Exchange Disruption - Equity Derivatives Provision
2002 ISDA Equity Derivatives Definitions
Section 6.3(c) in a Nutshell™
Full text of Section 6.3(c)
Content and comparisons
- 6.3(a) Market Disruption Event
- 6.3(b) Trading Disruption
- 6.3(c) Exchange Disruption
- 6.3(d) Early Closure
- 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)
- 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
Where your trade is an Index Transaction, or an Index Basket Transaction, the disruption relates to transactions in the underlying Shares - because the Index doesn’t exist per se as an investable stock.
There are, however, separate disruption events relating to change, cancellation or non-publication of Indices.
What’s going on here
Remember the underlying vibe here: this is meant to save the Hedging Party’s bacon if for some reason it can’t actually hedge its index exposure. One can hedge index exposure in multiple ways: through a total return swap, by buying futures on the index, or by trading the physical stocks underlying the index, or a combination of the above. Thus, the language is nice and loosey-goosey, allowing the flexibility to the Calculation Agent however it elects to hedge, and so contemplates a disruption whether it is because there is no market in the constituent components or index futures.
But this provides some rather odd optionality. It might be that some of the index component Shares are disrupted, but, say, futures in the index are not, and the Calculation Agent can in fact fully hedge its exposure, but it could technically invoke an Index Disruption anyway. At times of maximum dislocation, published index values don’t always fabulously represent the value of their constituents, especially where those constituents are connected with countries which unexpectedly invade Ukraine. This can lead to frantic conversations between counterparties to Index Swaps.