Options Exchange - Equity Derivatives Provision

Template:Eqderivanat Section 11.2. Adjustments to Share Transactions and Share Basket Transactions

11.2(a). Method of Adjustment

11.2(b). Options Exchange Adjustment

11.2(c). Calculation Agent Adjustment

11.2(d). Options Exchange

11.2(e). Potential Adjustment Event

Where there are no exchange-traded options

You do have to love ISDA’s crack drafting squad™, don’t you: for who else would take the time to consider what to do when you have selected Options Exchange Adjustment for Shares that don’t have any exchange-traded options. Look, folks, if there are no exchange-traded options on the underlying shares, then don’t select Options Exchange Adjustment as your Method of Adjustment for crying out loud.

If he were in a more patient mood, the JC might suppose that options may unexpectedly cease trading on exchange after a Transaction is executed, or may be temporarily suspended — and perhaps “an event having a concentrative or dilutive effect on the value of the shares” might be just the thing to cause a suspension or delisting. But even this is a recommendation to plump for Calculation Agent Adjustment under 11.2(b). You would think. I know, I know: but the Calculation Agent — usually the broker dealer counterparty to the transaction, of course —might rip my face off!

But, firstly, what choice have you got? If the options aren’t traded on exchange, what else are you doing to do: have a dealer poll? If they are traded on exchange, and the Calculation Agent makes a determination at variance from the one the Options Exchange makes, it will have to justify how it is acting “in good faith and a commercially reasonable manner”, being the standard required of it by Paragraph 1.40. Furthermore, if it is delta-one-hedging (as it will be, if you you are doing synthetic prime brokerage), its is market neutral and has no interest in delivering you a bad outcome, and indeed every incentive, under the commercial imperative to deliver you a good one.