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2002 ISDA Equity Derivatives Definitions
A Jolly Contrarian owner’s manual™
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Section 11 in a Nutshell™
Use at your own risk, campers!
Article 11 Adjustments and Modifications Affecting Indices, Shares and Transactions
11.1. Adjustments to Indices.
11.1(a) Successor Indices. The Calculation Agent may deem an Index calculated by a successor sponsor to the Index Sponsor, or a “Successor Index” that replaces the Index and uses a substantially similar formula and calculation method, to be the Index.
11.1(b) Index Adjustment Events: If before any Valuation Date the Index Sponsor announces a material change to the calculation method of, or materially modifies the Index in any way not contemplated in its formula or method (an “Index Modification”), permanently cancels the Index where no Successor Index exists (an “Index Cancellation”) or fails to announce a relevant Index (an “Index Disruption” (each of these events an “Index Adjustment Event”), then:
- (A) if “Calculation Agent Adjustment” applies, then the Calculation Agent must determine whether the Index Adjustment Event materially affects the Index Transaction and, if it does, must calculate the any necessary price, using the Index level as at that Valuation Date it determines using the Index calculation method last in effect before the Index Adjustment Event, using the securities that comprised that Index at that time;
- (B) if “Negotiated Close-out” applies then the parties may terminate the Transaction on mutually acceptable terms and if they do not it will continue on the terms and conditions and using formulas and calculation methods in effect as of the time of any necessary calculations; or
- (C) if “Cancellation and Payment” applies then following an Index Adjustment Event the Transaction cancelled and valued using the Index calculation method in effect immediately before the Index Adjustment Event in question, as follows:
- (1) for an Index Disruption, the Transaction will be cancelled on the Valuation Date,
- (2) for an Index Cancellation, the Transaction will be cancelled on the Exchange Business Day before the Index Cancellation is effective (or the date the Index Sponsor announces it, if later) and
- (3) following announcement of an Index Modification, either party may elect, on two Scheduled Trading Days’ notice (or less, so that termination occurs by the Index Modification date), to cancel the Transaction by the Scheduled Trading Day before the Index Modification becomes effective and
- (X) for Option Transactions, Seller will pay to Buyer the Section 12.7(b)(ii) amount and
- (Y) for Swap and Forward Transactions, one party will pay the other the Section 12.7(c) amount.
11.2. Adjustments to Share Transactions and Share Basket Transactions.
- 11.2(a) “Method of Adjustment” means a method for working out how to adjust a Share Transaction or Share Basket Transaction following an event that the Calculation Agent determines diluted or concentrated the theoretical value of the Shares.
- 11.2(b): Options Exchange Adjustment: If the Method of Adjustment is “Options Exchange Adjustment” then following adjustment to exchange-traded options the Calculation Agent will adjust any relevant variable under that Transaction that it thinks necessary to reflect the Options Exchange adjustment, effective as of the same date.
- If there aren’t any exchange-traded options options on the Shares, the Calculation Agent will adjust the Transaction as it thinks fit to account for the diluting or concentrative effect of any event that, would have led to an adjustment under the Options Exchange’s rules had options in the Shares in question been traded on it.
- 11.2(c) If “Calculation Agent Adjustment” is the Method of Adjustment for a Share Transaction or Share Basket Transaction (or if none is specified) then following the Issuer’s declaration of an Potential Adjustment Event, the Calculation Agent will determine whether the Potential Adjustment Event will concentrate or dilute the value of the Shares. If it will, the Calculation Agent may:
- (i) adjust any relevant variable under that Transaction it considers necessary to account for that dilution or concentration (without adjusting just for changes in volatility, expected dividends, stock loan rate or liquidity) and
- (ii) determine the effective dates of any adjustments.
- The Calculation Agent may refer to adjustments an Options Exchange makes to corresponding options when doing so.
- 11.2(d) “Options Exchange” will be specified in the Confirmation and includes any successor or substitute exchange or quotation system on which options contracts on the Shares have relocated (on which the Calculation Agent is satisfied there is comparable liquidity). If one is not specified, it will be the Related Exchange the Calculation Agent determines is the primary market for listed options contracts relating to the relevant Share.
- 11.2(e) “Potential Adjustment Event” means any of:
- (i) a subdivision or reclassification of Shares (not counting a Merger Event) or a free bonus distribution of any such Shares to existing holders;
- (ii) a distribution to existing holders of the relevant Shares of:
- (A) such Shares; or
- (B) securities granting the right to dividends or the proceeds of liquidation of the Issuer proportionately to holders of those Shares; or
- (C) securities of an entity owned by the Issuer as a result of a spin-off; or
- (D) any other securities, rights or assets for consideration of less than their prevailing market price as determined by the Calculation Agent;
- (iii) an Extraordinary Dividend;
- (iv) an Issuer call over partially-paid Shares;
- (v) a repurchase by the Issuer or any of its subsidiaries of relevant Shares;
- (vi) any shareholder’s rights being distributed or separated from the Issuer’s shares under a shareholder rights arrangement that provides for distribution of preferred stock, warrants, debt or rights below their prevailing market value, as determined by the Calculation Agent, provided that any adjustment effected following such an event must be readjusted if those rights are redeemed; or
- (vii) any other event that may dilute or concentrate the relevant Shares.
11.3. Adjustments to Certain Share Transactions and Share Basket Transactions in European Currencies. If any Shares were quoted in a pre-Euro currency after the Trade Date quoted exclusively in euro on the relevant Exchange or principal market, the Calculation Agent will adjust any variable relevant to the Transaction to preserve the economic terms of the Transaction. The Calculation Agent will make necessary conversions as of the Valuation Time at an appropriate mid-market spot rate as at the Valuation Time. No adjustments under this Section will affect the denomination of any payment due under the Transaction.
11.4. Correction of Share Prices and Index Levels. If any Exchange price or Index level is corrected by the Exchange or Index Sponsor within a Settlement Cycle of publication, either party may notify the other and the Calculation Agent will determine any resulting payment or adjustment to the Transaction. |
Full text of Section 11
Article 11 Adjustments and Modifications Affecting Indices, Shares and Transactions
Section 11.1. Adjustments to Indices.
11.1(a) [Successor Indices]. If, in respect of an Index Transaction or Index Basket Transaction, a relevant Index is (i) not calculated and announced by the Index Sponsor but is calculated and announced by a successor sponsor acceptable to the Calculation Agent, or (ii) replaced by a successor index using, in the determination of the Calculation Agent, the same or a substantially similar formula for and method of calculation as used in the calculation of that Index, then in each case that index (the “Successor Index”) will be deemed to be the Index.
11.1(b) If (i) on or prior to any Valuation Date in respect of an Index Transaction or Index Basket Transaction, a relevant Index Sponsor announces that it will make a material change in the formula for or the method of calculating that Index or in any other way materially modifies that Index (other than a modification prescribed in that formula or method to maintain that Index in the event of changes in constituent stock and capitalization and other routine events) (an “Index Modification”) or permanently cancels the Index and no Successor Index exists (an “Index Cancellation”) or (ii) on any Valuation Date in respect of an Index Transaction or Index Basket Transaction, the Index Sponsor fails to calculate and announce a relevant Index (an “Index Disruption” and together with an Index Modification and an Index Cancellation, each an “Index Adjustment Event”), then:
- (A) if “Calculation Agent Adjustment” is specified in the related Confirmation as the consequence of any such Index Adjustment Event, then the Calculation Agent shall determine if such Index Adjustment Event has a material effect on the Index Transaction and, if so, shall calculate the relevant Settlement Price, Final Price, Strike Price, Forward Price, Forward Floor Price, Forward Cap Price, Knock-in Price or Knock-out Price, as the case may be, using, in lieu of a published level for that Index, the level for that Index as at that Valuation Date as determined by the Calculation Agent in accordance with the formula for and method of calculating that Index last in effect prior to the change, failure or cancellation, but using only those securities that comprised that Index immediately prior to that Index Adjustment Event;
- (B) if “Negotiated Close-out” is specified in the related Confirmation as the consequence of any such Index Adjustment Event, then the parties may, but are not obliged to, terminate the Transaction on mutually acceptable terms and if they do not agree to terminate the Transaction, then it continues on the terms and subject to the conditions, formulas and calculation methods in effect as of any relevant time at which calculations may be made; or
- (C) if “Cancellation and Payment” is specified in the related Confirmation as the consequence of any such Index Adjustment Event, then
- (1) in the case of an Index Disruption, the Transaction will be cancelled on the Valuation Date,
- (2) in the case of an Index Cancellation, the Transaction will be cancelled on the later of the Exchange Business Day immediately prior to the effectiveness of the Index Cancellation and the date the Index Cancellation is announced by the Index Sponsor, and
- (3) in the case of an Index Modification, either party may elect, upon two Scheduled Trading Days' notice or such lesser notice as may be required so that termination occurs not later than the effective date of the Index Modification, to cancel the Transaction at any time following the announcement of the Index Modification but no later than the Scheduled Trading Day prior to the effectiveness of such Index Modification and (X) in the case of an Index Option Transaction or an Index Basket Option Transaction, Seller will pay to Buyer the amount specified in Section 12.7(b)(ii) and (Y) in the case of an Index Swap Transaction, an Index Basket Swap Transaction, an Index Forward Transaction or an Index Basket Forward Transaction, an amount calculated in accordance with Section 12.7(c) will be paid by one party to the other. Any Transaction cancelled as a result of an Index Adjustment Event will be valued using the formula or method to calculate the Index in effect immediately prior to such Index Adjustment Event.
Section 11.2. Adjustments to Share Transactions and Share Basket Transactions.
- 11.2(a) “Method of Adjustment” means a method for determining the appropriate adjustment to make to the terms of a Share Transaction or Share Basket Transaction upon the occurrence of an event having, in the determination of the Calculation Agent, a diluting or concentrative effect on the theoretical value of the relevant Shares.
- 11.2(b) If “Options Exchange Adjustment” is specified as the Method of Adjustment in the related Confirmation of a Share Transaction or Share Basket Transaction, then following each adjustment to the exercise, settlement, payment or other terms of options on any relevant Shares traded on any Options Exchange, the Calculation Agent will make the corresponding adjustments, if any, to any one or more of:
- (i) in respect of a Share Option Transaction or a Share Basket Option Transaction, the Strike Price, the Number of Options, the Option Entitlement, the Knock-in Price, the Knock-out, and the relevant Number of Shares;
- (ii) in respect of a Share Forward Transaction or a Share Basket Forward Transaction, the Forward Price, the Forward Floor Price, the Forward Cap Price, the Knock-in Price, the Knock-out Price, and the relevant Number of Shares;
- (iii) in respect of a Share Swap Transaction or a Share Basket Swap Transaction, the Initial Price, the Equity Notional Amount, the Knock-in Price, the Knock-out Price, and the relevant Number of Shares;
- and, in any case, any other variable relevant to the exercise, settlement, payment or other terms of that Transaction, as determined by the Calculation Agent, which adjustment will be effective as of the date determined by the Calculation Agent to be the effective date of the corresponding adjustment made by the Options Exchange. If options on the relevant Shares are not traded on the Options Exchange, the Calculation Agent will make such adjustment, if any, to any one or more of the relevant variables referred to above or any other variable relevant to the exercise, settlement, payment or other terms of the Transaction as the Calculation Agent determines appropriate, with reference to the rules of and precedents (if any) set by the Options Exchange, to account for the diluting or concentrative effect of any event that, in the determination of the Calculation Agent, would have given rise to an adjustment by the Options Exchange if such options were so traded.
- 11.2(c) If “Calculation Agent Adjustment” is specified as the Method of Adjustment in the related Confirmation of a Share Transaction or Share Basket Transaction (or if no Method of Adjustment is specified in the related Confirmation for such Transaction), then following the declaration by the Issuer of the terms of any Potential Adjustment Event, the Calculation Agent will determine whether such Potential Adjustment Event has a diluting or concentrative effect on the theoretical value of the relevant Shares and, if so, will
- (i) make the corresponding adjustment(s), if any, to any one or more of:
- (A) in respect of a Share Option Transaction or a Share Basket Option Transaction, the Strike Price, the Number of Options, the Option Entitlement, the Knock-in Price, the Knockout Price, and the relevant Number of Shares;
- (B) in respect of a Share Forward Transaction or a Share Basket Forward Transaction, the Forward Price, the Forward Floor Price, the Forward Cap Price, the Knock-in Price, the Knock-out Price, and the relevant Number of Shares;
- (C) in respect of a Share Swap Transaction or a Share Basket Swap Transaction, the Initial Price, the Equity Notional Amount, the Knock-in Price, the Knock-out Price, and the relevant Number of Shares;
- and, in any case, any other variable relevant to the exercise, settlement, payment or other terms of that Transaction as the Calculation Agent determines appropriate to account for that diluting or concentrative effect (provided that no adjustments will be made to account solely for changes in volatility, expected dividends, stock loan rate or liquidity relative to the relevant Share) and
- (ii) determine the effective date(s) of the adjustment(s).
- The Calculation Agent may (but need not) determine the appropriate adjustment(s) by reference to the adjustment(s) in respect of such Potential Adjustment Event made by an options exchange to options on the relevant Shares traded on such options exchange.
- 11.2(d) “Options Exchange” means the exchange or quotation system specified as such in the related Confirmation, any successor to such exchange or quotation system or any substitute exchange or quotation system to which trading in options contracts relating to the relevant Share has temporarily relocated (provided that the Calculation Agent has determined that there is comparable liquidity relative to such options contracts on such temporary substitute exchange or quotation system as on the original Options Exchange) or, if no such exchange or quotation system is specified in the related Confirmation, the Related Exchange (if such Related Exchange trades options contracts relating to the relevant Share) or, if more than one such Related Exchange is specified in the related Confirmation, the Related Exchange selected by the Calculation Agent as the primary market for listed options contracts relating to the relevant Share.
- 11.2(e) “Potential Adjustment Event” means any of the following:
- (i) a subdivision, consolidation or reclassification of relevant Shares (unless resulting in a Merger Event), or a free distribution or dividend of any such Shares to existing holders by way of bonus, capitalization or similar issue;
- (ii) a distribution, issue or dividend to existing holders of the relevant Shares of (A) such Shares, or (B) other share capital or securities granting the right to payment of dividends and/or the proceeds of liquidation of the Issuer equally or proportionately with such payments to holders of such Shares, or (C) share capital or other securities of another issuer acquired or owned (directly or indirectly) by the Issuer as a result of a spin-off or other similar transaction, or (D) any other type of securities, rights or warrants or other assets, in any case for payment (cash or other consideration) at less than the prevailing market price as determined by the Calculation Agent;
- (iii) an Extraordinary Dividend;
- (iv) a call by the Issuer in respect of relevant Shares that are not fully paid;
- (v) a repurchase by the Issuer or any of its subsidiaries of relevant Shares whether out of profits or capital and whether the consideration for such repurchase is cash, securities or otherwise;
- (vi) in respect of the Issuer, an event that results in any shareholder rights being distributed or becoming separated from shares of common stock or other shares of the capital stock of the Issuer pursuant to a shareholder rights plan or arrangement directed against hostile takeovers that provides upon the occurrence of certain events for a distribution of preferred stock, warrants, debt instruments or stock rights at a price below their market value, as determined by the Calculation Agent, provided that any adjustment effected as a result of such an event shall be readjusted upon any redemption of such rights; or
- (vii) any other event that may have a diluting or concentrative effect on the theoretical value of the relevant Shares.
Section 11.3. Adjustments to Certain Share Transactions and Share Basket Transactions in European Currencies. In respect of a Share Transaction or Share Basket Transaction relating to Shares originally quoted, listed and/or dealt as of the Trade Date in a currency of a member state of the European Union that has not adopted the single currency in accordance with the EC Treaty, if such Shares are at any time after the Trade Date quoted, listed and/or dealt exclusively in euro on the relevant Exchange or, where no Exchange is specified, the principal market on which those Shares are traded, then the Calculation Agent will adjust any one or more of the Strike Price, the Forward Price, the Forward Floor Price, the Forward Cap Price, the Knock-in Price, the Knock-out Price, the Settlement Price, the Initial Price, the Final Price and any other variable relevant to the terms of the Transaction as the Calculation Agent determines appropriate to preserve the economic terms of the Transaction. The Calculation Agent will make any conversion necessary for purposes of any such adjustment as of the Valuation Time at an appropriate mid-market spot rate of exchange determined by the Calculation Agent prevailing as of the Valuation Time. No adjustments under this Section 11.3 will affect the currency denomination of any payment obligation arising out of the Transaction.
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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