Market Disruption Event - Equity Derivatives Provision
2002 ISDA Equity Derivatives Definitions A Jolly Contrarian owner’s manual™
Market Disruption Event in all its glory
Resources and Navigation
|
Overview
Article 6. Valuation
Section 6.1. Valuation Time
Section 6.2. Valuation Date
Section 6.3. General Terms Relating to Market Disruption Events
- 6.3(a) Market Disruption Event
- 6.3(b) Trading Disruption
- 6.3(c) Exchange Disruption
- 6.3(d) Early Closure
Section 6.4. Disrupted Day
Section 6.5. Scheduled Valuation Date
Section 6.6. Consequences of Disrupted Days
Section 6.7. Averaging
- 6.7(a). Averaging Date
- 6.7(b). Settlement Price and Final Price
- 6.7(c). Averaging Date Disruption
- 6.7(d). Adjustments of the Exchange-traded Contract
- 6.7(e). Adjustments to Indices (Averaging)
Section 6.8. Futures Price Valuation
- 6.8(a) Valuation Date (Futures Price Valuation)
- 6.8(b) Additional definitions (Futures Price Valuation)
- 6.8(c) Settlement Price and Final Price (Futures Price Valuation)
- 6.8(d) Adjustments of the Exchange-traded Contract (Futures Price Valuation)
- 6.8(e) Non-Commencement or Discontinuance of the Exchange-traded Contract
- 6.8(f) Corrections of the Official Settlement Price
Market Disruption Events fall in the Valuation chapter of the 2002 ISDA Equity Derivatives Definitions, not the Extraodinary Events. So that should tell you these are disruptions that get in the Calculation Agent’s hair and make valuing the trade harder — annoying, sure, but not so gnarly that the Hedging Party can’t comfortably hedge its exposure, so there’s no need to reprice the Transaction, or call on time on it altogether. To be sure, that time might come — especially if the Market Disruption is prolonged — but as long as you are in the Valuation chapter, the presumption is that it hasn’t come just yet.
If it does, make directly for the Extraordinary Events section (Section 12), and especially the Triple Cocktail.
Summary
Market Disruption Events is part of Section 6 (Valuation) in the 2002 ISDA Equity Derivatives Definitions, so this isn’t really about catastrophic, end-of-days events that might bring your Transaction to an unexpected, premature end. For that you should look to Section 12, and especially 12.8 and 12.9.
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.
The rubber meets the road in the definition of Disrupted Day, whereupon you can find out what happens to your Transaction should you suffer a Market Disruption Event. These apply to Share Transactions, Basket Transactions and Index Transactions: it is least intuitive and most complicated in the case of Index transactions because, having the most underlying components, these are the ones most likely to be only partially disrupted.
An Index is really just an glorified, overgrown dynamic Share Basket, whose constituents from time to time are determined by a third party “index calculation agent” according to pre-formulated index rules.
That being the case, one can’t directly hedge by buying the “Index”: there is no Index, in the abstract, to buy (though of course you can buy index-tracking ETFs and Index futures — though these only really push the fundamental observation down one level). At some point, to hedge the risk of a glorified, overgrown dynamic {{eqderivprov|Share} Basket, someone, somewhere, has to go and buy the Shares in that basket, at the prices that the index determines, and that means having access to the markets on which those index constituents trade, at the point in time at which the index rules say one should take the price of those Shares.
Another oddity is that you are not necessarily trying to hit the best available price for the Share at the time of sale; you are trying to hit the actual price determined by the Index Calculation Agent, however good or bad that price is. That price is usually the “official closing price” of the Exchange.
You cannot, of course, ever guarantee you will be able to trade at exactly the official closing price, but it helps in trying to get near it if the Exchange on which that price is determined is open at the time when that closing price is derived, is liquid, tradable, and isn’t subject to some unforeseen disruption. These are “Market Disruption Events”.
Premium content
Here the free bit runs out. Subscribers click 👉 here. New readers sign up 👉 here and, for ½ a weekly 🍺 go full ninja about all these juicy topics 👇
|
- The JC’s famous Nutshell™ summary of this clause
- The overly engineered breakdown of the components of Market Disruption Event
- Some odd — but we think more honoured in breach than observance — Calculation Agent optionality in these days of multiple liquidity venues
- More on the effect upon Indices and Baskets
- Exchange and Related Exchange
See also
- The overly engineered breakdown of the components of Market Disruption Event
- Some odd — but we think more honoured in breach than observance — Calculation Agent optionality in these days of multiple liquidity venues
- More on the effect upon Indices and Baskets
- Exchange and Related Exchange