Valuation Date - Equity Derivatives Provision

Synthetic prime brokerage

The Valuation Date comes in handy if you are restriking your Transactions periodically, as you are likely to be doing if you are providing synthetic prime brokerage — being as it is, an undated delta-one exposure to equities delivered through an equity derivative. Your prime broker will not want to run indeterminate exposures to shares, even if it is collateralised daily, so restriking the transactions periodically can zero out whatever the residual risk is in the paranoid eyes of your financial controllers.

Now interim Valuation Dates — which are glorified estimates of the present value of an ongoing position — and the final Valuation Date — which is the price at which you definitively close out your position and go “off risk” — have rather different consequences. US Tax attorneys, as obsessed as they are with avoiding the suggestion that a swap counterparty is controlling its broker’s hedge, will seek to avoid any suggestion that the final, scheduled valuation arises from anything quite so mucky as the price at which the broker closes out its hedge. So expect references to VWAP.

The same tax attorney will not be so bothered how you come up with your prices on other valuation dates, seeing as the counterparty is mot going on or off risk.

In the synthetic prime brokerage world, where Transactions are callable at will, that scheduled Termination Date is a fairly arbitrary figure plucked out of the air at some point in the distant future, as much as anything else because “Termination Date” is a mandatory field in the booking system.

Curiously, tax attorneys are less exercised about the method by which a Broker values the transaction for an optional early termination, even though that is the usual method by which a clienbt terminates a synthetic equity swap, which is broadly an undated transaction terminable at the client’s whim.

Bullet swaps

Some times you will trade “bullet swaps” which do not have a Valuation Date. Being the tortured language of an ISDA drafting committee, there is no straightforward concept in the definitions of a swap which has no Valuation Dates other than the Termination Date, so expect wildly ungainly language in confirms to express a fairly simple idea.