Template:M comp disc Equity Derivatives 12.9

Section 12.9 of the Extraordinary Events chapter are the Additional Disruption Events, which are specific to the swap itself, as distinct from the underlying Shares, Indexes or the wider market — though (needless to say, really) the Additional Disruption Events are often a function of — derivative of, even — events in the underlying market.

Break these “Extraordinary Events” into four categories:

Corporate events on Issuers: Corporate Events are generally benign but not always expected or even wanted adjustments to the corporate structure and management of specific underlying Shares — Tender Offers, Mergers, management buyouts and events that change the economic proposition represented by those Shares, and not the equity derivative contract. So: Merger Events and Tender Offers;

Index adjustments: For Index trades, unexpected adjustments and changes to methodologies and publishing strategies of underlying Index (as opposed to changes in the composition of the Index according to its pre-existing rules) — collectively call these “Index Adjustment Events”. So:

Index Modification: Changes in the calculation methodology for the Index

Index Cancellation: Where Indexes are discontinued with replacement;

Index Disruption: disruption in the calculation and publication of Index values;

Negative events affecting Issuers: Nationalizations, Insolvency, Delisting of underlying Issuers;

Additional Disruption Events: Events which directly impair performance and risk management of the Transaction itself. These often cross over with market- and Issuer-dependent events above, but the emphasis here is their direct impact on the parties’ abilities to perform and hedge the derivative Transaction itself. So:

The Triple Cocktail: The Triple Cocktail of Change in Law, Hedging Disruption and Increased Cost of Hedging;

Stock borrow events: Specific issues relating to short-selling (Loss of Stock Borrow and Increased Cost of Stock Borrow); and

Random ones that aren’t needed or used: Two random ones that don’t brilliantly fit with this theory, and which people tend to disapply — possibly for that exact reason, but they are fairly well covered by the Triple Cocktail anyway — Failure to Deliver under the Transaction on account of illiquidity and, even more randomly, Insolvency Filing.