Template:M summ Equity Derivatives 11.4

Given that a Settlement Cycle means (in the JC’s summary):

1.37. “Settlement Cycle” means the usual period of Clearance System Business Days or Exchange Business Days) following a trade on which settlement usually occurs according to the Exchange’s rules. If there are multiple Exchanges, it will be the longest such period.

You will see these only apply to adjustments that happen quickly following publication of the relevant closing price, by way of snafu. There are some fairly obvious snafus — MSCI’s pricing of its Emerging Markets Index on the day of sanctions were imposed on Russian equities in 2002 — which were apparently wrong, but were not immediately corrected, and in all likelihood (writing a month later) will not be corrected at all.

If they are, it is too late, dear friends: your Index Swap Transaction will be stuck with the original calculation. Comfort yourself thus: even if it were not, your swap dealer would almost certainly have had some means of passing the loss it will inevitably take as a result of the adjustment.

To see why spontaneous, historical adjustments to index levels are unlikely, consider the real world in which indices operate:

• Path dependency: The index performance is path-dependent: not just that one value, six weeks ago, but every value since will need to be restated.
• Trading frequency: Bear in mind investors go in and out of these investments quickly, so the administrative or legal burden of figuring out who was affected by an index adjustment, and by how much — all functions of path-dependent time series — are hard, if not impossible to calculate.
• Synthetic: Indexes are inherently synthetic instruments, meaning the index provider has limited knowledge of who has exposure to the index, and how they may be affected. Unlike, say, an ETF which is long a phyiscal set of securities, investors can take positions on indices without telling the index provider.
• You can’t please everyone and two wrongs don’t make a right: For every short investor who is furious that the Index forgot to value Russian stocks at nil, there will be a long investor who is delighted. Reversing that mistake some time after you made it is going to generate only the exact opposite emotions among investors — at a net gain of zero on the global happiness index — and will create immense headaches for those manufacturing, issuing and delta-hedging products based on the index — at a net loss to global happiness.

So — it is spilt milk. Cry over it if you must, but don’t try to put it back in the carton.