2002 ISDA Equity Derivatives Definitions
A Jolly Contrarian owner’s manual™
12.9(a) in a Nutshell™
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Original text
- 12.9(a) Each of the following terms shall have the meaning set forth below:
- 12.9(a)(i) “Additional Disruption Event” means any of the events set forth in paragraphs 12.9(a)(ii) through 12.9(a)(viii) below:
- 12.9(a)(ii) “Change in Law” means that, on or after the Trade Date of any Transaction:
- (A) due to the adoption of or any change in any applicable law or regulation (including, without limitation, any tax law), or
- (B) due to the promulgation of or any change in the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law or regulation (including any action taken by a taxing authority),
- a party to such Transaction determines in good faith that:
- (X) it has become illegal to hold, acquire or dispose of Shares relating to such Transaction, or
- (Y) it will incur a materially increased cost in performing its obligations under such Transaction (including, without limitation, due to any increase in tax liability, decrease in tax benefit or other adverse effect on its tax position);
- 12.9(a)(iii) “Failure to Deliver” means the failure of a party to deliver, when due, the relevant Shares under that Transaction, where such failure to deliver is due to illiquidity in the market for such Shares;
- 12.9(a)(iv) “Insolvency Filing” means that the Issuer institutes or has instituted against it by a regulator, supervisor or any similar official with primary insolvency, rehabilitative or regulatory jurisdiction over it in the jurisdiction of its incorporation or organization or the jurisdiction of its head or home office, or it consents to a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition is presented for its winding-up or liquidation by it or such regulator, supervisor or similar official or it consents to such a petition, provided that proceedings instituted or petitions presented by creditors and not consented to by the Issuer shall not be deemed an Insolvency Filing;
- 12.9(a)(v) “Hedging Disruption” means that the Hedging Party is unable, after using commercially reasonable efforts, to (A) acquire, establish, re-establish, substitute, maintain, unwind or dispose of any transaction(s) or asset(s) it deems necessary to hedge the equity price risk of entering into and performing its obligations with respect to the relevant Transaction, or (B) realize, recover or remit the proceeds of any such transaction(s) or asset(s);
- 12.9(a)(vi) “Increased Cost of Hedging” means that the Hedging Party would incur a materially increased (as compared with circumstances existing on the Trade Date) amount of tax, duty, expense or fee (other than brokerage commissions) to (A) acquire, establish, re-establish, substitute, maintain, unwind or dispose of any transaction(s) or asset(s) it deems necessary to hedge the equity price risk of entering into and performing its obligations with respect to the relevant Transaction, or (B) realize, recover or remit the proceeds of any such transaction(s) or asset(s), provided that any such materially increased amount that is incurred solely due to the deterioration of the creditworthiness of the Hedging Party shall not be deemed an Increased Cost of Hedging;
- 12.9(a)(vii) “Loss of Stock Borrow” means that the Hedging Party is unable, after using commercially reasonable efforts, to borrow (or maintain a borrowing of) Shares with respect to such Transaction in an amount equal to the Hedging Shares (not to exceed the number of Shares underlying the Transaction) at a rate equal to or less than the Maximum Stock Loan Rate;
- 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(a)(ix) “Hedging Party” means the party specified in the related Confirmation as the Hedging Party or, if no Hedging Party is specified, either party to the Transaction;
- 12.9(a)(x) “Hedging Shares” means the number of Shares that the Hedging Party deems necessary to hedge the equity price risk of entering into and performing its obligations with respect to a Transaction to which “Loss of Stock Borrow” or “Increased Cost of Stock Borrow” is applicable;
- 12.9(a)(xi) “Lending Party” means a third party that the Hedging Party considers to be a satisfactory counterparty (acting in good faith and in a commercially reasonable manner in light of other transactions that the Hedging Party may have entered into with such party);
- 12.9(a)(xii) “Non-Hedging Party” means the party that is not the Hedging Party;
- 12.9(a)(xiii) “Maximum Stock Loan Rate” means, in respect of a Transaction to which “Loss of Stock Borrow” is applicable, the stock loan rate specified as such in the related Confirmation;
- 12.9(a)(xiv) “Initial Stock Loan Rate” means, in respect of a Transaction to which “Increased Cost of Stock Borrow” is applicable, the stock loan rate specified as such in the related Confirmation; and
- 12.9(a)(xv) “Price Adjustment” means an adjustment to the Strike Price, Initial Price, Forward Price, Forward Floor Price, Forward Cap Price, Knock-in Price, Knock-out Price, spread or other variable with respect to the relevant Transaction.
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Resources and Navigation
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Comparisons
To follow what’s going on you’ll need to understand the Consequences of an Additional Disruption Event, which is set out at Section 12.9(b).
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
Section 12.9(a): Other definitions relating to Additional Disruption Events
- 12.9(a)(ix) Hedging Party
- 12.9(a)(x) Hedging Shares
- 12.9(a)(xi) Lending Party
- 12.9(a)(xii) Non-Hedging Party
- 12.9(a)(xiii) Maximum Stock Loan Rate
- 12.9(a)(xiv) Initial Stock Loan Rate
- 12.9(a)(xv) Price Adjustment
Basics
Section 12.9(a)(i) Additional Disruption Events
Whereas most of the Extraordinary Events in Section 12 directly impair or change the economic outlook for the Issuer of Shares or the composition of an Index, Additional Disruption Events impact the dealer’s ability to perform and hedge its exposure to the Shares or Index under a Transaction. Usually. this has nothing to do with the Issuer or the Index itself at all.
There are seven Additional Disruption Events: “Change in Law”, “Failure to Deliver”, “Insolvency Filing”, “Hedging Disruption”, “Increased Cost of Hedging”, “Loss of Stock Borrow” and “Increased Cost of Stock Borrow”.
These often cross over with market- and Issuer-dependent events above, but the emphasis here is their direct impact on the parties’ abilities to perform and hedge the derivative Transaction itself. So there is the so-called “Triple Cocktail” of Change in Law, Hedging Disruption and Increased Cost of Hedging and specific issues impairing the dealer’s access to the stock loan market (Loss of Stock Borrow and Increased Cost of Stock Borrow).
There are two random ones that don’t brilliantly fit with this theory, and which tend to get disapplied since they are well-enough covered by the Triple Cocktail anyway — Failure to Deliver under the Transaction on account of illiquidity and, even more randomly, Insolvency Filing, especially since there is already an “Insolvency” event covering most of this).
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