Calculation Agent - Equity Derivatives Provision
2002 ISDA Equity Derivatives Definitions
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Note, distressingly, it doesn’t fall back to the Schedule if not defined in the Confirmation, which would have been a nice little accommodation. No doubt a legal eagle will tell you, you must therefore put a line in the Confirmation if there isn’t one there already.
Not a hill, if we were you, we would die on.
The Determining Party only ever has to determine a Cancellation Amount, Cancellation and Payment or Partial Cancellation and Payment under 12.8, and that will only happen in only when a Transaction terminates following an Extraordinary Event or an Additional Disruption Event.
Why: The Equity Derivatives recognise that while most calculations could be performed by whoever is appointed Calculation Agent, determination of a Cancellation Amount is inextricably related to the hedge and — especially where there is a disrupted market – this is best to be calculated by the one whose problem it is to unwind that hedge: namely, the Hedging Party.
In theory, too, the Hedging Party might not be named the Determining Party. Which is kind of awkward, since the Cancellation Amount is couched in terms of the cost to the determining Party of unwinding, liquidating or re-establishing its hedge — which it would only do if it was, like, hedging.
Lastly, note that if your investment bank is as left-handedly configured as some the JC has come across, the group entity writing the equity swaps might not be the same as the one doing the physical hedging of those swap obligations (with a back-to-back trade between them, for example), so the Hedging Party/Determining Party might not be either party to the actual ISDA Master Agreement at all.
The User’s Guide
We have noted elsewhere that the User’s Guide is less forthcoming than one might like it to be on what the Determining Party is for, and when (or why) there might ever be two. But it does say this:
“In calculating a Cancellation Amount, a Determining Party is required to act in good faith and to use commercially reasonable procedures. It should be noted that quotations are not necessarily required, as depending on the Transaction in question, the cost of liquidating hedges may be a more appropriate basis for determining a Cancellation Amount than soliciting quotations.
Parties should note that the Determining Party is the party that will be calculating its own cost of replacing or providing the economic equivalent of a terminated Transaction. The Calculation Agent may be a party to the Transaction, but when performing its duties as Calculation Agent it is acting as a neutral party. The Calculation Agent as such will not have a replacement cost or economic equivalent and therefore should not be designated as the Determining Party.”
If this is meant to help, it singularly fails to, except to recognise that the Determining Party is acting in its capacity as a Hedging Party, and not in its gnomic, wise, dispassionate role as impartial determiner of abstract values. This explains, maybe, why ISDA’s crack drafting squad™ thought it worthwhile to have distinct roles of Calculation Agent and Determining Party — it is not saying (as far as we can tell) that the party who is Calculation Agent cannot be Determining Party at all, but only that when it is being a Determining Party it is not being Calculation Agent: the two roles wear different trousers, so to speak.
But what it does confirm is that the Determining Party is meant to refer to the person who is actually hedging the trade, and that what they will be doing is liquidating hedges to get prices.
- The JC’s famous Nutshell™ summary of this clause
- The difference between Determining Party and Calculation Agent, and what the User’s Guide has to say about it
- Dispute rights for Determining Party and Calculation Agents: arguments you can expect to hear/make, and why you should push back on /be politely disabused of these foolish notions