Exchanges, Clearing Systems and Currencies - 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

Index: Click to expand:

Section Exchanges, Clearing Systems and Currencies in a Nutshell
Use at your own risk, campers!

1.25. “Exchange” means each specified exchange for an Index or Share (and any Alternative Exchange).
1.26. “Related Exchange” means each specified exchange for an Index or Share and any Alternative Exchange. Where “All Exchanges” is specified, “Related Exchange” means each exchange the Calculation Agent considers to have a material effect on the overall market for trading futures or options on the Index or Share.
1.27. “Clearance System” means the specified clearing system for a Share (or any successor the Calculation Agent determines) or, if none, the main domestic clearance system for that Share on the Settlement Date. If it ceases clearing the Share, the parties must try to settle some other way.
1.28. “Index Sponsor” means the corporation or other entity that

(a) is responsible for the rules, procedures and calculation methods of the Index and
(b) regularly announces the Index level during each Scheduled Trading Day.

1.29. “Exchange Business Day” means any Scheduled Trading Day on which each Exchange and Related Exchange is open for trading during their respective regular trading sessions, even if it closes before its Scheduled Closing Time.
1.30. “Scheduled Closing Time” means the scheduled weekday closing time of an Exchange or Related Exchange on a Scheduled Trading Day, ignoring after-hours trading.
1.31. “Scheduled Trading Day” means a day when each Exchange and Related Exchange is scheduled to be open for their regular trading sessions.
1.32. “Currency Business Day” means a day on which commercial banks are open for business in the principal financial center for the currency or, for euro, when the TARGET system is operating.
1.33 Settlement Currency: The currency specified as such in the relevant Confirmation.
1.34. “Euro” means the lawful currency of the European Union.
1.35. “EC Treaty” means the Treaty of Rome establishing the European Community as amended from time to time.
1.36. “Clearance System Business Day” means any day on which a Clearance System is scheduled to be open for business.
1.37. “Settlement Cycle” means the usual period of Clearance System Business Days or Exchange Business Days) following a trade on which settlement usually occurs according to the Exchange’s rules. If there are multiple Exchanges, it will be the longest such period.
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Full text of Section Exchanges, Clearing Systems and Currencies

Section 1.25. Exchange. “Exchange” means:

1.25(a) in respect of an Index relating to an Index Transaction or Index Basket Transaction, each exchange or quotation system specified as such for such Index in the related Confirmation, any successor to such exchange or quotation system or any substitute exchange or quotation system to which trading in the Shares underlying such Index has temporarily relocated (provided that the Calculation Agent has determined that there is comparable liquidity relative to the Shares underlying such Index on such temporary substitute exchange or quotation system as on the original Exchange); and
1.25(b) in respect of a Share relating to a Share Transaction or Share Basket Transaction, each exchange or quotation system specified as such for such Share in the related Confirmation, any successor to such exchange or quotation system or any substitute exchange or quotation system to which trading in the Share has temporarily relocated (provided that the Calculation Agent has determined that there is comparable liquidity relative to such Share on such temporary substitute exchange or quotation system as on the original Exchange).

Section 1.26. Related Exchange. “Related Exchange” means, subject to the proviso below, in respect of an Index relating to an Index Transaction or Index Basket Transaction or a Share relating to a Share Transaction or Share Basket Transaction, each exchange or quotation system specified as such for such Index or Share in the related Confirmation, any successor to such exchange or quotation system or any substitute exchange or quotation system to which trading in futures or options contracts relating to such Index or such Share has temporarily relocated (provided that the Calculation Agent has determined that there is comparable liquidity relative to the futures or options contracts relating to such Index or such Share on such temporary substitute exchange or quotation system as on the original Related Exchange), provided, however, that where “All Exchanges” is specified as the Related Exchange in the related Confirmation, “Related Exchange” shall mean each exchange or quotation system where trading has a material effect (as determined by the Calculation Agent) on the overall market for futures or options contracts relating to such Index or such Share.
Section 1.27. Clearance System. “Clearance System” means, in respect of a Share relating to a Physically-settled Transaction, the clearance system specified as such for such Share in the related Confirmation or any successor to such clearance system as determined by the Calculation Agent. If the related Confirmation does not specify a Clearance System, the Clearance System will be the principal domestic clearance system customarily used for settling trades in the relevant Share on the Settlement Date. If the Clearance System ceases to settle trades in such Share, the parties will negotiate in good faith to agree on another manner of delivery.
Section 1.28. Index Sponsor. “Index Sponsor” means the corporation or other entity that (a) is responsible for setting and reviewing the rules and procedures and the methods of calculation and adjustments, if any, related to the relevant Index and (b) announces (directly or through an agent) the level of the relevant Index on a regular basis during each Scheduled Trading Day.
Section 1.29. Exchange Business Day. “Exchange Business Day” means any Scheduled Trading Day on which each Exchange and each Related Exchange are open for trading during their respective regular trading sessions, notwithstanding any such Exchange or Related Exchange closing prior to its Scheduled Closing Time.
Section 1.30. Scheduled Closing Time. “Scheduled Closing Time” means, in respect of an Exchange or Related Exchange and a Scheduled Trading Day, the scheduled weekday closing time of such Exchange or Related Exchange on such Scheduled Trading Day, without regard to after hours or any other trading outside of the regular trading session hours.
Section 1.31. Scheduled Trading Day. “Scheduled Trading Day” means any day on which each Exchange and each Related Exchange are scheduled to be open for trading for their respective regular trading sessions.
Section 1.32. Currency Business Day. “Currency Business Day” means any day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) in the principal financial center for the relevant currency. In respect of any Transaction in which the Settlement Currency is the euro, any day on which the Trans-European Automated Real-time Gross settlement Express Transfer (TARGET) system is open shall be a Currency Business Day.
1.33 Settlement Currency. “Settlement Currency” means, in respect of a Transaction, the currency specified as such in the related Confirmation.
Section 1.34. Euro. “Euro” and “euro” each mean the lawful currency of the member states of the European Union that adopt the single currency in accordance with the EC Treaty.
Section 1.35. EC Treaty. “EC Treaty” means the Treaty establishing the European Community (signed in Rome on March 25, 1957), as amended by the Treaty on European Union (signed in Maastricht on February 7, 1992) and as amended by the Treaty of Amsterdam (signed in Amsterdam on October 2, 1997), as further amended from time to time.
Section 1.36. Clearance System Business Day. “Clearance System Business Day” means, in respect of a Clearance System, any day on which such Clearance System is (or, but for the occurrence of a Settlement Disruption Event, would have been) open for the acceptance and execution of settlement instructions.
Section 1.37. Settlement Cycle. “Settlement Cycle” means, in respect of an Index or Share, the period of Clearance System Business Days following a trade in the shares underlying such Index or such Shares, as the case may be, on the Exchange in which settlement will customarily occur according to the rules of such Exchange (or, if there are multiple Exchanges in respect of an Index, the longest such period), and in respect of an Exchange-traded Contract, the period of Exchange Business Days following a trade in such Exchange-traded Contract on the Exchange in which settlement will customarily occur according to the rules of such Exchange.
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Content and comparisons

A JC-curated sub-division of the General Definitions section. We sub-group the Section 1 definitions into the following subgroups:

These are the Exchanges, Clearing Systems and Currencies definitions:

1.25. Exchange
1.26. Related Exchange
1.27. Clearance System
1.28. Index Sponsor
1.29. Exchange Business Day
1.30. Scheduled Closing Time
1.31. Scheduled Trading Day
1.32. Currency Business Day
1.33. Settlement Currency
1.34. Euro
1.35. EC Treaty
1.36. Clearance System Business Day
1.37. Settlement Cycle

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Summary

Section 1.25

Relevant to the definition of Market Disruption Event. Note also the related concept of the “Related Exchange” — a real ISDA definition, and Alternative Exchange, which is a JC fabrication we just made up because the “substitute or successor exchange offering comparable liquidity” language, which gets repeated a lot, is so tedious.

The limbs are:

They are, mutatis mutandis, the same, only 1.25(a) talks about “Shares underlying the Index” which obviously isn’t needed when referring to Shares themselves.

Not to be confused, however tempting and, really, forgiveable it may be, with a Related Exchange under paragraph 1.26. A Related Exchange (real) is not the same as an Alternative Exchange (made up by the JC)

Section 1.26

Relevant to Market Disruption Event. See also the related definition at "Exchange”.

In each case, the relevant Exchange or Related Exchange is simply the exchange specified as such in the Confirmation.

There is a corresponding fallback to substitute exchanges (what we our our nutshelly way call “Alternative Exchanges”) to which trading has temporarily located, although it is expresses slightly differently (more succinctly) here.

And the difference between Exchange and Related Exchange is what exactly?

The difference between the two is the inclusion in Related Exchange of the “All Exchangesproviso. In practice this is what you tend to see — “Related Exchanges”, if used, is set to “All Exchanges”:

...provided, however, that where “All Exchanges” is specified as the Related Exchange in the related Confirmation, “Related Exchange” shall mean each exchange or quotation system where trading has a material effect (as determined by the Calculation Agent) on the overall market for futures or options contracts relating to such Index or such Share.

Section 1.27

The artist known to to ISDA’s crack drafting squad™ as a Clearance System but to the rest of the world as a clearing system, or if it breaks down, whatever the parties can figure out. But in that regard see Additional Disruption Events and Extraordinary Events.

Section 1.28

One who sponsors indices: the likes of Dow Jones, FTSE, Reuters, Eurostoxx, and for customised indices many of the banks and dealers.

Section 1.29

The sort of thing you would like to think did not need to be defined, enormously, but then there is what to do if the exchange closes unexpectedly halfway through its day — that is still an Exchange Business Day, but it may affect the Valuation Time. For much tedium in this regard do directly to the Disrupted Days and Valuation provisions of section 6 and the Physical Settlement provisions of Section 9.

Section 1.30

Scheduled Closing Time be like the scheduled “closing time”. We wonder what would happen if some kind of disintermediated, permissionless, always-on crypto-exchange with noscheduled closing time ever started — for trading NFTs of equities or something — but struggle to care, frankly.

Section 1.31

Relevance to Additional Disruption Events

Additional Disruption Events dans une Nutshell

The important Additional Disruption Events are the Triple Cocktail: Change in Law, Hedging Disruption and Increased Cost of Hedging. They have marginally different play-out rights:

Okay, okay, I hear you — LOSB and ICOSB are important too. For those:

Insolvency Filing and Failure to Deliver ... well — are they even applied in your confirm?

Section 1.32

A business day in the principal financial centre for a currency. Well, I’d like to see you think of something interesting to say about this. Could ISDA’s crack drafting squad™ have left this undefined? We think so. Would they, in any possible universe? Unlikely.

Section 1.33

ET phone in.

Section 1.34 and 1.35

A bit of a historical artefact: At the time the ISDA’s crack drafting squad™ was labouring over the 2002 ISDA Equity Derivatives Definitions, the euro was a rather new fangled thing, and as such there are a number of provisions that have the air of skepticism about them that such a project could ever really work. After all, it is hard to see how a sovereign state could really control its fiscal policy without the levers of currency control and rate setting. But twenty years on, it all seems to have been a roaring success, so we needn’t have worried.

That said, there have been some wobbles, and given the succession of global disasters that have befallen us since that single stabilising force for the modern world, David Bowie, left us — you know, Brexit, the decline of America, global pandemic, hyperinflation, war in Europe — we should not be at all surprised if the Euro falls apart next, and may yet be grateful for the ’squad’s patient curlicues.

Section 1.36

A bit of deemery here: a day that is, or was meant to be, an ordinary clearing system business day even if, due to the vicissitudes of our nasty brutish and short modern life, no business is in fact done on that day.

Section 1.37

Handy concept for specifying the date on which an action must be effected such that settlement takes place on a given date: eg “The Final Price will be determined one Settlement Cycle prior to the Termination Date”. Note also Correction of Share Prices and Index Levels in Section 11.4.
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See also

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References