Hedging Disruption - Equity Derivatives Provision

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Equity Derivatives Anatomy™


12.9(a)(v)Hedging Disruption” means that the Hedging Party is unable, after using commercially reasonable efforts, to (A) acquire, establish, re-establish, substitute, maintain, unwind or dispose of any 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, or (B) realize, recover or remit the proceeds of any such transaction(s) or asset(s);

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12.9(b)(iii) If “Hedging Disruption” is specified in the related Confirmation to be applicable to a Transaction, then upon the occurrence of such an event the Hedging Party may elect, while the Hedging Disruption is continuing, to terminate the Transaction, upon at least two Scheduled Trading Days’ notice to the Non-Hedging Party specifying the date of such termination, in which event the Determining Party will determine the Cancellation Amount payable by one party to the other.

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Hedging Disruption in a Nutshell (Equity Derivatives edition)

12.9(a)(v)Hedging Disruption” means that the Hedging Party cannot reasonably acquire, hold, replace or unwind any transactions hedging its equity price risk, or realise, recover or pay the proceeds of any hedging transactions.

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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


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See also


Consequences of Hedging Disruption

Consequences of an Additional Disruption Event in particular 12.9(b)(iii) and, where Loss of Stock Borrow intersects with Hedging Disruption, 12.9(b)(vii):

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  1. It is always sad to see an ISDA drafting committee pass up the opportunity to use and/or, by the way.