Correction of Share Prices and Index Levels - Equity Derivatives Provision

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2002 ISDA Equity Derivatives Definitions

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11.4 in a Nutshell

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11.4 in all its glory

Section 11.4. Correction of Share Prices and Index Levels. In the event that any price or level published on the Exchange or by the Index Sponsor and which is utilized for any calculation or determination made under a Transaction is subsequently corrected and the correction is published by the Exchange or the Index Sponsor within one Settlement Cycle after the original publication, either party may notify the other party of that correction and the Calculation Agent will determine the amount that is payable or deliverable as a result of that correction, and, to the extent necessary, will adjust the terms of such Transaction to account for such correction.

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This clause deals with what happens of the Index Sponsor or calculation gent or an Exchange screws something up and then quickly takes action to fix it. See also Adjustments to Indices for what to do where the index methodology is changed, the Index is cancelled or disrupted.



Given that a Settlement Cycle means (in the JC’s summary):

1.37. “Settlement Cycle” means the usual period of Clearance System Business Days or Exchange Business Days) following a trade on which settlement usually occurs according to the Exchange’s rules. If there are multiple Exchanges, it will be the longest such period.

You will see these only apply to adjustments that happen quickly following publication of the relevant closing price, by way of snafu.

There is no method for calculating what the adjustment should be, which is commendably laissez faire from ISDA’s crack drafting squad™ but really no more than common sense: trying to solve for an unspecified error in the complex adaptive system that is an equity market is a fool’s errand. The Calculation Agent should usually be the swap dealer, and we would expect any such dealer wanting to keep its clients at all, let alone happy, is going to consult with them and do whatever most appears to be The Decent Thing as long as it does not involve the dealer itself taking a bath.

(There will be some earnest souls in compliance who think the safest thing will be for the dealer to take a bath, but try to resist this siren call, and spare a thought for that other ill-considered bunch of investors: the dealer’s shareholders.)

There is usually a common-sense solution that means the dealer does not take a bath and the investors are treated fairly (remember to treat investors rateably, by the way). All you need is someone on the trading desk to think of it.

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  • The JC’s famous Nutshell summary of this clause
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See also