Loss 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)(vii)-(iv) in a Nutshell
Use at your own risk, campers!

12.9(a)(vii)Loss of Stock Borrow” means that, having used commercially reasonable efforts, the Hedging Party cannot borrow the Shares it needs to hedge the Transaction at a rate equal to or lower than the Maximum Stock Loan Rate;
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12.9(b)(iv) If “Loss of Stock Borrow” applies, then if the Hedging Party notifies the Non-Hedging Party of a Loss of Stock Borrow, the Non-Hedging Party may, within 2 Scheduled Trading Days of notice, lend the Hedging Party the necessary Shares at a rate no greater than the Maximum Stock Loan Rate. If it does not, the Hedging Party may terminate the Transaction on notice and the Determining Party will determine the Cancellation Amount.

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Full text of Section 12.9(a)(vii)-(iv)

12.9(a)(vii)Loss of Stock Borrow” means that the Hedging Party is unable, after using commercially reasonable efforts, to borrow (or maintain a borrowing of) Shares with respect to such Transaction in an amount equal to the Hedging Shares (not to exceed the number of Shares underlying the Transaction) at a rate equal to or less than the Maximum Stock Loan Rate;
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12.9(b)(iv) If “Loss 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 may give notice that a Loss of Stock Borrow has occurred to the Non-Hedging Party, who may (A) 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 Maximum Stock Loan Rate or (B) refer the Hedging Party to a Lending Party that will lend the Hedging Party Shares in an amount equal to the Hedging Shares at a rate equal to or less than the Maximum Stock Loan Rate, in each case within two Scheduled Trading Days of receipt of the notice of Loss of Stock Borrow. If neither the Non-Hedging Party nor the Lending Party lends Shares in the amount of the Hedging Shares or a satisfactory Lending Party is not identified within this period, 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. The Determining Party will then determine the Cancellation Amount payable by one party to the other.

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This article covers both concept of Loss of Stock Borrow under Section 12.9(a)(vii) and the consequences of that Extraordinary Event happening, which features under Section 12.9(b)(iv).
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Summary

Loss of Stock Borrow is an Additional Disruption Event in the 2002 ISDA Equity Derivatives Definitions, and is fondly abbreviated, by this commentator at least, to LOSB. It pairs nicely with an Increased Cost of Stock Borrow, fish or chicken. See also 12.9(b)(vii) which deals with the tension between LOSB and Hedging Disruption.

Loss of Stock Borrow under Synthetic PB: For synthetic prime brokerage, it is common for the PB to pass on its stock borrowing costs (well: it is a synthetic equivalent of a stock borrow and a short sale, after all, so this makes sense). It does this by subtracting the prevailing borrow rate from the floating rate it pays under the swap. Therefore the Non-Hedging Party wears the ultimate cost of the expensive stock borrow, so there’s no real need to impose a Maximum Stock Loan Rate (though prime brokers will typically impose one as a matter of course).
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