Trade Features - Equity Derivatives Provision

2002 ISDA Equity Derivatives Definitions A Jolly Contrarian owner’s manual™ Go premium Overview — Summary — Premium — See also — Wikitext Crosscheck: 2002 ISDA Equity Derivatives Definitions Wikitext Trade Features in a Nutshell™ The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack. You can even ask questions! Ask about it here. Original text Section 1.38. Cash-settled. “Cash-settled” means, in respect of a Transaction, that Cash Settlement is applicable to that Transaction. Section 1.39. Physically-settled. “Physically-settled” means, in respect of a Transaction, that Physical Settlement is applicable to that Transaction. Section 1.40. Calculation Agent. “Calculation Agent” means the person or entity specified as such in the related Confirmation. Whenever a Calculation Agent is required to act or to exercise judgment in any way, it will do so in good faith and in a commercially reasonable manner. Furthermore, each party agrees that the Calculation Agent is not acting as a fiduciary for or as an advisor to such party in respect of its duties as Calculation Agent in connection with any Transaction. Section 1.41. ISDA Master Agreement. “ISDA Master Agreement” means one of the standard form master agreements published by the International Swaps and Derivatives Association, Inc. The terms “Event of Default”, “Affiliate” and “Early Termination Date” will have the meanings given to those terms in the ISDA Master Agreement. Resources and Navigation Resources About the Equity Derivatives Definitions | (full wikitext) | (nutshell wikitext) | Equity v credit derivatives showdown Hot topics Synthetic Prime Brokerage Anatomy | The Triple Cocktail | Cancellation and Payment | Calculation Agent TOC | 1 General Definitions | 2 Option Transactions | 3 Exercise of Options | 4 Forward Transactions | 5 Equity Swap Transactions | 6 Valuation | 7 Settlement | 8 Cash Settlement | 9 Physical Settlement | 10 Dividends | 11 Adjustments and Modifications | 12 Extraordinary Events · 12.8 Cancellation Amount · 12.9 Additional Disruption Events · 12.9 List of ADEs · 12.9(b) Consequences of ADEs | 13 Miscellaneous Index: Click ᐅ to expand: Equity Derivatives Prime Brokerage

Comparisons

A JC-curated sub-division of the General Definitions section. We sub-group the Section 1 definitions into the following subgroups:

• Transactions — Sections 1.1 - 1.12
• Underliers — Sections 1.13 - 1.16
• Trade Details — Sections 1.17 - 1.24
• Exchanges, Clearing Systems and Currencies — Sections 1.25 - 1.37
• Trade Features — Sections 1.38 - 1.41
• Calculation Agent and Determination Agent - Section 1.40 and 12.8(f)
• Knock-ins and Knock-outs — Sections 1.42 - 1.51

Basics

Cash-settled

This is your classic equity derivative: given that much of the point of equity swaps is to invest synthetically in securities you either don’t want to, or cannot, own physically — or instruments like indices that you can’t own. The great preponderance of delta one equity swaps which makes up the synthetic prime brokerage business, will be cash settled at all times.

Physically-settled

Some quick thoughts on where physical settlement is likely in equity derivatives.

Firstly, in ordinary equity swaps, the avowed intent of a customer is generally to avoid having a physical position in the share itself thereby appearing on the share register and possibly being in scope for various tax consequences it might rather avoid, so it would tend to be very unusual for a equity swap transaction to be physically settled.

In equity options world similar considerations apply although occasionally particularly in US markets listed options can be settled physically, although as far as JC knows only a very small part of the market in practice takes physical settlement.

You may see physical settlement in Forward Transactions. Two main scenarios here: firstly, common or garden financing: where a long-term investor wants to raise funding against a static position it will execute a spot sale and a forward purchase, and in that case will want the shares returned.

Secondly, in financing arrangements where banks are helping investors acquire large positions, for example by providing a financed collar structure with physical settlement that allows the investor to finally take possession of the shares while managing its downside risk, or in some M&A situations where derivatives are used to manage stake-building.

In essence, you will see physical settlement of equity derivatives where a customer’s end goal is to own shares and not just to get economic exposure. Here, derivatives are used as tools to manage the acquisition process rather than for pure investment purposes.

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