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2002 ISDA Equity Derivatives Definitions
A Jolly Contrarian owner’s manual™
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Clause 11.1(b) in a Nutshell™
Use at your own risk, campers!
11.1(b) If, as of a Valuation Date an Index Sponsor does any of the following (each an Index Adjustment Event):
- (i) Index Modification: announces an material change to the Index which was not built into the method to cater for routine market events; or
- (ii) Index Cancellation: cancels the Index altogether; or
- (iii) Index Disruption: fails to publish the Index level —
Then:
(A) if “Calculation Agent Adjustment” applies and the Calculation Agent decides the Index Adjustment Event has materially affected the Index Transaction, it must calculate the Index level for that Valuation Date, using the Index methodology in effect immediately before the Index Adjustment Event, using only those securities comprising Index at that time;
(B) if “Negotiated Close-out” applies, then unless the parties agree to terminate the Transaction it will continue as adjusted; or
(C) if “Cancellation and Payment” applies, then:
- (1) for an Index Disruption, the Transaction will be cancelled on the Valuation Date;
- (2) for an Index Cancellation, the Transaction will be cancelled on the later of the Exchange Business Day immediately before the Index Cancellation is effective and the date the Index Sponsor announces it, and
- (3) for an Index Modification, either party may choose to cancel the Transaction following the announcement of the Index Modification but before the Scheduled Trading Day on which Index Modification is effective; and for Index Options, Seller will pay to Buyer the Section 12.7(b)(ii) amount, and for Index Swaps and Forwards, the Section 12.7(c) amount will be paid by one party to the other.
Any Transaction so cancelled will be valued using the Index methodology in effect immediately before Index Adjustment Event.
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Full text of Clause 11.1(b)
11.1(b) If (i) on or prior to any Valuation Date in respect of an Index Transaction or Index Basket Transaction, a relevant Index Sponsor announces that it will make a material change in the formula for or the method of calculating that Index or in any other way materially modifies that Index (other than a modification prescribed in that formula or method to maintain that Index in the event of changes in constituent stock and capitalization and other routine events) (an “ Index Modification”) or permanently cancels the Index and no Successor Index exists (an “ Index Cancellation”) or (ii) on any Valuation Date in respect of an Index Transaction or Index Basket Transaction, the Index Sponsor fails to calculate and announce a relevant Index (an “ Index Disruption” and together with an Index Modification and an Index Cancellation, each an “ Index Adjustment Event”), then:
- (A) if “Calculation Agent Adjustment” is specified in the related Confirmation as the consequence of any such Index Adjustment Event, then the Calculation Agent shall determine if such Index Adjustment Event has a material effect on the Index Transaction and, if so, shall calculate the relevant Settlement Price, Final Price, Strike Price, Forward Price, Forward Floor Price, Forward Cap Price, Knock-in Price or Knock-out Price, as the case may be, using, in lieu of a published level for that Index, the level for that Index as at that Valuation Date as determined by the Calculation Agent in accordance with the formula for and method of calculating that Index last in effect prior to the change, failure or cancellation, but using only those securities that comprised that Index immediately prior to that Index Adjustment Event;
- (B) if “Negotiated Close-out” is specified in the related Confirmation as the consequence of any such Index Adjustment Event, then the parties may, but are not obliged to, terminate the Transaction on mutually acceptable terms and if they do not agree to terminate the Transaction, then it continues on the terms and subject to the conditions, formulas and calculation methods in effect as of any relevant time at which calculations may be made; or
- (C) if “Cancellation and Payment” is specified in the related Confirmation as the consequence of any such Index Adjustment Event, then
- (1) in the case of an Index Disruption, the Transaction will be cancelled on the Valuation Date,
- (2) in the case of an Index Cancellation, the Transaction will be cancelled on the later of the Exchange Business Day immediately prior to the effectiveness of the Index Cancellation and the date the Index Cancellation is announced by the Index Sponsor, and
- (3) in the case of an Index Modification, either party may elect, upon two Scheduled Trading Days' notice or such lesser notice as may be required so that termination occurs not later than the effective date of the Index Modification, to cancel the Transaction at any time following the announcement of the Index Modification but no later than the Scheduled Trading Day prior to the effectiveness of such Index Modification and (X) in the case of an Index Option Transaction or an Index Basket Option Transaction, Seller will pay to Buyer the amount specified in Section 12.7(b)(ii) and (Y) in the case of an Index Swap Transaction, an Index Basket Swap Transaction, an Index Forward Transaction or an Index Basket Forward Transaction, an amount calculated in accordance with Section 12.7(c) will be paid by one party to the other. Any Transaction cancelled as a result of an Index Adjustment Event will be valued using the formula or method to calculate the Index in effect immediately prior to such Index Adjustment Event.
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