Market Disruption Event - Equity Derivatives Provision

Equity Derivatives Anatomy™ →Go uptown 6.3(a) Market Disruption Event. “Market Disruption Event” means in respect of a Share or an Index, the occurrence or existence of: (i) a Trading Disruption, (ii) an Exchange Disruption, which in either case the Calculation Agent determines is material, at any time during the one hour period that ends at the relevant Valuation Time, Latest Exercise Time, Knock-in Valuation Time or Knock-out Valuation Time, as the case may be, or (iii) an Early Closure. For the purposes of determining whether a Market Disruption Event in respect of an Index exists at any time, if a Market Disruption Event occurs in respect of a security included in the Index at any time, then the relevant percentage contribution of that security to the level of the Index shall be based on a comparison of (x) the portion of the level of the Index attributable to that security and (y) the overall level of the Index, in each case immediately before the occurrence of such Market Disruption Event. (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.

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6.3(a) in a Nutshell™ _{(Equity Derivatives edition)}

6.3(a) “Market Disruption Event” means

(i) a material Trading Disruption or Exchange Disruption to a Share or Index during the hour before the Valuation Time (etc), or

(ii) an Early Closure.

To work out whether there is a Market Disruption Event on an Index due to a Market Disruption Event on one of its component securities, the Calculation Agent will determine the percentage that security contributes to the Index by comparing

(x) how much of the Index level is attributable to that security with

(y) the Index level just before the Market Disruption Event happened.

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What counts as Market Disruption?

A Market Disruption Event is a Trading Disruption or Exchange Disruption at any time during the hour before any Valuation Time or Exercise Time, or Early Closure.

• Trading Disruption: suspension/limitation in trading on an underlier (or futures on it) on any Exchange/Related Exchange
• Exchange Disruption: any event that impairs the ability to value, settle transactions across any Exchange/Related Exchange
• Early Closure: the closure of any Exchange/Related Exchange prior to scheduled closing time unless announced at least one hour prior to the earlier of (i) the actual closing time for the regular trading session on that exchange and (ii) the submission deadline for orders on Exchange for execution at the Valuation Time

Additionally a day is “Disrupted Day” if an Exchange/Related Exchange fails to open for trading during a regular trading session.

Indices

In the case of an Index, the disruption needs to affect 20% of more of the securities comprising the Index for the Index to be treated as disrupted. In that case valuation is moved for the whole index, not just the disrupted part.

Baskets

In the case of Baskets where some underliers are disrupted and some aren’t, only the affected underliers are subject to disruption provisions and the undisrupted aspects settle/value as scheduled.

Exchange/Related Exchange

• Determining which are the “Exchanges” and “Related Exchanges” is ordinarily straightforward as they are specified in the confirmation.
• However, where “All Exchanges” is specified as the “Related Exchange”, then the Market Disruption Event may be triggered if there is a disruption on any exchange where trading has a material effect (as determined by Calculation Agent) on the overall market for futures or options relating to the underlier.

See also

• Disrupted Day, being a day on which a Market Disruption Event has occurred.
• Consequences of Disrupted Days;
• Trading Disruption under 6.3(b);
• Exchange;
• Related Exchange;
• Exchange Disruption under 6.3(c);
• Early Closure under 6.3(d).

VWAP adjustments to Final Price for US Shares

Where share Final Price is determined by reference to the Volume Weighted Average Price during a trading session you may see this following amendment:

(a) Section 6.3(a) is amended by deleting “at any time during the one hour period that ends at the relevant Valuation Time, Latest Exercise Time, Knock-in Valuation Time or Knock-out Valuation Time, as the case may be” and replacing it with “at any time during the regular trading session on the Exchange, without regard to after hours or any other trading outside of the regular trading session hours”.

(b) Section 6.3(d) is amended by deleting the remainder of the provision following the term “Scheduled Closing Time” in the fourth line thereof;

(c) If the final Valuation Date is a Disrupted Day, the Calculation Agent may determine that such day is a Disrupted Day only in part, in which case the Calculation Agent must designate the Valuation Date determined pursuant to Section 6.6(a) for the remaining portion and the Calculation Agent must adjust the Number of Shares for which the Disrupted Day is the Valuation Date and must determine the Final Price based on such adjustments which will be based on such factors as the Calculation Agent considers relevant.

The current US tax interpretation is that benchmarking an equity swap on a US Share to the close is viewed a cross (and one is guilty until proven innocent). Therefore, do not use the official closing price for US Shares at maturity as it would then invalidate them as true derivatives and recharacterise them as repos. Instead, confirm VWAP over the day as an observable benchmark price for termination.

This does not, however, prevent one early-terminating an Equity Swap Transaction on a US Share using methods other than VWAP. Now, if you are a synthetic prime brokerage sort of camper, you might wonder why all this fuss as equity swaps are treated, for most purposes, as undated and are always terminated at the client’s motion as an optional early termination. Template:Eqderivanatomy