Template:M detail Equity Derivatives 12.9(a)(ii)

Omission of “Prong Y”

The industry has generally moved to omit Prong Y, though possibly errantly so — the “material increase in costs” limb of this definition — because it is largely dealt with already in “Increased Cost of Hedging”. It was introduced to capture those changes in law and regulation (changes in regulatory capital calculations, for very good example), that are driven by legislation, but don’t outlaw the trade altogether, but just make it more expensive to run (either the transaction itself, or its hedge)

But, if you were splitting hairs, you might say that not all “materially increased” costs a party may incur “in performing its obligations under such Transaction” will necessarily relate to hedging — if you suffer a higher regulatory capital charge on your actual transaction with your counterparty, that would not be an Increased Cost of Hedging, so a Hedging Party (and, when it comes to it, a non-Hedging Party) should stand its ground on omitting “Prong Y”.

Those who do not have the stomach for this fight may see this expressed as: “Applicable, provided that Section 12.9(a)(ii)(Y) of the Equity Definitions does not apply.”

See also, for example, the 2007 European Master Equity Derivatives Confirmation Agreement. Yet, arguably, there’s no crossover here between Prong Y and Increased Cost of Hedging, as Prong Y only related to performance of the Transaction not the hedge.

Prong Y was also a cool band.