Non-Commencement or Discontinuance of the Exchange-traded Contract - Equity Derivatives Provision
Template:Eqderivanat Part of the greater flow of what you should do if you have a Index swap which you are hedging by reference to an Exchange-traded Contract. This part: what to do if the Exchange-traded Contract you are hedging with goes away, or — more ontologically challengingly, you would think — never existed in the first place.
A trick for young players. For all this talk of Futures Price Valuation, section 6.8 is all about Index Transactions and Index Basket Transactions, where (since you can’t by an Index directly, it not being a corporeal thing, but merely an interesting[1] disembodied intellectual concept), so the cleanest way of getting actual exposure to an index is to buy futures on the Index. It’s that, or buying the actual shares underlying the index — which is quite the operational pain in the posterior, if there are a hundred shares: all that balancing whenever the index constituents change. Gah. You get the idea.
Now, what say you want to write an Equity Swap Transaction on a share future directly?
Question one you’ll have (I know, because I had it) is why would you write an OTC derivative on an exchange-traded derivative of an exchange-traded security? At least with an Index, if you want to hedge unmessily, the only option is a future. Hence all this Futures Price Valuation malarkey.
But if it is just a single share, why not just reference that single Share and make it a standard Share Transaction?
As is so often the case, the answer can be laid at the door of our American friends. The CFTC doesn’t allow one to write swaps on certain Shares, so if you want synthetic exposure to them, the, ahhh, future is your only hope.[2]
You may want to borrow some of the concepts from this Futures Price Valuation — what’s not to like about ISDA standard drafting, after all — but you’ll need to do some ninja mutatis mutandis moves, taking our references to “Index” throughougt and replacing them with references to “the assets underling the Exchange-traded Contract”.
See also
- Section 6.8 relating to Futures Price Valuation, being the wider provision of which this is a part.