Template:M gen Equity Derivatives 12.9(b)

Consequences of Change in Law or Insolvency Filing under Section 12.9(b)(i)

Your counterparties — or at any rate, their legal departments — may enjoy the intellectual challenge of jousting over the precise number of days’ notice one must give before decreeing and acting upon a Change in Law or Insolvency Filing. The practical reality here is that a sensible broker will be in touch with affected clients and will manage out of such a position by some kind of consent without reaching for a copy of the agreement, and a non-sensible broker won’t have clients for very long, but that is not how legal eagles are conditioned to think.

ISDA’s crack drafting squad™ drafting over-reach to mention, for the sheer bloody-minded satisfaction if it: the incluso in the definition of Cancellation Amount so:— “... including payments and deliveries that would, but for the Extraordinary Event, have been required after termination,” is unnecessary (or at the very least stating the bleeding obvious) because the Change in Law, Hedging Disruption or other Extraordinary Events and Additional Disruption Events relate to the underlier and associated hedge transaction not the Transaction itself. Not that it makes any difference, of course.

Consequences of Failure to Deliver under Section 12.9(b)(ii)

This is for physical settlement only. It is a beast of a definition, even when nutshelled, but relevant only if physical settlement is your bag. If you cash settle your equity swaps — and in synthetic prime brokerage, that’s kinda the point, you know — you can keep on truckin’. For you weirdoes who are physically settling a synthetic contract, okay — what looks to be happening here is that it is replicating a buy-in mechanic, only in a left-handed way, in that the onus is on the failing Delivering Party to notify that there has been a failure.

This seems odd to us: the buy-in mechanic is a neat self-help arrangement whereby if you don’t deliver what you are meant to, to me, when due, then I can go get it elsewhere in the market, cancel your delivery to me, and charge you the difference. This puts control in the hands of the innocent party — who may (per market convention) leave it a few days before actually exercising the buy-in, and even then only do it if it is part of a settlement chain, or otherwise it has direct onward obligations to settle the same securities to someone else.

The Consequences of Failure to Deliver, by contrast, depends on the Delivering Party announcing a failure (odd, seeing as the Receiving Party is perfectly well placed to look in its account on the Settlement Date to see if there has been a failure) and then calculating some Cancellation Amount with respect to the portion of the delivery that has failed.

Compare and contrast with a Buy-in following a Failure by either Party to deliver under the 2010 GMSLA.

Consequences of Hedging Disruption under Section 12.9(b)(iii)

You may see a rider to this clause along the following lines:

“Where reasonably practical, the Hedging Party must elect to terminate only the part of the Transaction with the Number of Shares corresponding to the Hedge Position that the Hedging Disruption relates to, and the Cancellation Amount is then determined over only the terminated part of the Transaction”.

See also Hedging Disruption, the event itself.

Consequences of Loss of Stock Borrow under Section 12.9(b)(iv)

See our article on Loss of Stock Borrow which discussed the event, and its consequences in a single, joined up, safe space.

Consequences of Increased Cost of Stock Borrow under Section 12.9(b)(v)

See our article on Increased Cost of Stock Borrow which discussed the event, and its consequences holistically, like.

Consequences of Hedging Disruption and Loss of Stock Borrow under 12.9(b)(vii)

If the same event could be a Hedging Disruption or a Loss of Stock Borrow, it will be treated as a Loss of Stock Borrow. The remedies for that are marginally less stentorian.