Market Disruption Event - Equity Derivatives Provision

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eqderiv in a Nutshell (6.3(a) edition)

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Commentary

Other relevant concepts:

What counts as Market Disruption?

A Market Disruption Event is a Trading Disruption or Exchange Disruption at any time during the hour before any Valuation Time or Exercise Time, or Early Closure.

Additionally a day is “Disrupted Day” if an Exchange/Related Exchange fails to open for trading during a regular trading session.

Indices

In the case of an Index, the disruption needs to affect 20% of more of the securities comprising the Index for the Index to be treated as disrupted. In that case valuation is moved for the whole index, not just the disrupted part.

Baskets

In the case of Baskets where some underliers are disrupted and some aren’t, only the affected underliers are subject to disruption provisions and the undisrupted aspects settle/value as scheduled.

Exchange/Related Exchange


VWAP adjustments to Final Price for US Shares

Where share Final Price is determined by reference to the Volume Weighted Average Price during a trading session you may see this following amendment:

(a) Section 6.3(a) is amended by deleting “at any time during the one hour period that ends at the relevant Valuation Time, Latest Exercise Time, Knock-in Valuation Time or Knock-out Valuation Time, as the case may be” and replacing it with “at any time during the regular trading session on the Exchange, without regard to after hours or any other trading outside of the regular trading session hours”.
(b) Section 6.3(d) is amended by deleting the remainder of the provision following the term “Scheduled Closing Time” in the fourth line thereof;
(c) If the final Valuation Date is a Disrupted Day, the Calculation Agent may determine that such day is a Disrupted Day only in part, in which case the Calculation Agent must designate the Valuation Date determined pursuant to Section 6.6(a) for the remaining portion and the Calculation Agent must adjust the Number of Shares for which the Disrupted Day is the Valuation Date and must determine the Final Price based on such adjustments which will be based on such factors as the Calculation Agent considers relevant.

The current US tax interpretation is that benchmarking an equity swap on a US Share to the close is viewed a cross (and one is guilty until proven innocent). Therefore, do not use the official closing price for US Shares at maturity as it would then invalidate them as true derivatives and recharacterise them as repos. Instead, confirm VWAP over the day as an observable benchmark price for termination.

This does not, however, prevent one early-terminating an Equity Swap Transaction on a US Share using methods other than VWAP. Now, if you are a synthetic prime brokerage sort of camper, you might wonder why all this fuss as equity swaps are treated, for most purposes, as undated and are always terminated at the client’s motion as an optional early termination. Template:Eqderivanatomy