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2002 ISDA Equity Derivatives Definitions
A Jolly Contrarian owner’s manual™
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Article 5 General Terms Relating to Equity Swap Transactions
Section 5.1. Equity Amount Payer. “Equity Amount Payer” means, in respect of an Equity Swap Transaction, the party or parties specified as such in the related Confirmation.
Section 5.2. Equity Amount Receiver. “Equity Amount Receiver” means, in respect of an Equity Swap Transaction, the party or parties specified as such in the related Confirmation. If a party is not specified as such in the related Confirmation, then in respect of an Equity Amount Payer, the Equity Amount Receiver shall be the other party to the Equity Swap Transaction.
Section 5.3. Initial Exchange Amount. "Initial Exchange Amount", if applicable, means, in respect of an Equity Swap Transaction and a party, an amount that is specified as such in the related Confirmation for that party and is payable by that party on the Initial Exchange Date.
Section 5.4. Initial Exchange Date. "Initial Exchange Date" means the date specified as such
or otherwise determined as provided in the related Confirmation, or, if such date is not an Exchange
Business Day that is a Currency Business Day, the next following Exchange Business Day that is a
Currency Business Day.
Section 5.5. Final Exchange Amount. “Final Exchange Amount”, if applicable, means, in respect of an Equity Swap Transaction and a party, an amount that is specified as such in the related Confirmation for that party and is payable by that party on the Final Exchange Date.
Section 5.6. Final Exchange Date. “Final Exchange Date” means the date specified as such or otherwise determined as provided in the related Confirmation, or, if such date is not an Exchange Business Day that is a Currency Business Day, the next following Exchange Business Day that is a Currency Business Day.
Section 5.7. Rate of Return. “Rate of Return” means, in respect of each Cash Settlement Payment Date, a rate determined by the Calculation Agent as of the relevant Valuation Date to which the Cash Settlement Payment Date relates on a formula basis as follows: ((Final Price - Initial Price)/Initial Price) * Multiplier (if any)
Section 5.8. Initial Price. “Initial Price” means, in respect of the first Valuation Date under an Equity Swap Transaction, the price specified as such or otherwise determined as provided in the related Confirmation, and in respect of each subsequent Valuation Date, the Final Price for the Valuation Date immediately preceding such Valuation Date.
Section 5.9. Final Price. “Final Price” means, in respect of each Valuation Date:
- 5.9(a) in respect of an Index Swap Transaction, the level of the Index determined by the Calculation Agent as provided in the related Confirmation as of the Valuation Time on the Valuation Date or, if no means for determining the Final Price are so provided, the level of the Index as of the Valuation Time on the Valuation Date;
- 5.9(b) in respect of a Share Swap Transaction, the price per Share determined by the Calculation Agent as provided in the related Confirmation as of the Valuation Time on the Valuation Date or, if no means for determining the Final Price are so provided:
- (i) in respect of any Share for which the Exchange is an auction or “open outcry” exchange that has a price as of the Valuation Time at which any trade can be submitted for execution, the Final Price shall be the price per Share as of the Valuation Time on the Valuation Date, as reported in the official real-time price dissemination mechanism for such Exchange; and
- (ii) in respect of any Share for which the Exchange is a dealer exchange or dealer quotation system, the Final Price shall be the mid-point of the highest bid and lowest ask prices quoted as of the Valuation Time on the Valuation Date (or the last such prices quoted immediately before the Valuation Time), without regard to quotations that “lock” or “cross” the dealer exchange or dealer quotation system;
- 5.9(c) in respect of an Index Basket Swap Transaction, an amount for the Basket determined by the Calculation Agent as provided in the related Confirmation as of the relevant Valuation Time(s) on the Valuation Date or, if no means for determining the Final Price are so provided, an amount for the Basket equal to the sum of the Relevant Prices (weighted or adjusted in relation to each Index as provided in the related Confirmation) for the Indices comprised in the Basket; and
- 5.9(d) in respect of a Share Basket Swap Transaction, an amount for the Basket determined by the Calculation Agent as provided in the related Confirmation as of the relevant Valuation Time(s) on the Valuation Date or, if no means for determining the Final Price are so provided, an amount for the Basket equal to the sum of the values for the Shares of each Issuer as the product of
- (i) the Relevant Price of such Share and
- (ii) the relevant Number of Shares comprised in the Basket.
Section 5.10. Equity Notional Reset. In respect of each Cash Settlement Payment Date for an Equity Amount Payer under an Equity Swap Transaction, if “Equity Notional Reset” is specified as applicable in the related Confirmation, then:
- (a) the Equity Notional Amount applicable in respect of the first Cash Settlement Payment Date for that Equity Amount Payer under the relevant Equity Swap Transaction will be the amount specified as such in the related Confirmation;
- (b) the Equity Notional Amount applicable in respect of each subsequent Cash Settlement Payment Date will be the sum of (i) the Equity Notional Amount in respect of the prior Cash Settlement Payment Date and (ii) the Equity Amount, whether positive or negative, in respect of the prior Cash Settlement Payment Date; and
- (c) if a “Notional Amount” has been specified in the related Confirmation in relation to the other party, the Notional Amount will be adjusted, unless otherwise specified in the related Confirmation, as provided in sub-clauses (a) and (b) above as though it were an Equity Notional Amount.
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Resources and Navigation
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Overview
Section 5.1. Equity Amount Payer
Section 5.2. Equity Amount Receiver
Section 5.3. Initial Exchange Amount
Section 5.4. Initial Exchange Date
Section 5.5. Final Exchange Amount
Section 5.6. Final Exchange Date
Section 5.7. Rate of Return
Section 5.8. Initial Price
Section 5.9. Final Price
Section 5.10. Equity Notional Reset
Summary
Equity Amount Payer: Not of itself a wildly interesting definition but the question of when one is an Equity Amount Payer — when you are long, and not when you are short — is not entirely intuitive. The Equity Amount Payer is the equivalent of a “Seller” in an Option Transaction. The person paying away the equity performance. If the customer is long, the swap dealer. If the customer is short, the customer.
Equity Amount Receiver: Used in the context of Price Return Transactions, where the amount is payable by the Equity Amount Payer of the equity or index performance is positive, but (its absolute value) payable by the Equity Amount Receiver is the price return is negative.
Final Exchange Amount: In a delta-one Equity Swap Transaction, there is unlikely to be one. Maybe if the swap has a cross-currency element you might exchange notional amounts, or if it is some kind of par-asset swap.
Rate of Return: Used in calculating the Equity Amount, which is the amount you pay our on a Cash Settlement Payment Date.
Initial Price: Used in Rate of Return, which in turn is used in Equity Amount, and also very relevant to the Equity Notional Reset process. The Initial Price is different to the Equity Notional Amount in that it is expressed as a price per Share, whereas the Equity Notional Amount tends to be Initial Price * Number of Shares.
Note there is an initial Initial Price — the strike price in the Confirmation — but it is reset on every Valuation Date to the Final Price on that date — so the prevailing Initial Price fluctuates over time.
The way the Initial Price definition is drafted, you don’t need to say “... subject to adjustment on each Valuation Date” in the Confirmation, although for many of you this is sure to prove an irresistible temptation.
Final Price: Note that Final Price isn’t necessary the final Final Price: you determine a fresh Final Price on every Valuation Date, as of the Valuation Time, and they feed into the Cash Settlement (or Equity Notional Reset) process, whereby one party pays out the movement price of the underlier over the period since the last Valuation Date.
Thus, Final Price for today’s Valuation Date becomes the Initial Price for the next Valuation Date, and so on and so on — yesterday’s rooster is today’s feather duster so to say.
Only on the final Final Price does the Transaction terminate and that contingency — you know, calling it quits and wrapping the whole thing up — isn’t addressed in any particular way in the definitions booklet, the presumption being that you will just follow the same procedure as you would for any other Valuation Date on the last one. This might give your US Tax guy the heebie-jeebies, be warned, as he will want VWAP, or some kind of hypothetical broker dealer referenced in the very last one. Dash cold water in his face if so, and tell him to get it together, man.
Where you are doing synthetic equity swaps, the Final Price on the Termination Date — the very one which gives your tax guy the heebie-jeebies — is mainly of academic interest, as it will only be a jowl-slappingly fortuitous coincidence if a client happens to go off risk at exactly the scheduled Termination Date.
In fact, a synthetic equity swap is an indefinite arrangement — it is replicating cash prime brokerage, remember, where a fellow holds (or shorts) a security at her own pleasure, so to speak — so the client can terminate at any time, and if it doesn’t terminate by the scheduled Termination Date she will typically want to roll the position (if she can[1]) without realising a gain or loss. Thus the Termination Date is fairly arbitrary, existing really only to avoid syntax errors in a booking system which will insist on you inputting one, or to resolve the unspoken anguish of your financial reporting folk who may otherwise fear you have an undated exposure to the underlying security[2].
Equity Notional Reset: The Equity Notional Reset is a feature for automatically restriking the Equity Notional Amount on a periodic basis to its prevailing value. It has the effect of converting posted collateral — which for financial institutions may suffer a punitive capital treatment — into realised profit and loss; and therefore no longer contingent liabilities to pay cash amounts.
Am equity swap will reset automatically on each Cash Settlement Payment Date, (i.e., usually a Settlement Cycle after each Valuation Date).
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- The JC’s famous Nutshell™ summary of this clause
- On the difference between Final Price and Relevant Price
- VWAP adjustments to Final Price for US Shares
- How Equity Notional Reset works
See also
References
- ↑ There are complicated US Tax rules at play here
- ↑ Not, in fact true, as the broker-dealer will almost certainly have a right to terminate on (a month or more’s) notice, but do not expect this to placate a financial controller.