Hedging Party - Equity Derivatives Provision

Equity Derivatives Anatomy™ →Go uptown 12.9(a)(ix) “Hedging Party” means the party specified in the related Confirmation as the Hedging Party or, if no Hedging Party is specified, either party to the Transaction; (view template) 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 - Premium Synthetic Prime Brokerage 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.

Commentary

the conceptual confusion caused by physical hedging not being done by the counterparty in person

Relevant in the context of Additional Disruption Events and hedging disruption as the entity which is actually carrying out the hedging activity, if it isn't the party itself (where not specified, it defaults to the parties themselves.

In this case there will be a string of intermediate hedging contracts - usually derivatives - but these may not behave in exactly the way that a real underlier would (in terms of market disruption, tax events, liquidity etc). and what the Equity Derivatives Definitions are meant to do is pass on the risk associated with the actual underlier.

So for example in the example below Party A provide exposure to client, hedges that with a equity TRS to Hedging Party, which goes long the physical share. Now the Hedging Party, not Party A, has the risk of the physical assets. If there is a market disruption, or a tax event on the physical hedge this is reflected in the price that Hedging Party will have to pay to Party A, but it isn’t a market disruption or tax event directly on Party A itself (and in fact might not be – Party A might be domiciled in a jurisdiction benefitting from a different tax treaty with the jurisdiction of the underlier, for example). So in this case we need to reference the position as held by a person other than the counterparty to the swap.

Note also that "Non-Hedging Party" definition somewhat assumes that the Hedging Party will indeed be the actual counterparty to the Transaction.

See also

See, for example, definitions:

• Non-Hedging Party,
• Hedging Disruption,
• Increased Cost of Hedging,
• Loss of Stock Borrow,
• Increased Cost of Stock Borrow,
• Hedging Shares,
• Lending Party.