Additional Disruption Events - Equity Derivatives Provision
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Equity Derivatives Anatomy™
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Section 12.9. Additional Disruption Events
- Section 12.9(a): The actual Additional Disruption Events
Section 12.9(a): Other definitions relating to Additional Disruption Events
- 12.9(b) Consequences of an Additional Disruption Event
- 12.9(b)(i) Consequences of Change in Law or Insolvency Filing
- 12.9(b)(ii) Consequences of Failure to Deliver
- 12.9(b)(iii) Consequences of Hedging Disruption
- 12.9(b)(iv) Consequences of Loss of Stock Borrow
- 12.9(b)(v) Consequences of Increased Cost of Stock Borrow
- 12.9(b)(vi) Consequences of Increased Cost of Hedging
- 12.9(b)(vii) Consequences of Hedging Disruption and Loss of Stock Borrow
- 12.9(b)(viii) Shares provided by the Non-Hedging Party
- 12.9(b)(ix) Cancellation Amount payable by one party to the other
- 12.9(b)(i) Consequences of Change in Law or Insolvency Filing
From the User’s Guide
Section 12.9. Additional Disruption Events. The 2002 Definitions introduce a new category of seven elective disruption events entitled “Additional Disruption Events”. The Additional Disruption Events were included at the request of members who found that in the intervening six years since publication of the 1996 Definitions, market participants had begun to develop their own firm-specific description of additional Disruption events that apply in the case of Disruptions to the parties' hedging arrangements, a change in law, an insolvency filing or a failure to deliver Shares as a result of an illiquid market. Members requested that the most common additional Disruption events be standardized in the 2002 Definitions.
Unlike the consequences related to Extraordinary Events, the parties can elect as many Additional Disruption Events as are agreed to. The Additional Disruption Events are elective, so none of them apply automatically. There may be overlap between Change in Law and Hedging Disruption. Given that Change in Law contains no cure period and Hedging Disruption contains a two Scheduled Trading Days’ cure period, parties should consider specifying a priority between the two Additional Disruption Events in the related Confirmation. If parties select more than one Additional Disruption Event to apply to their Transaction, they should consider whether certain events would constitute more than one Additional Disruption Event, and whether the consequences of each Additional Disruption Event are different (e.g., Increased Cost of Hedging and Increased Cost of Stock Borrow). In such cases parties should add a provision to the Confirmation that states which provision should be followed if there is a conflict. The only conflict addressed by the 2002 Definitions is between Hedging Disruption and Loss of Stock Borrow. If both events are specified as applicable in a Confirmation and an event occurs that could qualify under either elective, then such event will be treated as a Loss of Stock Borrow, pursuant to Section 12.9(b)(vii). Lastly, any of the Additional Disruption Events can apply to any type of Transaction, except that Failure to Deliver (discussed below) applies only to Physically-settled Transactions.
Commentary
- See: Triple Cocktail for the famous triumvirate of Change in Law, Increased Cost of Hedging and Hedging Disruption.