Partial Cancellation and Payment - Equity Derivatives Provision
2002 ISDA Equity Derivatives Definitions A Jolly Contrarian owner’s manual™ Partial Cancellation and Payment in all its glory
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Overview
It is at times like this one despairs of ISDA’s crack drafting squad™. For here is some ugly, convoluted text, repeated three times in the document, and each time it is, but for a cross-reference, identical. We would like to think that the text could have been used just once, and maybe simplified too, but perhaps that is too much to ask. This page is a piece of the extended universe, then; some ISDA fan fiction that wonders what might have happened had someone done that.
Summary
So, what is going on here then? Well, in a certain type of Transaction — specifically, a Share Basket Transaction — an Extraordinary Event may affect one but not the other Shares in the Basket: Tender Offer, Merger Event, Nationalization, Insolvency or a Delisting.
In this case there is the opportunity to partially cancel the Transaction, pay that bit of it out, and the remainder of the Transaction carries on, at the reduced notional. Partial Cancellation and Payment isn’t relevant for a single Share Transaction — it’s all or nothing, obviously enough — nor an Index Transaction, because the Index will likely be adjusted and recalculated (there may be a substitution or some such thing) but in any case the notional of the Transaction does not reduce in this case: rather the deterioration in value is reflected in the level of the Index.
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- The JC’s famous Nutshell™ summary of this clause
- A worked example illustrating what might happen in a Share Basket Transaction if one of the Shares is subject to an Extraordinary Event.