Increased Cost of Stock Borrow - Equity Derivatives Provision

2002 ISDA Equity Derivatives Definitions A Jolly Contrarian owner’s manual™ Resources and navigation 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 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 Section 12.9(a)(viii) and 12.9(b)(v) in a Nutshell™ Use at your own risk, campers! 12.9(a)(viii) “Increased Cost of Stock Borrow”: the rate the Hedging Party incurs to borrow Shares for the Transaction exceeds the Initial Stock Loan Rate; 12.9(b)(v) If “Increased Cost of Stock Borrow” applies, the Hedging Party may tell the Non-Hedging Party that an Increased Cost of Stock Borrow has happened and that it will make a Price Adjustment to the Transaction. Within 2 Scheduled Trading Days of that notice the Non-Hedging Party must: (A) amend the Transaction to make the Price Adjustment, (B) pay the Hedging Party the Price Adjustment or (C) terminate the Transaction as of that second Scheduled Trading Day. Within this period, the Non-Hedging Party may lend the Hedging Party, the necessary Hedging Shares at no more than the Initial Stock Loan Rate. Absent such an election the Hedging Party may terminate the Transaction. On any termination of the Transaction, the Determining Party will determine the Cancellation Amount. view template Full text of Section 12.9(a)(viii) and 12.9(b)(v) 12.9(a)(viii) “Increased Cost of Stock Borrow” means that the Hedging Party would incur a rate to borrow Shares in respect of such Transaction that is greater than the Initial Stock Loan Rate; 12.9(b)(v) If “Increased Cost of Stock Borrow” is specified in the related Confirmation to be applicable to a Transaction, then upon the occurrence of such an event the Hedging Party will give prompt notice to the Non-Hedging Party that an Increased Cost of Stock Borrow has occurred and that a Price Adjustment will be made to the Transaction. The Non-Hedging Party shall, within two Scheduled Trading Days of receipt of the notice of Increased Cost of Stock Borrow and corresponding Price Adjustment, notify the Hedging Party that it elects to (A) agree to amend the relevant Transaction to take into account the Price Adjustment, (B) pay the Hedging Party an amount determined by the Calculation Agent that corresponds to the Price Adjustment or (C) terminate the Transaction as of that second Scheduled Trading Day. If such notice is not given by the end of that second Scheduled Trading Day, then the Hedging Party may give notice that it elects to terminate the Transaction, specifying the date of such termination, which may be the same day that the notice of termination is effective. If either party elects to terminate the Transaction, the Determining Party will determine the Cancellation Amount payable by one party to the other. Within this period, the Non-Hedging Party may, in order to avoid a Price Adjustment or termination with respect to the Transaction, (X) lend the Hedging Party, subject to the conditions below, Shares in an amount equal to the Hedging Shares at a rate equal to or less than the Initial Stock Loan Rate or (Y) refer the Hedging Party to a Lending Party that lends the Hedging Party Shares in an amount equal to the Hedging Shares at a rate equal to or less than the Initial Stock Loan Rate. view template 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.

Content and comparisons

Section 12.9(a): The actual Additional Disruption Events

12.9(a)(i) Additional Disruption Event

12.9(a)(ii) Change in Law

12.9(a)(iii) Failure to Deliver

12.9(a)(iv) Insolvency Filing

12.9(a)(v) Hedging Disruption

12.9(a)(vi) Increased Cost of Hedging

12.9(a)(vii) Loss of Stock Borrow

12.9(a)(viii) Increased Cost of Stock Borrow

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Summary

A gentler provision than Loss of Stock Borrow — wherein the non-hedging party has to either find a stock borrow for the Hedging Party to execute, or be closed out of its position like that, under an Increased Cost of Stock Borrow, if the Hedging Party notifies an Increased Cost of Stock Borrow, specifying a proposed Price Adjustment, the non-Hedging Party has three options:

• Accept the Price Adjustment, the Transaction is amended and carries on as repriced;
• Make a one-off payment of the determined Price Adjustment; or
• Allow the dealer to terminate the Transaction on the second Scheduled Trading Day.

Only if the Non-Hedging Party has failed to give any such election by the end of the second Scheduled Trading Day can the Hedging Party terminate the Transaction. The Non-Hedging Party can lend the Hedging Party the relevant Shares in the intervening period to mitigate its loss. Template:M summ Equity Derivatives 12.9(b)(vi) Comparing Loss of Stock Borrow and Increased Cost of Stock Borrow: There is a logical hand-off and interaction between Loss of Stock Borrow with Increased Cost of Stock Borrow:

• Under a Loss of Stock Borrow the Non-Hedging Party has a bit less flexibility in what it does: it must pony up (or procure) a stock borrow within 2 Scheduled Trading Days itself, or Hedging Party can terminate outright. Under Increased Cost of Stock Borrow, the worst that can happen is the trade is repriced to take in the higher rate. So ICOSB is the “gentler” provision from the Non-Hedging Party’s perspective.
• If the cost of a stock borrow exceeds the Maximum Stock Loan Rate it is deemed to be (as good as) impossible to borrow stock, so it is treated as a Loss of Stock Borrow, not merely an Increased Cost of Stock Borrow.
• If a counterparty wants to apply Increased Cost of Stock Borrow whatever the cost of an available bid — and given that it can pass the cost on, a synthetic prime broker might be happy to do this — the answer is to disapply Maximum Stock Loan Rate altogether. This means that any possible stock borrow rate, however astronomical, comes under Increased Cost of Stock Borrow, and Loss of Stock Borrow (which is slightly more onerous a termination right) only applies where there are no offers in the market at all.
  

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See also

• Triple cocktail
• Loss of Stock Borrow

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