Change in Law - Equity Derivatives Provision
2002 ISDA Equity Derivatives Definitions
A Jolly Contrarian owner’s manual™
12.9(a)(ii) in all its glory
Resources and Navigation
“It has become illegal”
For those inclined to look even gift horses in the mouth, this provision may appear to leave some things unsaid.
What if it has become illegal to hold Shares the way the Hedging Party is holding them, but it remains legal to hold them some other way? For example, if Shares needed to be listed on a certain Exchange, or cleared across a certain clearinghouse? At first blush this seems fanciful but before you laugh don’t forget this was one of the potential consequences of Brexit — and for the Swissies — when the EU share trading obligation row blew up in 2019.
Even leaving aside the direction that one must act in good faith in arriving at one’s conclusion, it is hard to see how one could say it was “illegal to hold Shares” if in fact one could legally hold those Shares some other way. So this one’s a bit silly.
What if one could hedge via futures, derivatives, GDRs or some other instrument without significant extra cost or inconvenience? Would that still count as a Change in Law, just because you couldn't hedge with actual Shares?
Well, as fussy as it may seem, it is hard to fault in its basic logic. The scope entertained by ISDA’s crack drafting squad™ does seem a shade narrow, talking as it does only of Shares and not other instruments by which one could hedge an exposure. Not even our old friend the good faith rider can win the day here, since the clause only talks about acquiring, holding or disposing of Shares themselves. On the other hand, if a jurisdiction has declared the very act of holding a physical Share illegal, it is hard to see anyone in the jurisdiction offering a swap on it, so this may be more of a theoretical than a practical objection, especially where it is a synthetic equity swap where the hedging party has no incentive not to accommodate its client if it can source an alternative legal, somehow-derivative, hedge.
You may be inclined, therefore, gracefully to concede. We don’t think you’ll have to do this often, this is a bit of an aficionado’s point. So, knee-slide and jet wings to the whoever the negotiator was who thought of it.
- The JC’s famous Nutshell™ summary of this clause
- “Shares” versus “Hedge Positions” when it comes to Change in Law
- “Reasonable steps” to avoid a Change in Law — such as what? writing to your MP? Moving to Spain?
- “Amended” Change In Law for “closed markets” — some drafting you see in master confirmations.
- The famous Triple Cocktail