Template:M summ Equity Derivatives 12.1
All hail the Determining Party
Note that where an Extraordinary Event occurs, the Determining Party, rather than the Calculation Agent, may be the person called on to calculate a Cancellation Amount. (This is relevant especially where the Calculation Agent is not the Hedging Party, as the Hedging Party will have definite ideas about how to value cancellation vis a vis its own hedge).
Is it just is or did ISDA’s crack drafting squad™ hit the wall on the definition of “Share-for-Share”? What do you mean, “and (ii) Reverse Merger”? It looks like something is missing, but we think the rather exasperated tone is basically, “a reverse merger is necessarily Share-for-Share so do we really need to “wrap it round with deemery”, as Büchstein would say? Well, we are jolly well not going to, so see how you like that.”
Definitions
12.1(a). “Extraordinary Event”
Break these “Extraordinary Events” into four categories:
Corporate events on Issuers: Corporate Events are generally benign[1] but not always expected or even wanted adjustments to the corporate structure and management of specific underlying Shares — Tender Offers, Mergers, management buyouts and events that change the economic proposition represented by those Shares, and not the equity derivative contract. So: Merger Events and Tender Offers;
Index adjustments: For Index trades, unexpected adjustments and changes to methodologies and publishing strategies of underlying Index (as opposed to changes in the composition of the Index according to its pre-existing rules) — collectively call these “Index Adjustment Events”. So:
- Index Modification: Changes in the calculation methodology for the Index
- Index Cancellation: Where Indexes are discontinued with replacement;
- Index Disruption: disruption in the calculation and publication of Index values;
Negative events affecting Issuers: Nationalizations, Insolvency, Delisting of underlying Issuers;
Additional Disruption Events: Events which directly impair performance and risk management of the Transaction itself. These often cross over with market- and Issuer-dependent events above, but the emphasis here is their direct impact on the parties’ abilities to perform and hedge the derivative Transaction itself. So:
- The Triple Cocktail: The Triple Cocktail of Change in Law, Hedging Disruption and Increased Cost of Hedging;
- Stock borrow events: Specific issues relating to short-selling (Loss of Stock Borrow and Increased Cost of Stock Borrow); and
- Random ones that aren’t needed or used: Two random ones that don’t brilliantly fit with this theory, and which people tend to disapply — possibly for that exact reason, but they are fairly well covered by the Triple Cocktail anyway — Failure to Deliver under the Transaction on account of illiquidity and, even more randomly, Insolvency Filing[2].
12.1(b). “Merger Event”
12.1(c). “Merger Date”
12.1(d). “Tender Offer”
12.1(e). “Tender Offer Date”
12.1(j). “Other Consideration”
12.1(k). “Combined Consideration”
12.1(l). “Announcement Date”
12.1(m). “Implied Volatility”
Applies only to Merger Events and Tender Offers and is, you won’t be surprised to hear, the Shares that are affected by one of them.
- ↑ “Benign” from the point of view of the target company’s solvency and market prospects; not quite so benign from its management team’s prospects of ongoing employment.
- ↑ especially since there is already an “Insolvency” event covering most of this).