Hedging Disruption - Equity Derivatives Provision
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