Increased Cost of Stock Borrow - Equity Derivatives Provision

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2002 ISDA Equity Derivatives Definitions
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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 12.9(a)(viii) and 12.9(b)(v) in a Nutshell
Use at your own risk, campers!

12.9(a)(viii)Increased Cost of Stock Borrow”: the rate the Hedging Party incurs to borrow Shares for the Transaction exceeds the Initial Stock Loan Rate;

12.9(b)(v) If “Increased Cost of Stock Borrow” applies, the Hedging Party may tell the Non-Hedging Party that an Increased Cost of Stock Borrow has happened and that it will make a Price Adjustment to the Transaction.
Within 2 Scheduled Trading Days of that notice the Non-Hedging Party must:
(A) amend the Transaction to make the Price Adjustment,
(B) pay the Hedging Party the Price Adjustment or
(C) terminate the Transaction as of that second Scheduled Trading Day.
Within this period, the Non-Hedging Party may lend the Hedging Party, the necessary Hedging Shares at no more than the Initial Stock Loan Rate.
Absent such an election the Hedging Party may terminate the Transaction. On any termination of the Transaction, the Determining Party will determine the Cancellation Amount.

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Full text of Section 12.9(a)(viii) and 12.9(b)(v)

12.9(a)(viii)Increased Cost of Stock Borrow” means that the Hedging Party would incur a rate to borrow Shares in respect of such Transaction that is greater than the Initial Stock Loan Rate;

12.9(b)(v) If “Increased Cost of Stock Borrow” is specified in the related Confirmation to be applicable to a Transaction, then upon the occurrence of such an event the Hedging Party will give prompt notice to the Non-Hedging Party that an Increased Cost of Stock Borrow has occurred and that a Price Adjustment will be made to the Transaction. The Non-Hedging Party shall, within two Scheduled Trading Days of receipt of the notice of Increased Cost of Stock Borrow and corresponding Price Adjustment, notify the Hedging Party that it elects to (A) agree to amend the relevant Transaction to take into account the Price Adjustment, (B) pay the Hedging Party an amount determined by the Calculation Agent that corresponds to the Price Adjustment or (C) terminate the Transaction as of that second Scheduled Trading Day. If such notice is not given by the end of that second Scheduled Trading Day, then the Hedging Party may give notice that it elects to terminate the Transaction, specifying the date of such termination, which may be the same day that the notice of termination is effective. If either party elects to terminate the Transaction, the Determining Party will determine the Cancellation Amount payable by one party to the other. Within this period, the Non-Hedging Party may, in order to avoid a Price Adjustment or termination with respect to the Transaction, (X) lend the Hedging Party, subject to the conditions below, Shares in an amount equal to the Hedging Shares at a rate equal to or less than the Initial Stock Loan Rate or (Y) refer the Hedging Party to a Lending Party that lends the Hedging Party Shares in an amount equal to the Hedging Shares at a rate equal to or less than the Initial Stock Loan Rate.

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Section 12.9(a): The actual Additional Disruption Events

12.9(a)(i) Additional Disruption Event
12.9(a)(ii) Change in Law
12.9(a)(iii) Failure to Deliver
12.9(a)(iv) Insolvency Filing
12.9(a)(v) Hedging Disruption
12.9(a)(vi) Increased Cost of Hedging
12.9(a)(vii) Loss of Stock Borrow
12.9(a)(viii) Increased Cost of Stock Borrow

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Summary

A gentler provision than Loss of Stock Borrow — wherein the non-hedging party has to either find a stock borrow for the Hedging Party to execute, or be closed out of its position like that, under an Increased Cost of Stock Borrow, if the Hedging Party notifies an Increased Cost of Stock Borrow, specifying a proposed Price Adjustment, the non-Hedging Party has three options:

Only if the Non-Hedging Party has failed to give any such election by the end of the second Scheduled Trading Day can the Hedging Party terminate the Transaction. The Non-Hedging Party can lend the Hedging Party the relevant Shares in the intervening period to mitigate its loss. Template:M summ Equity Derivatives 12.9(b)(vi) Comparing Loss of Stock Borrow and Increased Cost of Stock Borrow: There is a logical hand-off and interaction between Loss of Stock Borrow with Increased Cost of Stock Borrow:

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See also

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References

  1. The dealer will always be the Hedging Party, though you may on occasion have trouble persuading buy-side counsel of this patently obvious fact.