Agents and Parties - Equity Derivatives Provision

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2002 ISDA Equity Derivatives Definitions

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Calculation Agent, Determining Party and Hedging Party in a Nutshell

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Calculation Agent, Determining Party and Hedging Party in all its glory

Section 1.40. Calculation Agent. “Calculation Agent” means the person or entity specified as such in the related Confirmation. Whenever a Calculation Agent is required to act or to exercise judgment in any way, it will do so in good faith and in a commercially reasonable manner. Furthermore, each party agrees that the Calculation Agent is not acting as a fiduciary for or as an advisor to such party in respect of its duties as Calculation Agent in connection with any Transaction.

12.8(f)Determining Party” means the party or parties specified as such in the related Confirmation.

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;

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There is no provision per se, but these are the three key determiners of values in an Equity Derivatives Transaction, at least as envisaged by the 2002 ISDA Equity Derivatives Definitions.

Between them, the definitions of Calculation Agent, Determining Party and Hedging Party rich fodder for buy-side legal eagles to make a nuisance of themselves arguing the toss over plainly fatuous “potential” risks. This is good for the healthy revenues that flow into that cottage industry of master agreement negotiations, but an appalling waste of time on any other axis.



The Calculation Agent is the person appointed to calculate all the values that need calculation during the ordinary course of the Transaction. These include the Final Price, on each Valuation Date, the prevailing Floating Rate and so on.

The Determining Party has the more limited role, and only comes into its own should the physical market have gone Pete Tong and the Transaction has been fully or partially cancelled. At this point, the Determining Party must work out the Cancellation Amount. This is meant to reflect the actual price that the Hedging Party was able to terminate its hedge, so it should come as no surprise to you that the Hedging Party is the Determining Party. This does seem to surprise some people who ought to know better, partly because ISDA’s crack drafting squad™, in its usual quest to cater for every logically possible eventuality, and not just ones that make practical sense, spent a paragraph or two ruminating about what should happen where there are two Determining Parties.

The Hedging Party is, as the name suggests, the one who is actually doing the hedging — in the case of an equity derivative, that means buying or selling a physical security. This is usually the dealer, and if it is not will be one of the dealer’s affiliates with market access in the relevant market, and who may transfer its risk back to the dealer some other way.

Friends, unless you are doing something truly exotic[1] there will only be one Determining Party, and it will be the Hedging Party, who will be the Calculation Agent, who will be the dealer.

Now buy-side legal eagles do not like to hear this, but it is true. The swap dealer — often your prime broker — is the one you go to because of its market access, back-office systems and attractive financing rates. You place, or give up, your orders to the swap dealer; the swap dealer executes them for its own book, and provides you the return of your synthetic investment through a delta-one equity swap. The swap dealer does not come to you looking for exposure to equity derivatives.

Therefore: (i) it (or its affiliates) will be the one that is hedging; (ii) it will be the one having to make the determinations required of a Determination Agent should there be some kind of Market Disruption, and (iii) it will be the one executing the opening and closing orders, using best execution, that are determined by the Calculation Agent.

If you want to control the price at which you trade, you can do that via a give-up (in the European market, anyway), or by placing an upper or lower limit on your order (at which point you risk your order being unfilled. Your remedy, should you not like the price you get, is to give your order to another broker next time.

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  • The JC’s famous Nutshell summary of this clause
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  • The “good faith and commercial reasonableness” standard

See also



  1. “Exotic”, to finance professionals, means the same thing as “courageous” to civil servants.