Potential Adjustment Event - Equity Derivatives Provision
Template:Eqderivanat
Section 11.2. Adjustments to Share Transactions and Share Basket Transactions
- 11.2(a). Method of Adjustment
- 11.2(b). Options Exchange Adjustment
- 11.2(c). Calculation Agent Adjustment
- 11.2(d). Options Exchange
- 11.2(e). Potential Adjustment Event
Corporate adjustments that may dilute or concentrate the theoretical value of the Shares.
Retrospective adjustments
Now what might happen under a total return swap if such a Potential Adjustment Event happens retrospectively, after a Transaction has been terminated (or has matured)? This does happen from time to time. For example:
- A total return swap transaction is traded on 1 January. It matures and is settled on 1 June. On 1 September, following an accounting error coming to light, the Issuer declares an Extraordinary Dividend to all holders of record on 1 March. It pays this dividend on 1 December.
First thing: just because the Transaction has passed its term, doesn't mean it winks out of existence, white rabbits and no returns. Payment obligations which were due under the term remain due and payable afterward - see the commentary to Termination Date in the 2021 ISDA Interest Rate Derivatives Definitions.
So the question is which is the material date: the date on which the Potential Adjustment Event happened, or the date on which is was stipulated to have effect?