Trade Details - Equity Derivatives Provision
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2002 ISDA Equity Derivatives Definitions A Jolly Contrarian owner’s manual™
Trade Details in all its glory
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Overview
A JC-curated sub-division of the General Definitions section. We sub-group the Section 1 definitions into the following subgroups:
- Transactions — Sections 1.1 - 1.12
- Underliers — Sections 1.13 - 1.16
- Trade Details — Sections 1.17 - 1.24
- Exchanges, Clearing Systems and Currencies — Sections 1.25 - 1.37
- Trade Features — Sections 1.38 - 1.41
- Knock-ins and Knock-outs — Sections 1.42 - 1.51
These are the Trade Detailss:
1.17. Trade Date
1.18. Buyer
1.19. Seller
1.20. Number of Shares
1.21. Number of Baskets
1.22. Multiplier
1.23. Relevant Price
1.24. Equity Notional Amount
Summary
Section 1.17 Trade Date
Boringly, there is a (formally) conflicting definition in the 2006 ISDA Definitions at Section 3.7. This means, if you are using definitions from both booklets, you need to be careful which one you specify, and create a priority in the case of conflict.
Well, you sort of do, if you are inclined to give a monkey’s —
WHAT ARE YOU TALKING ABOUT MAN OF COURSE YOU CARE. YOU ARE PAID TO CARE. YOU ARE PAID TO SWEAT THE LITTLE STUFF.
Section 1.18 Buyer
He, or she, who is not the Seller.
Section 1.19 Seller
The equivalent, for an Option Transaction, of an Equity Amount Payer for a Equity Swap Transaction. That is, the person paying away the equity performance.
Engine-room stuff, as you will see. ISDA’s crack drafting squad™ descending into the oubliette of sticky detail.
Section 1.21 Number of Baskets
See above. The obvious statement, for those nervous types who cannot bear to think what might happen if the common place and face-slappingly obvious were to go unarticulated.
Section 1.22 Multiplier
A fairly mechanical idea: if you want to have some kind of multiplier effect in your confirmation, here is where you designate it. Typically,[1] of course, your Multiplier will tend to be one, unless you are doing something funky.
Section 1.23 Relevant Price
On the difference between Final Price and Relevant Price
Final Price is defined in Article 5 of the 2002 ISDA Equity Derivatives Definitions and is germane therefore to Equity Swap Transactions only and not, say, Forward Transactions (which, circuitously, rely instead on Relevant Price, albeit defined in a similar way).
The Final Price also has separately broken-out scenarios for Basket Transactions (being just the weighted sums of the individual components in the basket). Relevant Price doesn't bother to break these out — whether that is a function of the fact that Share Basket Forwards behave differently to Basket Swaps, or just because the drafting committee was losing the will to live, is a question to which we have yet to get to the bottom.
Don’t hold your breath.
Section 1.24 Equity Notional Amount
Equity Notional Amount is different to the Initial Price in that Initial Price is expressed as a price per Share, whereas the Equity Notional Amount tends to be Initial Price * Number of Shares.
- 5.10 is the "Equity Notional Reset". The Equity Notional Reset is a feature for automatically restriking the Equity Notional Amount to the prevailing value of the Equity Notional Amount. It has the effect of converting posted collateral - which for financial institutions may suffer a punitive capital treatment - into absolutely paid amounts.
- 10.1 is Re-investment of Dividends - wherein declared and paid dividends are not manufactured out but rolled up and added to the Equity Notional Amount.
- 11 is Adjustments and Modifications.
How Equity Notional Reset works
Strap yourselves in, kids!
A beginner’s guide to the complex and tortuous world of what happens when your Equity Notional Amount is subject to Equity Notional Reset.
The short version’s really quite easy: You just restrike the trade at the market value, and pay out the difference in the value of the underlier over the reset period. As follows:
- On each Cash Settlement Payment Date, you pay the difference between the prevailing Initial Price (being the Equity Notional Amount before the CSPD) and the present market value of the stock on the CSPD (the Final Price).
- You then adjust the Equity Notional Amount to be equal to that Final Price.
- When the next CSPD rolls around, the new Equity Notional Amount is the Initial Price and you do it all over again.
The long version’s a bit of a ball-breaker:
- If Equity Notional Reset (5.10) applies, then on each Cash Settlement Payment Date you have to adjust the Equity Notional Amount by the Equity Amount.
- The Equity Amount (8.7) equals the Equity Notional Amount times the Rate of Return.
- The Rate of Return (5.7) is ((Final Price - Initial Price)/Initial Price) * any Multiplier
- The Final Price is the market value of the Share on the Valuation Date
- Initial Price is the price specified in the confirm (as adjusted by this glorious mechanic).
- You pay out the Equity Amount on the Cash Settlement Payment Date, and adjust the Equity Notional Amount accordingly.
It’s like converting a posted variation margin into an absolute obligation by restriking the Transaction.
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- The JC’s famous Nutshell™ summary of this clause
See also
References
- ↑ In synthetic prime brokerage, for example, and delta-one trades generally.