Valuation - Equity Derivatives Provision

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2002 ISDA Equity Derivatives Definitions
A Jolly Contrarian owner’s manual™

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Resources About the Equity Derivatives Definitions | (full wikitext) | (nutshell wikitext)
Hot topics Synthetic Prime Brokerage Anatomy | The Triple Cocktail | Cancellation and Payment | Calculation Agent
TOC | 1 General Definitions | 2 Option Transactions | 3 Exercise of Options | 4 Forward Transactions | 5 Equity Swap Transactions | 6 Valuation | 7 Settlement | 8 Cash Settlement | 9 Physical Settlement | 10 Dividends | 11 Adjustments and Modifications | 12 Extraordinary Events · 12.8 Cancellation Amount · 12.9 Additional Disruption Events · 12.9 List of ADEs · 12.9(b) Consequences of ADEs | 13 Miscellaneous

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Section 6 in a Nutshell
Use at your own risk, campers!

Article 6 Valuation
6.1. “Valuation Time” means the time on the relevant Valuation Date or Averaging Date specified in the related Confirmation or, if not specified, the Scheduled Closing Time on the Exchange on for the Index or Share on that date. If the Exchange closes before its Scheduled Closing Time and the Valuation Time is after the time it actually closes, then the Valuation Time will be that actual closing time.
6.2. “Valuation Date” means (for Option Transactions) each Exercise Date and (for Forward Transactions and Equity Swap Transactions) each date so specified in the Confirmation (and, where that is not a Scheduled Trading Day, the following Scheduled Trading Day), subject to the disruption provisions in Section 6.6.
6.3. General Terms Relating to Market Disruption Events
6.3(a)Market Disruption Event” means

(i) a material Trading Disruption or Exchange Disruption to a Share or Index during the hour before the Valuation Time (etc), or
(ii) an Early Closure.

To work out whether there is a Market Disruption Event on an Index due to a Market Disruption Event on one of its component securities, the Calculation Agent will determine the percentage that security contributes to the Index by comparing

(x) how much of the Index level is attributable to that security with
(y) the Index level just before the Market Disruption Event happened.
6.3(b)Trading Disruption” means any suspension or limitation on trading imposed by an Exchange or Related Exchange for any reason
(i) relating to the Share on the Exchange (or on Exchanges for securities comprising at least 20 percent of the Index level, for any Index Transactions and Index Basket Transactions), or
(ii) in futures or options contracts on the Share or Index on any Related Exchange.
6.3(c) Exchange Disruption means any event (other than an Early Closure) that the Calculation Agent determines impedes market participants trading or valuing:
(i) Shares on an Exchange (or, for Index Transactions and Index Basket Transactions, on Exchanges whose securites comprise at least 20 percent of the Index level), or
(ii) futures or options contracts on the Share or the Index on any Related Exchange.

6.4. “Disrupted Day” means any Scheduled Trading Day on which an Exchange or Related Exchange does not open for trading during its regular trading session or suffers a Market Disruption Event. The Calculation Agent must notify the parties as soon as practicable if any Averaging Date, a Valuation Date, Potential Exercise Date, Knock-in Determination Day, Knock-out Determination Day or Expiration Date is a Disrupted Day.
6.5. “Scheduled Valuation Date” means any date that, had it not been a Disrupted Day, would have been a Valuation Date (i.e., ignoring any postponement on account of a disruption).
6.6. Consequences of Disrupted Days. If any Valuation Date is a Disrupted Day, then:

(a) Index Transaction or Share Transactions: It will be the next undisrupted Scheduled Trading Day unless eight Scheduled Trading Days in a row are Disrupted Days, in which case:
(i) that eighth Scheduled Trading Day will be the Valuation Date, even though it is a Disrupted Day, and
(ii) the Calculation Agent must determine:
(A) for an Index Transaction, the Index level at the Valuation Time on that day using the calculation method used for the Index before the disruption began, using the Exchange-traded price as of the Valuation Time on that eighth Scheduled Trading Day for each security in the Index (or, if that security is still disrupted, its good faith estimate of its value as of the Valuation Time on that day; and
(B) for a Share Transaction, its good faith estimate of the value for the Share as of the Valuation Time on that eighth Scheduled Trading Day;
(b) Index Basket Transactions: the Valuation Date for each undisrupted Index will be the Scheduled Valuation Date, and the Valuation Date for each disrupted Index will be the next undisrupted Scheduled Trading Day for that Index, unless eight Scheduled Trading Days in a row are Disrupted Days, in which case:
(i) that eighth Scheduled Trading Day will be the Valuation Date, even though it is a Disrupted Day, and
(ii) the Calculation Agent must determine the Index level as of the Valuation Time on that eighth Scheduled Trading Day using the calculation method used for the Index before the disruption began, using the Exchange-traded price as of the Valuation Time on that eighth Scheduled Trading Day for each security in the Index (or, if that security is still disrupted, its good faith estimate of its value as of the Valuation Time on that day; and
(c) Share Basket Transactions: the Valuation Date for each undisrupted Share will be the Scheduled Valuation Date, and the Valuation Date for each disrupted Share will be the next undisrupted Scheduled Trading Day, unless eight Scheduled Trading Days in a row are Disrupted Days, in which case:
(i) that eighth Scheduled Trading Day will be the Valuation Date, even though it is a Disrupted Day, and
(ii) the Calculation Agent must determine its good faith estimate of the value for that Share as of the Valuation Time on that eighth Scheduled Trading Day.

6.7. Averaging. If Averaging Dates are specified, then the following provisions will apply for any Valuation Date:

6.7(a)Averaging Date” means, for each Valuation Date, each date so specified (or, if it is not a Scheduled Trading Day, the following Scheduled Trading Day).
6.7(b) Settlement Price and Final Price. The Settlement Price or Final Price for a Valuation Date will be:
(i) Index Transactions and Cash-settled Share Transactions: The average of the Relevant Prices of the Index or the Shares on each Averaging Date;
(ii) Index Basket Transactions: The average for the Basket the Calculation Agent determines using the method set out in the Confirmation at the Valuation Time on each Averaging Date or, if not so set out, the average for the Baskets it determines on the Averaging Date as the sum of Relevant Prices for each Index in the Basket; and
(iii) Cash-settled Share Basket Transactions: The average of the Baskets the Calculation Agent determines using the method set out in the Confirmation at the Valuation Time on each Averaging Date or, if not so set out, the average of the Baskets it determines on the Averaging Date as the sum of each Share determined as Relevant Price x Number of Shares.
6.7(c) Averaging Date Disruption. If any Averaging Date is a Disrupted Day, then, if the specified consequence for "Averaging Date Disruption” is:
6.7(c)(i)Omission”, then the Averaging Date will not be relevant when determining the Settlement Price or Final Price. If as a result there would be no Averaging Date on that Valuation Date, Section 6.6 will apply when determining the relevant level on the final Averaging Date for that Valuation Date as if it were a disrupted Valuation Date;
6.7(c)(ii)Postponement”, then Section 6.6 will apply when determining the relevant level on that Averaging Date as if it were a disrupted Valuation Date whether or not the deferred Averaging Date would fall on a date that already is an Averaging Date; or
6.7(c)(iii)Modified Postponement”, then:
(A) Index Transactions and Share Transactions: The Averaging Date will be the next Valid Date, though if one has not occurred by the Valuation Time on the eighth Scheduled Trading Day following the originally disrupted Averaging Date or Disrupted Day:
(1) that eighth Scheduled Trading Day will be the Averaging Date (even if it is already an Averaging Date), and
(2) the Calculation Agent will determine the relevant level for that Averaging Date per Section 6.6;
(B) Index Basket Transactions or Share Basket Transactions: the Averaging Date for each unaffected Index or Share will be as specified in the Confirmation as an Averaging Date for tat Valuation Date and the Averaging Date for a disrupted Index or Share will be the next Valid Date for the Index or Share. However if the next Valid Date for the Index or Share has not occurred by the Valuation Time on that eighth following Scheduled Trading Day then:
(1) that eighth Scheduled Trading Day will be the Averaging Date (even if it is already an Averaging Date) and
(2) the Calculation Agent will determine the relevant level under Section 6.6; and
(C) “Valid Date” means an undisrupted Scheduled Trading Day on which another Averaging Date for the same Valuation Date does not occur.
6.7(d) Adjustments of the Exchange-traded Contract. If any Exchange-traded Contract terms are changed by the Exchange, the Calculation Agent must adjust any variable relevant to Transaction settlement as necessary to preserve the economic equivalent of all payments by the parties under the Transaction that would have been required following that change.
6.7(e) Adjustments to Indices. If an Index Modification or Index Cancellation occurs by, or an Index Disruption occurs on an Averaging Date under any Index Transaction or Index Basket Transaction, then the Index Adjustment Events under Section 11.1(b) will apply.

6.8. If “Futures Price Valuation” applies to an Index in an Index Transaction, then on a Valuation Date:

6.8(a)Valuation Date” means the day on which the Official Settlement Price is published whether or not it is a Disrupted Day (except where Section 6.8(e) applies).
6.8(b) Additional definitions:
6.8(b)(i) “Exchange-traded Contract” for an Index is as specified in the Confirmation by reference to
(A) that Index and
(B) its delivery month; and
(C) the Exchange on which it is traded.
6.8(b)(ii) “Official Settlement Price” means the official settlement price of the Exchange-traded Contracts as published by the Exchange or its clearing house.
6.8(c) Settlement Price and Final Price. the Settlement Price or the Final Price on any Valuation Date:
6.8(c)(i) for an Index Transaction, will be the Official Settlement Price; and
6.8(c)(ii) for an Index Basket Transaction, the Settlement Price or the Final Price will be as provided elsewhere in these Definitions, provided that the Relevant Price for each Index where Futures Price Valuation applies will be the Official Settlement Price.
6.8(d) Adjustments of the Exchange-traded Contract. Without duplicating Section 11.1 (which takes priority), if the Exchange-traded Contract is changed by the Exchange, the Calculation Agent will, if necessary, adjust the Strike Price, Number of Options, Initial Price, Forward Price, Forward Floor Price, Forward Cap Price, Knock-in Price, Knock-out Price or any other relevant variable to preserve the economic equivalent of any payments by the parties under the Transaction required after the date of the change.
6.8(e) Non-Commencement or Discontinuance of the Exchange-traded Contract. If there is no Official Settlement Price because trading in the Exchange-traded Contract is permanently discontinued by a Valuation Date, the Official Settlement Price for that Valuation Date the relevant Index level at the close of the Exchange’s regular trading session on the Valuation Date.
The Expiration Date or Valuation Date will be the date on which Official Settlement Price would be published (had the Exchange-traded Contract been trading) unless it is a Disrupted Day, in which case Sections 3.1(f) or 6.6, will apply.
6.8(f) Corrections of the Official Settlement Price. If the Exchange corrects the Official Settlement Price for any Valuation Date within one Settlement Cycle after its original publication, either party may notify the other and the Calculation Agent will adjust the terms of the Transaction to account for such correction if needed and determine any amount payable as a result.

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Full text of Section 6

Article 6 Valuation
Section 6.1. Valuation Time. “Valuation Time” means the time on the relevant Valuation Date or Averaging Date, as the case may be, specified as such in the related Confirmation or, if no such time is specified, the Scheduled Closing Time on the relevant Exchange on the relevant Valuation Date or Averaging Date, as the case may be, in relation to each Index or Share to be valued. If the relevant Exchange closes prior to its Scheduled Closing Time and the specified Valuation Time is after the actual closing time for its regular trading session, then the Valuation Time shall be such actual closing time.
Section 6.2. Valuation Date. “Valuation Date” means, in respect of an Option Transaction, each Exercise Date and, in respect of a Forward Transaction or an Equity Swap Transaction, each date specified as such or otherwise determined as provided in the related Confirmation (or, if such date is not a Scheduled Trading Day, the next following Scheduled Trading Day), in each case, subject to the provisions of Section 6.6 below.
Section 6.3. General Terms Relating to Market Disruption Events.

6.3(a) Market Disruption Event. “Market Disruption Event” means in respect of a Share or an Index, the occurrence or existence of:
(i) a Trading Disruption,
(ii) an Exchange Disruption, which in either case the Calculation Agent determines is material, 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, or
(iii) an Early Closure.
For the purposes of determining whether a Market Disruption Event in respect of an Index exists at any time, if a Market Disruption Event occurs in respect of a security included in the Index at any time, then the relevant percentage contribution of that security to the level of the Index shall be based on a comparison of (x) the portion of the level of the Index attributable to that security and (y) the overall level of the Index, in each case immediately before the occurrence of such Market Disruption Event.
6.3(b) Trading Disruption. “Trading Disruption” means any suspension of or limitation imposed on trading by the relevant Exchange or Related Exchange or otherwise and whether by reason of movements in price exceeding limits permitted by the relevant Exchange or Related Exchange or otherwise
(i) relating to the Share on the Exchange (or in the case of an Index Transaction or Index Basket Transaction on any relevant Exchange(s) relating to securities that comprise 20 percent or more of the level of the relevant Index), or
(ii) in futures or options contracts relating to the Share or the relevant Index on any relevant Related Exchange.
6.3(c) Exchange Disruption. “Exchange Disruption” means any event (other than an Early Closure) that disrupts or impairs (as determined by the Calculation Agent) the ability of market participants in general
(i) to effect transactions in, or obtain market values for, the Shares on the Exchange (or in the case of an Index Transaction or Index Basket Transaction, on any relevant Exchange(s) in securities that comprise 20 percent or more of the level of the relevant Index), or
(ii) to effect transactions in, or obtain market values for, futures or options contracts relating to the Share or the relevant Index on any relevant Related Exchange.
6.3(d) Early Closure. “Early Closure” means the closure on any Exchange Business Day of the relevant Exchange (or in the case of an Index Transaction or Index Basket Transaction, any relevant Exchange(s) relating to securities that comprise 20 percent or more of the level of the relevant Index) or any Related Exchange(s) prior to its Scheduled Closing Time unless such earlier closing time is announced by such Exchange(s) or Related Exchange(s) at least one hour prior to the earlier of (i) the actual closing time for the regular trading session on such Exchange(s) or Related Exchange(s) on such Exchange Business Day and (ii) the submission deadline for orders to be entered into the Exchange or Related Exchange system for execution at the Valuation Time on such Exchange Business Day.

Section 6.4. Disrupted Day. “Disrupted Day” means any Scheduled Trading Day on which a relevant Exchange or any Related Exchange fails to open for trading during its regular trading session or on which a Market Disruption Event has occurred. The Calculation Agent shall as soon as reasonably practicable under the circumstances notify the parties or other party, as the case may be, of the occurrence of a Disrupted Day on any day that, but for the occurrence of a Disrupted Day, would have been an Averaging Date, a Valuation Date, a Potential Exercise Date, a Knock-in Determination Day, a Knock-out Determination Day or an Expiration Date. Without limiting the obligation of the Calculation Agent to notify the parties as set forth in the preceding sentence, failure by the Calculation Agent to notify the parties of the occurrence of a Disrupted Day shall not affect the validity of the occurrence and effect of such Disrupted Day on any Transaction.
Section 6.5. Scheduled Valuation Date. “Scheduled Valuation Date” means any original date that, but for the occurrence of an event causing a Disrupted Day, would have been a Valuation Date (ignoring for the purposes of this Section 6.5 any postponement of the Potential Exercise Date or Expiration Date as a result of the occurrence of a Disrupted Day and assuming that the original Potential Exercise Date or original Expiration Date, as the case may be, would have been a Valuation Date).
Section 6.6. Consequences of Disrupted Days. If any Valuation Date is a Disrupted Day, then:

(a) in the case of an Index Transaction or Share Transaction, the Valuation Date shall be the first succeeding Scheduled Trading Day that is not a Disrupted Day, unless each of the eight Scheduled Trading Days immediately following the Scheduled Valuation Date is a Disrupted Day. In that case, (i) that eighth Scheduled Trading Day shall be deemed to be the Valuation Date, notwithstanding the fact that such day is a Disrupted Day, and (ii) the Calculation Agent shall determine:
(A) in respect of an Index Transaction, the level of the Index as of the Valuation Time on that eighth Scheduled Trading Day in accordance with the formula for and method of calculating the Index last in effect prior to the occurrence of the first Disrupted Day using the Exchange traded or quoted price as of the Valuation Time on that eighth Scheduled Trading Day of each security comprised in the Index (or, if an event giving rise to a Disrupted Day has occurred in respect of the relevant security on that eighth Scheduled Trading Day, its good faith estimate of the value for the relevant security as of the Valuation Time on that eighth Scheduled Trading Day); and
(B) in respect of a Share Transaction, its good faith estimate of the value for the Share as of the Valuation Time on that eighth Scheduled Trading Day;
(b) in the case of an Index Basket Transaction, the Valuation Date for each Index not affected by the occurrence of a Disrupted Day shall be the Scheduled Valuation Date, and the Valuation Date for each Index affected by the occurrence of a Disrupted Day shall be the first succeeding Scheduled Trading Day that is not a Disrupted Day relating to that Index, unless each of the eight Scheduled Trading Days immediately following the Scheduled Valuation Date is a Disrupted Day relating to that Index. In that case, (i) that eighth Scheduled Trading Day shall be deemed to be the Valuation Date for the relevant Index, notwithstanding the fact that such day is a Disrupted Day, and (ii) the Calculation Agent shall determine the level of that Index as of the Valuation Time on that eighth Scheduled Trading Day in accordance with the formula for and method of calculating that Index last in effect prior to the occurrence of the first Disrupted Day using the Exchange traded or quoted price as of the Valuation Time on that eighth Scheduled Trading Day of each security comprised in that Index (or, if an event giving rise to a Disrupted Day has occurred in respect of the relevant security on that eighth Scheduled Trading Day, its good faith estimate of the value for the relevant security as of the Valuation Time on that eighth Scheduled Trading Day); and
(c) in the case of a Share Basket Transaction, the Valuation Date for each Share not affected by the occurrence of a Disrupted Day shall be the Scheduled Valuation Date, and the Valuation Date for each Share affected by the occurrence of a Disrupted Day shall be the first succeeding Scheduled Trading Day that is not a Disrupted Day relating to that Share, unless each of the eight Scheduled Trading Days immediately following the Scheduled Valuation Date is a Disrupted Day relating to that Share. In that case, (i) that eighth Scheduled Trading Day shall be deemed to be the Valuation Date for the relevant Share, notwithstanding the fact that such day is a Disrupted Day, and (ii) the Calculation Agent shall determine its good faith estimate of the value for that Share as of the Valuation Time on that eighth Scheduled Trading Day.

Section 6.7. Averaging. If Averaging Dates are specified in the related Confirmation, then notwithstanding any other provisions of these Definitions, the following provisions will apply to the valuation of the relevant Index, Share or Basket in respect of a Valuation Date:

6.7(a) Averaging Date. “Averaging Date” means, in respect of each Valuation Date, each date specified or otherwise determined as provided in the related Confirmation (or, if such date is not a Scheduled Trading Day, the next following Scheduled Trading Day).
6.7(b) Settlement Price and Final Price. For purposes of determining the Settlement Price or the Final Price, as the case may be, in respect of a Valuation Date, the Settlement Price or the Final Price will be:
(i) in respect of an Index Transaction or Cash-settled Share Transaction, the arithmetic mean of the Relevant Prices of the Index or the Shares on each Averaging Date;
(ii) in respect of an Index Basket Transaction, the arithmetic mean of the amounts for the Basket determined by the Calculation Agent as provided in the related Confirmation as of the relevant Valuation Time(s) on each Averaging Date or, if no means for determining the Settlement Price or the Final Price are so provided, the arithmetic mean of the amounts for the Basket calculated on each Averaging Date as the sum of the Relevant Prices of each Index comprised in the Basket (weighted or adjusted in relation to each Index as provided in the related Confirmation); and
(iii) in respect of a Cash-settled Share Basket Transaction, the arithmetic mean of the amounts for the Basket determined by the Calculation Agent as provided in the related Confirmation as of the relevant Valuation Time(s) on each Averaging Date or, if no means for determining the Settlement Price or the Final Price are so provided, the arithmetic mean of the amounts for the Basket calculated on each Averaging Date as the sum of the values calculated for the Shares of each Issuer as the product of (A) the Relevant Price of such Share and (B) the relevant Number of Shares comprised in the Basket.
6.7(c) Averaging Date Disruption. If any Averaging Date is a Disrupted Day, then, if under "Averaging Date Disruption” the consequence specified in the related Confirmation is:
6.7(c)(i)Omission”, then such Averaging Date will be deemed not to be a relevant Averaging Date for purposes of determining the relevant Settlement Price or Final Price. If through the operation of this provision no Averaging Date would occur with respect to the relevant Valuation Date, then Section 6.6 will apply for purposes of determining the relevant level, price or amount on the final Averaging Date in respect of that Valuation Date as if such final Averaging Date were a Valuation Date that was a Disrupted Day;
6.7(c)(ii)Postponement”, then Section 6.6 will apply for purposes of determining the relevant level, price or amount on that Averaging Date as if such Averaging Date were a Valuation Date that was a Disrupted Day irrespective of whether, pursuant to such determination, that deferred Averaging Date would fall on a date that already is or is deemed to be an Averaging Date for the Transaction; or
6.7(c)(iii)Modified Postponement”, then:
(A) in the case of an Index Transaction or a Share Transaction, the Averaging Date shall be the first succeeding Valid Date. If the first succeeding Valid Date has not occurred as of the Valuation Time on the eighth Scheduled Trading Day immediately following the original date that, but for the occurrence of another Averaging Date or Disrupted Day, would have been the final Averaging Date in respect of the relevant Scheduled Valuation Date, then (1) that eighth Scheduled Trading Day shall be deemed the Averaging Date (irrespective of whether that eighth Scheduled Trading Day is already an Averaging Date), and (2) the Calculation Agent shall determine the relevant level or price for that Averaging Date in accordance with Section 6.6;
(B) in the case of an Index Basket Transaction or a Share Basket Transaction, the Averaging Date for each Index or Share not affected by the occurrence of a Disrupted Day shall be the date specified in the Confirmation as an Averaging Date in respect of the relevant Valuation Date and the Averaging Date for an Index or Share affected by the occurrence of a Disrupted Day shall be the first succeeding Valid Date in relation to such Index or Share. If the first succeeding Valid Date in respect of such Index or Share has not occurred as of the Valuation Time on the eighth Scheduled Trading Day immediately following the original date that, but for the occurrence of another Averaging Date or Disrupted Day, would have been the final Averaging Date in relation to the relevant Scheduled Valuation Date, then (1) that eighth Scheduled Trading Day shall be deemed to be the Averaging Date (irrespective of whether that eighth Scheduled Trading Day is already an Averaging Date) in respect of such Index or Share, and (2) the Calculation Agent shall determine the relevant level, price or amount for that Averaging Date in accordance with Section 6.6; and
(C) “Valid Date” shall mean a Scheduled Trading Day that is not a Disrupted Day and on which another Averaging Date in respect of the relevant Valuation Date does not or is not deemed to occur.
6.7(d) Adjustments of the Exchange-traded Contract. Without duplication of Section 11.1 (which shall govern in the event of any conflict), in the event that the terms of the Exchange-traded Contract are changed or modified by the Exchange, the Calculation Agent shall, if necessary, adjust one or more of the Strike Price, the Number of Options, the Initial Price, the Forward Price, the Forward Floor Price, the Forward Cap Price, the Knock-in Price, the Knock-out Price and/or any other variable relevant to the settlement terms of the Transaction to preserve for each party the economic equivalent of any payment or payments (assuming satisfaction of each applicable condition precedent) by the parties in respect of the Transaction that would have been required after the date of such change.
6.7(e) Adjustments to Indices. If (i) on or prior to any Averaging Date in respect of an Index Transaction or Index Basket Transaction an Index Modification or Index Cancellation occurs, or (ii) on any Averaging Date in respect of an Index Transaction or Index Basket Transaction an Index Disruption occurs, then the consequence specified in respect of Index Adjustment Events for the purpose of Section 11.1(b) shall apply to such Index Transaction or Index Basket Transaction.

Section 6.8. Futures Price Valuation. If “Futures Price Valuation” is specified as applicable in respect of an Index in the related Confirmation of an Index Transaction, then notwithstanding any other provisions of these Definitions the following provisions will apply to the valuation of that Index on a Valuation Date:

6.8(a) Valuation Date. For the purpose of this Section 6.8 only, “Valuation Date” shall mean a day on which the Official Settlement Price is published and, in all cases except for Section 6.8(e), irrespective of whether such day is a Disrupted Day.
6.8(b) Additional Definitions Relating to Futures Price Valuation.
6.8(b)(i) “Exchange-traded Contract” in relation to an Index means a contract specified as such for that Index in the related Confirmation. For this purpose, the parties shall specify the futures or options contract by reference to (A) the Index to which it relates, (B) the delivery month of such contract and (C) the exchange on which it is traded.
6.8(b)(ii) “Official Settlement Price” means the official settlement price (however described under the rules of the relevant Exchange or its clearing house) of any of the relevant Exchange-traded Contracts published by the Exchange or its clearing house.
6.8(c) Settlement Price and Final Price. For purposes of determining the Settlement Price or the Final Price, as the case may be, on a Valuation Date:
6.8(c)(i) in respect of an Index Transaction, the Settlement Price or the Final Price will be the Official Settlement Price on that Valuation Date; and
6.8(c)(ii) in respect of an Index Basket Transaction, the Settlement Price or the Final Price will be determined as otherwise provided in these Definitions, provided, however, that in relation to each Index for which Futures Price Valuation is applicable, the Relevant Price will be the Official Settlement Price (weighted or adjusted in relation to that Index as provided in the related Confirmation) on that Valuation Date.
6.8(d) Adjustments of the Exchange-traded Contract. Without duplication of Section 11.1 (which shall govern in the event of any conflict), in the event that the terms of the Exchange-traded Contract are changed or modified by the Exchange, the Calculation Agent shall, if necessary, adjust one or more of the Strike Price, the Number of Options, the Initial Price, the Forward Price, the Forward Floor Price, the Forward Cap Price, the Knock-in Price, the Knock-out Price and/or any other variable relevant to the settlement terms of the Transaction to preserve for each party the economic equivalent of any payment or payments (assuming satisfaction of each applicable condition precedent) by the parties in respect of the Transaction that would have been required after the date of such change.
6.8(e) Non-Commencement or Discontinuance of the Exchange-traded Contract. If there is no Official Settlement Price as a result of the fact that trading in the Exchange-traded Contract never commences or is permanently discontinued at any time on or prior to a Valuation Date, the Official Settlement Price for that Valuation Date shall be deemed to be the level of the relevant Index at the close of the regular trading session on the relevant Exchange on the Valuation Date. If this Section 6.8(e) applies, then the Expiration Date, in respect of an Option Transaction, or the relevant Valuation Date, in respect of a Forward Transaction or an Equity Swap Transaction, shall mean the date that, but for the non-commencement or permanent discontinuance of the Exchange-traded Contract, would have been the date of publishing the relevant Official Settlement Price unless such day is a Disrupted Day, in which case the provisions of Sections 3.1(f) or 6.6, as applicable, will apply.
6.8(f) Corrections of the Official Settlement Price. If the Official Settlement Price for any Valuation Date is corrected and the correction is published by the relevant exchange within one Settlement Cycle for the related Exchange-traded Contract 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 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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Content and comparisons

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



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Summary

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General discussion

In some jurisdictions, derivatives are taxed differently — more favourably — than cash equities (for example stamp duty reserve tax, and in the US, for certain types of underlier, under 871(m)) so it is important that your synthetic position doesn’t look like a tax play. Tax attorneys — especially American ones — fret mightily that high-delta equity derivatives do.

One of the key indicators, they intuit, is the degree to which the contract permits a swap counterparty influence or control its prime broker’s hedge. A swap counterparty should care not one whit about its broker’s hedge — other than its cost. If it does takes an unhealthy interest, the swap position may be — dramatic look gopher — recharacterised as a disguised custody arrangement of shares the swap counterparty has in reality bought, and on which it should pay tax, stamp duty and so on. Depending on which tax specialist you ask, an “unhealthy interest” might extend even to the execution price the broker-dealer achieves on its hedge. (This seems potty to us, by the way, but such is the interior world of the US tax attorney). US tax attorneys are greatly calmed by the suggestion that a hedge execution price is imaginary, and not real, even though it happens to be identical to the real one. Thus, you will see much chatter about prices a “hypothetical broker-dealer” might achieve selling fungible securities, and volume-weighted average prices and so on.

What is a hypothetical broker-dealer anyway?

So who, why, which or what is this much-talked-about, seldom-seen “hypothetical broker-dealer”?

Well, it’s an investment banker’s imaginary friend. A fellow just like the actual broker-dealer — in the same jurisdiction, having the same taxation status, earning the same income, executing the same hedge transactions, eating at the same restaurants, having the same GSOH and watching the same stuff on Netflix — but not the actual broker-dealer. He’s like actual broker-dealer’s “sober me”, only he gets drunk too. Now this might strike you, as it strikes the JC, as just too cute – too much of a playground argument to hold water. (“I didn’t break the window, sir, honest, sir, it was a boy who looked exactly like me who arrived from out of nowhere and is gone now”). But US tax attorneys seem to be taken in by it, even if they won’t buy arguments on actual economic substance.

But do synthetic equity swaps resemble disguised custody arrangements?

Um — no. About the economic substance: synthetic equity swaps don’t resemble disguised custody arrangements at all:

(i) a prime broker will hedge delta-one across its whole client portfolio — some of which will be short, and some long — so there is no one-to-one relationship between each client’s long position and the prime broker’s net physical hedge in the first place — that is to say, there is no assurance that the prime broker is holding anything in custody at any time; and
(ii) even if there were, the prime broker will almost certainly finance the net long portion of its delta anyway, to reduce its funding costs, by lending it out, title transfer, for cash, so even if the prime broker has a corresponding exposure, it won’t be hedging it with holding a physical hedge at all, let alone one it is covertly holding on custody for its clients.

But US tax attorneys wilfully ignore all this dispiriting logical talk and insist the only thing that can save you are some magic words about you hedge costs being incurred by a hypothetical broker dealer exactly like you, but who isn’t you.
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See also

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References