Triple Cocktail - Equity Derivatives Provision: Difference between revisions
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Revision as of 10:56, 13 October 2023
2002 ISDA Equity Derivatives Definitions A Jolly Contrarian owner’s manual™
Triple Cocktail in all its glory
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Overview
These provisions are often carried over to an equivalent triple cocktail in the 2005 ISDA Commodity Definitions — but hte 2002 ISDA Equity Derivatives Definitions got there first. A few years later they were rewritten in enormous, painstaking, pain-inflicting, detail by a Linklaters combat squadron, for the machine age 2011 Equity Derivatives Definitions, but tragically the squadron disappeared without trace over the Bermuda Triangle in hurricane season that year. Since all copies of the new definitions were on board, no-one knows what became of them, we can only now wonder what they might have said.
Summary
The “triple cocktail” is the JC’s shorthand for the collection of Additional Disruption Events that can justify a broker terminating, or repricing, an equity derivatives Transaction. There is a fundamental asymmetry at play in a delta-one equity swap: the customer can get in or out at any time at will and without excuse as long as it has the resources to meet any margin calls that might come along. It is a synthetic version of buying a share on margin: the customer, and not the broker decides when and if to buy or sell, and accordingly can stay in as song as it pleases.
The broker is therefore, effectively, committed: as long as it is adequately collateralised — which is what its margin and hedge arrangements do — it should not have any reason to terminate the trade. Of course, the development over time of capital regulations, which take a dim view of indefinite commitments, put something of a gloss on that, and brokers will usually insist on some kind of 90-day break right, but this is to cheer the crowd in their treasury department, not because they would ever insist on using it.
But there are some cases in which they might need to get out, and quicker than on 90 days’ notice. These are the Additional Disruption Events of the triple cocktail. These are events that materially impact on the broker’s ability to manage its market risk and funding requirements. Okay, there are five, but the main ones are the first three:
Change in Law
Hedging Disruption
Increased Cost of Hedging
Loss of Stock Borrow
Increased Cost of Stock Borrow.
Premium content
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- The JC’s famous Nutshell™ summary of this clause
- A deeper dive into the five instalments of the triple cocktail, what they all mean, what happens if they conflict, and some examples of when they have happened.