommodate the client’s preferences.
*But excluding a venue impacts the quality of the available execution (whenever the excluded 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 there is [[market risk]] in replacing the trade, not [[credit risk]].
*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 a market loss when a venue or [[intermediate broker]] fails while getting the benefit its best pricing as long as it does not is asking for a free option on your own execution risk.
===Pernickety amendments===
===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:

Revision as of 09:17, 15 March 2019

Template:Eqderivanat

Regulator informal action

Does a regulator’s direction to ditch a hedge mean a Hedging Party is “unable to commercially reasonably maintain” its hedge?

As long as there is no regulatory-approved alternative means of hedging (you know, futures, for example), then the JC says yes. The aspiration to maintain good relations with a body having power to regulate your operations, let alone a plausible apprehension of sanction (be it a monetary penalty, adverse publicity or the regulator barring you from operating in its market or just taking a dim view of your outfit) — provided it is sincere — is a reasonable commercial consideration which would prevent you from maintaining that hedge.

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

Template:Triplecocktail

See also

References

  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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