Change in Law - Equity Derivatives Provision

Template:Eqderivanat Part of the great triple cocktail of protections against nasty things happening on your hedge. The consequences of a Change in Law (or an Insolvency Filing are set out in 12.9(b)(i) (see box to the right).

Shares versus Hedge Positions

Common to see references in (x) to “Shares” replaced by the slightly wider “Hedge Positions”. Not objectionable, but not massively germane either. Ok, maybe your Hedging Party is hedging with futures, or a derivative and not Shares directly. But even then, and someone else therefore, is holding the Shares.

But they can either continue to do that, and your Hedging Party can continue to hold its future or swap — in which case what’s your disruption? — or they can’t, in which case you have a more general Hedging Disruption. We don’t think it is so likely that it will somehow become illegal to hold a future or swap — one doesn’t tend to nationalise derivatives on the whole — but in these kooky political times anything is possible, I suppose.

Reasonable steps to avoid?

Uber pedants may also try to argue that there should be some obligation on the Hedging Party to take reasonable steps to avoid a change in law. This is silly, Chicken Lickenish behaviour. I mean, what are you meant to do? Lobby Congress? Remember, “Hedge Positions” is wider and more generic than “any particular hedge position that you happen to have on” at the time the law changes. If you can change your hedging strategy, you are not subject to a Change in Law. So resist this drafting, but don’t die in a ditch about it.

Omission of “Prong Y”

The industry has generally moved to omit Prong Y — 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 leglisation, 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, which provides the following: Template:Eqderivsnap Template:Triplecocktail