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Loss of Stock Borrow - Equity Derivatives Provision: Difference between revisions
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Loss of Stock Borrow - Equity Derivatives Provision (view source)
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{{fullanat2|eqderiv|12.9(a)(vii)||12.9(b)(iv)|}} | {{fullanat2|eqderiv|12.9(a)(vii)||12.9(b)(iv)|}} | ||
{{eqderivprov|Loss of Stock Borrow}} is an {{eqderivprov|Additional Disruption Event}} in the {{2002equitydefs}}, and is fondly abbreviated, by this commentator at least, to {{eqderivprov|LOSB}}. | {{eqderivprov|Loss of Stock Borrow}} is an {{eqderivprov|Additional Disruption Event}} in the {{2002equitydefs}}, and is fondly abbreviated, by this commentator at least, to {{eqderivprov|LOSB}}. It pairs nicely with an {{eqderivprov|Increased Cost of Stock Borrow}}, fish or chicken. See also {{eqderivprov|12.9(b)(vii)}} which deals with the tension between {{eqderivprov|LOSB}} and {{eqderivprov|Hedging Disruption}}. | ||
{{box| | {{box| | ||
{{nuts|Equity Derivatives|12.9(b)(iv)}}}} | {{nuts|Equity Derivatives|12.9(b)(iv)}}}} | ||
'''Summary''': | |||
*Where the {{eqderivprov|Hedging Party}} can't locate a stock borrow, the {{eqderivprov|Non-Hedging Party}} has the option to source one that is struck at less than the {{eqderivprov|Maximum Stock Loan Rate}} within two {{eqderivprov|Scheduled Trading Days}}, failing which the {{eqderivprov|Hedging Party}} can terminate the {{eqderivprov|Transaction}}. | |||
*Where {{eqderivprov|LOSB}} and {{eqderivprov|Hedging Disruption}} both apply and the same event could qualify as either, it will be treated as a {{eqderivprov|LOSB}} (which has milder consequences for the affected party). | |||
*For [[synthetic prime brokerage]], it is common for the swap provider 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 {{eqderivprov|Non-Hedging Party}} wears the ultimate cost of the expensive [[stock borrow]], so there’s no real need to impose a {{eqderivprov|Maximum Stock Loan Rate}} (though [[Prime Broker]]s will typically impose one as a matter of course). | |||
'''Summary''': Where the {{eqderivprov|Hedging Party}} can't locate a stock borrow, the {{eqderivprov|Non-Hedging Party}} has the option to source one that is struck at less than the {{eqderivprov|Maximum Stock Loan Rate}} within two {{eqderivprov|Scheduled Trading Days}}, failing which the {{eqderivprov|Hedging Party}} can terminate the {{eqderivprov|Transaction}}. Where {{eqderivprov|LOSB}} and {{eqderivprov|Hedging Disruption}} both apply and the same event could qualify as either, it will | |||
'''Compare and contrast''' with {{eqderivprov|Increased Cost of Stock Borrow}}. There is a logical handoff and interaction between the two. | '''Compare and contrast''' with {{eqderivprov|Increased Cost of Stock Borrow}}. There is a logical handoff and interaction between the two. | ||
*If the cost of a stock borrow exceeds the {{eqderivprov|Maximum Stock Loan Rate}} it is deemed to be (as good as) impossible to borrow stock, so it is treated as a {{eqderivprov|Loss of Stock Borrow}}, not merely an {{eqderivprov|Increased Cost of Stock Borrow}}. If a counterparty wants to apply Increased Cost of Stock Borrow whatever the cost of an available bid, the answer is to disapply {{eqderivprov|Maximum Stock Loan Rate}} altogether. This means that ''any'' possible stock borrow rate, however astronomical, comes under {{eqderivprov|Increased Cost of Stock Borrow}}, and {{eqderivprov|Loss of Stock Borrow}} (which is slightly more onerous a termination right) only applies where there are no offers in the market at all. | *If the cost of a stock borrow exceeds the {{eqderivprov|Maximum Stock Loan Rate}} it is deemed to be (as good as) impossible to borrow stock, so it is treated as a {{eqderivprov|Loss of Stock Borrow}}, not merely an {{eqderivprov|Increased Cost of Stock Borrow}}. If a counterparty wants to apply Increased Cost of Stock Borrow whatever the cost of an available bid, the answer is to disapply {{eqderivprov|Maximum Stock Loan Rate}} altogether. This means that ''any'' possible stock borrow rate, however astronomical, comes under {{eqderivprov|Increased Cost of Stock Borrow}}, and {{eqderivprov|Loss of Stock Borrow}} (which is slightly more onerous a termination right) only applies where there are no offers in the market at all. | ||