Increased Cost of Hedging - Equity Derivatives Provision

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2002 ISDA Equity Derivatives Definitions

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12.9(a)(vi) in a Nutshell

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12.9(a)(vi) in all its glory

12.9(a)(vi)Increased Cost of Hedging” means that the Hedging Party would incur a materially increased (as compared with circumstances existing on the Trade Date) amount of tax, duty, expense or fee (other than brokerage commissions) to (A) acquire, establish, re-establish, substitute, maintain, unwind or dispose of any transaction(s) or asset(s) it deems necessary to hedge the equity price risk of entering into and performing its obligations with respect to the relevant Transaction, or (B) realize, recover or remit the proceeds of any such transaction(s) or asset(s), provided that any such materially increased amount that is incurred solely due to the deterioration of the creditworthiness of the Hedging Party shall not be deemed an Increased Cost of Hedging;

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When you are done here proceed immediately to 12.9(a)(vi) for Consequences of Increased Cost of Hedging.



Compare with Increased Cost of Stock Borrow, the equivalent provision where the Hedging Party is short.

Part of the famed “triple cocktail” of protections against unexpected problems hedging and risk managing Transactions, together with Hedging Disruption and Change in Law. Note also references to Hedging Party.

Excluding own credit deterioration

Increased Cost of Hedging excludes costs a Hedging Party incurs through the deterioration of its own credit — so it will tend to capture market wide cost increases, and exclude those that are personal to the Hedging Party. Assiduous sell-side brokers will try to cut out the “deterioration of own credit” wording. Muscular asset managers will tell them where to go.

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See also