Template:M summ Equity Derivatives 6.3

Valuation Time

For run-of-the-mill valuations not related to the termination of a Transaction, the fall-back Scheduled Closing Time regime is fine.

The effect of the Valuation Date is to re-strike the Equity Notional Amount (or cash settle the movement in the underlier since the last Valuation Date which is economically similar to a variation margin payment.

For the final Valuation Date, on the other hand - which feeds into the actual termination price for the Transaction, expect the broker to be more exercised about the timing matching the point at which it liquidates its actual Hedge Position. Expect jumpier US tax folk to start rabbiting on about hypothetical broker-dealers liquidating hypothetical hedges, but have no truck with that sort of talk.

Valuation Date

Final Valuation Date

The Valuation Date concept assumes you have a Transaction that will run to its term. For you cheeky synthetic prime brokerage types who write your Equity Swaps as if they were undated delta-one exposures — which, unless the Master in Charge of Tax is looking, they are — your master confirmation will need to create an extra, bonus, final Valuation Date as of the Optional Early Termination Date, otherwise on closing out a position you might find yourselves harking back to a Valuation Date that happened in that happier, gentler time that was two or three weeks ago.

The Calculation Period that didn’t bark in the night-time

Where, oh where, are the Calculation Periods 2002 ISDA Equity Derivatives Definitions? Ok so this is a bit of a trick question. There are no “Calculation Periods” — that is instead defined in the 2006 ISDA Definitions. In the 2002 ISDA Equity Derivatives Definitions, the periods for Equity calculations are handled by the “Valuation Date” concept.

That in turn determines the “Cash Settlement Payment Date” (for cash-settled Equity Swap Transactions) and “Settlement Date” (for physically settled ones).

You may see a Calculation Period on the Floating leg of an equity swap though - that will be a reference to the 2006 ISDA Definitions.

Bullet swaps

Some times you will trade “bullet swaps” which do not have a Valuation Date. Being the tortured language of ISDA’s crack drafting squad™, 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 that fairly simple idea.

Market Disruption Events

A Market Disruption Event is a Trading Disruption or Exchange Disruption that exists during the hour before any Valuation Time or Exercise Time — it keys off the occurrence or existence of the event, not the point when the Calculation Agent determined it — or Early Closure.

The point is to capture material disruptions around the close of the market. If there was a disruption, earlier in the day but, say, it cleared up by lunchtime, then — as far as valuing equity derivatives is concerned — all is Kool and the Gang. The kinds of disruptions are:

• 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.