Depositary receipt

Financial Weapons of Mass Destruction™ A guide to the tools of our trade. →Go uptown Index: Click ᐅ to expand: FWMD Master Agreements Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Depositary receipts and hostile governmental action

Now imagine that rather than nationalizing, a national government announced some draconian law preventing corporations in its jurisdiction from accessing the international capital markets even through depositary receipt programmes — you know, something crazy like that. So say, ooh: the DRs must be converted into underlying shares within a stipulated period, failing which the underlying shares lose their dividend and voting rights

The common sense (and economically correct) answer is “however it shakes out, this is all the customer’s risk” — remember the synthetic equity mantra: this is just equity brokerage done with swaps. Imagine what would happen, dear customer, had your broker sold you the ADR outright, a year ago, and now it has been unwound by wartime governmental manoeuvre. Whose problem would that be? Not your equity broker’s, for sure.

That said, the 2002 ISDA Equity Derivatives Definitions don’t do a magnificent job of specifically dealing with what is undoubtedly an extremely far-fetched situation. For once, we should not be too exacting on ISDA’s crack drafting squad™. I mean, who ever heard of a government forcing local issuers to unwind their GDRs just to spite hostile foreign investors?

So, anyway, you are a swap dealer, everything is messy as hell, tanks are unexpectedly rolling across foreign lands somewhere, and now your customer is on the horn asking what the hell is going on. You, naturally, will be as accommodating and constructive as you can in looking for outcomes for your client in such devilish times, but would still like the peace of mind of knowing, should everything go titten hoch, you can cancel the swap and walk away, paying a nugatory Cancellation Amount based on the worthlessness of the underliers. How can you?

• Nationalization, Insolvency and Delisting: this probably:

• Isn’t a nationalization
• Isn’t an insolvency
• It isn’t *inherently* a delisting (though de facto almost certainly will be as the international (...er hostile?...) Exchanges will most likely delist the DRs, but they don’t have to)

• Triple Cocktail

• It isn’t a Change in Law as that refers to laws impacting the counterparties to the trade, not the Issuer;
• It isn’t an Increased Cost of Hedging. well — it just isn’t, is it?
• It may be a Hedging Disruption – I mean it is hard to hedge an instrument that has just been compusorily dissolved, right? — though is disappearance of an instrument altogether so that there is nothing to replicate the return of at all really just a hedge disruption?

Also useful at least by way of analogy is “Tender Offer”. It’s not quite on point – but close, and perhaps useful by way of analogy should you have counterparties that are in denial about the fact that, from a very basic standpoint, they are the ones that are long local “craziest regulator in the room” risk, and not their long-suffering swap dealer.