Exchange Disruption - 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 6.3(c) in a Nutshell
Use at your own risk, campers!

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.

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Full text of Section 6.3(c)

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.

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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

See Market Disruption Event, for which this Exchange Disruption provision is relevant.

Where your trade is an Index Transaction, or an Index Basket Transaction, the disruption relates to transactions in the underlying Shares - because the Index doesn’t exist per se as an investable stock.

There are, however, separate disruption events relating to change, cancellation or non-publication of Indices.

What’s going on here

Remember the underlying vibe here: this is meant to save the Hedging Party’s bacon if for some reason it can’t actually hedge its index exposure. One can hedge index exposure in multiple ways: through a total return swap, by buying futures on the index, or by trading the physical stocks underlying the index, or a combination of the above. Thus, the language is nice and loosey-goosey, allowing the flexibility to the Calculation Agent however it elects to hedge, and so contemplates a disruption whether it is because there is no market in the constituent components or index futures.

But this provides some rather odd optionality. It might be that some of the index component Shares are disrupted, but, say, futures in the index are not, and the Calculation Agent can in fact fully hedge its exposure, but it could technically invoke an Index Disruption anyway. At times of maximum dislocation, published index values don’t always fabulously represent the value of their constituents, especially where those constituents are connected with countries which unexpectedly invade Ukraine. This can lead to frantic conversations between counterparties to Index Swaps.
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See also

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References