Loss of Stock Borrow - Equity Derivatives Provision
Loss of Stock Borrow is an Additional Disruption Event in the 2002 ISDA Equity Derivatives Definitions, and is fondly abbreviated, by this commentator at least, to LOSB.
Definition
Operative Provision
But see also 12.9(b)(vii) which deals with the tension between LOSB and Hedging Disruption.
12.9(b)(iv) in a Nutshell™ (Equity Derivatives edition)
- 12.9(b)(iv) If “Loss of Stock Borrow” applies, then if the Hedging Party notifies the Non-Hedging Party of a Loss of Stock Borrow, the Non-Hedging Party may, within 2 Scheduled Trading Days of notice, lend the Hedging Party the necessary Shares at a rate no greater than the Maximum Stock Loan Rate. If it does not, the Hedging Party may terminate the Transaction on notice and the Determining Party will determine the Cancellation Amount.
- 12.9(b)(iv) If “Loss of Stock Borrow” applies, then if the Hedging Party notifies the Non-Hedging Party of a Loss of Stock Borrow, the Non-Hedging Party may, within 2 Scheduled Trading Days of notice, lend the Hedging Party the necessary Shares at a rate no greater than the Maximum Stock Loan Rate. If it does not, the Hedging Party may terminate the Transaction on notice and the Determining Party will determine the Cancellation Amount.
Commentary
Summary: Where the Hedging Party can't locate a stock borrow, the Non-Hedging Party has the option to source one that is struck at less than the Maximum Stock Loan Rate within two Scheduled Trading Days, failing which the Hedging Party can terminate the Transaction. Where LOSB and Hedging Disruption both apply and the same event could qualify as either, it will hbe treated as a LOSB (which has milder consequences for the affected party).
Compare and contrast with Increased Cost of Stock Borrow. There is a logical handoff and interaction between the two.
- If the cost of a stock borrow exceeds the Maximum Stock Loan Rate it is deemed to be (as good as) impossible to borrow stock, so it is treated as a Loss of Stock Borrow, not merely an Increased Cost of Stock Borrow. If a counterparty wants to apply Increased Cost of Stock Borrow whatever the cost of an available bid, the answer is to disapply Maximum Stock Loan Rate altogether. This means that any possible stock borrow rate, however astronomical, comes under Increased Cost of Stock Borrow, and Loss of Stock Borrow (which is slightly more onerous a termination right) only applies where there are no offers in the market at all.