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===[[Dividend clawback]]: if the {{eqderivprov|Issuer}} doesn’t actually pay a declared dividend===
===[[Dividend clawback]]: if the {{eqderivprov|Issuer}} doesn’t actually pay a declared dividend===
The [[User’s Guide to the 2002 ISDA Equity Derivatives Definitions]] suggests, without saying in which cases, that you might need a claw-back right if you don’t want to be on the hook for a declared but unpaid {{eqderivprov|Dividend Amount}}<ref>This is a JC bastardisation of typically grim ISDA textical contortion, needless to say.</ref>:   
The ''User’s Guide to the 2002 ISDA Equity Derivatives Definitions'' suggests, without saying when, that you ''might'' need a claw-back right if you don’t want to be on the hook for a declared but unpaid {{eqderivprov|Dividend Amount}}<ref>This is a JC bastardisation of typically grim ISDA textical contortion, needless to say.</ref>:   
:'''''{{eqderivprov|Dividend Recovery}}''': If the amount an {{eqderivprov|Issuer}} actually pays to {{eqderivprov|Share}}holders of record in respect of a {{eqderivprov|gross cash dividend}} is less than the amount declared (a “'''{{eqderivprov|Dividend Mismatch}}'''”) the {{isdaprov|Calculation Agent}} may calculate a payment under the {{isdaprov|Transaction}} to account for {{eqderivprov|Dividend Mismatch}} and compensate for interest incurred by the party that made the relevant payments. Where the amount actually paid by the {{eqderivprov|Issuer}} to {{eqderivprov|Share}}holders of record for any such dividend is paid or (scheduled) after the {{eqderivprov|Termination Date}}, this provision will still apply even though relevant settlement date has passed. If the {{eqderivprov|Issuer}} subsequently corrects the under-payment, the {{isdaprov|Calculation Agent}} may make a further adjustment.''
:'''''{{eqderivprov|Dividend Recovery}}''': If the amount an {{eqderivprov|Issuer}} actually pays to {{eqderivprov|Share}}holders of record in respect of a {{eqderivprov|gross cash dividend}} is less than the amount declared (a “'''{{eqderivprov|Dividend Mismatch}}'''”) the {{isdaprov|Calculation Agent}} may calculate a payment under the {{isdaprov|Transaction}} to account for {{eqderivprov|Dividend Mismatch}} and compensate for interest incurred by the party that made the relevant payments. Where the amount actually paid by the {{eqderivprov|Issuer}} to {{eqderivprov|Share}}holders of record for any such dividend is paid or (scheduled) after the {{eqderivprov|Termination Date}}, this provision will still apply even though relevant settlement date has passed. If the {{eqderivprov|Issuer}} subsequently corrects the under-payment, the {{isdaprov|Calculation Agent}} may make a further adjustment.''
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“Parties should consider,” further it further ruminates, in typically [[passive-aggressive]] fashion, “the potential [[credit risk]] created by this provision and may wish to consider whether such amounts are adequately covered under the definition of “{{csaprov|Exposure}}” under any relevant [[credit support document]].”
“Parties should consider,” further it further ruminates, in typically [[passive-aggressive]] fashion, “the potential [[credit risk]] created by this provision and may wish to consider whether such amounts are adequately covered under the definition of “{{csaprov|Exposure}}” under any relevant [[credit support document]].”


But on what planet would an {{eqderivprov|Equity Amount Payer}} want to be liable for a [[dividend]] ''declared'' but not ultimately ''paid'' by the {{eqderivprov|Issuer}}? And ''why''?That would be to do something [[equity derivative]]s are expressly designed not to do.
But ''on what planet'' would an {{eqderivprov|Equity Amount Payer}} want to be liable for a [[dividend]] ''declared'' but not ultimately ''paid'' by the {{eqderivprov|Issuer}}? And ''why''? That would be to do something [[equity derivative]]s are designed ''not'' to do.


===House view: S.N.A.F.U.===
===House view: S.N.A.F.U.===
The [[JC]] concludes this is simply a howler in the {{eqdefs}} which ISDA hastily tried to cover up with that clawback malarkey. In any case, to be safe, reference the {{eqderivprov|Paid Amount}}, with an amendment to cover [[ex date]]s occurring on or before the trade date, and [[dividend payment date]]s occurring after the trade date.<ref>Good news! The [[JC]] has had a go for you. See {{eqderivprov|Paid Amount}} for more.</ref> In any case, consensus amongst market professionals we have consulted is that {{eqderivprov|Paid Amount}} does, as its drafting suggests, depend on the {{eqderivprov|Issuer}} ponying up, so no need for that clawback language. That is where you want to be. <br>
The [[JC]] concludes this is simply a howler in the {{eqdefs}} which ISDA hastily tried to cover up with that clawback malarkey. In any case, to be safe, reference the {{eqderivprov|Paid Amount}}, with an amendment to cover [[ex date]]s occurring on or before the trade date, and [[dividend payment date]]s occurring after the trade date.<ref>Good news! The [[JC]] has had a go for you. See {{eqderivprov|Paid Amount}} for more.</ref> In any case, consensus amongst market professionals we have consulted is that {{eqderivprov|Paid Amount}} does, as its drafting suggests, depend on the {{eqderivprov|Issuer}} ponying up, so no need for that clawback language. That is where you want to be. <br>

Latest revision as of 17:00, 27 March 2020

Dividend clawback: if the Issuer doesn’t actually pay a declared dividend

The User’s Guide to the 2002 ISDA Equity Derivatives Definitions suggests, without saying when, that you might need a claw-back right if you don’t want to be on the hook for a declared but unpaid Dividend Amount[1]:

Dividend Recovery: If the amount an Issuer actually pays to Shareholders of record in respect of a gross cash dividend is less than the amount declared (a “Dividend Mismatch”) the Calculation Agent may calculate a payment under the Transaction to account for Dividend Mismatch and compensate for interest incurred by the party that made the relevant payments. Where the amount actually paid by the Issuer to Shareholders of record for any such dividend is paid or (scheduled) after the Termination Date, this provision will still apply even though relevant settlement date has passed. If the Issuer subsequently corrects the under-payment, the Calculation Agent may make a further adjustment.

“Parties should consider,” further it further ruminates, in typically passive-aggressive fashion, “the potential credit risk created by this provision and may wish to consider whether such amounts are adequately covered under the definition of “Exposure” under any relevant credit support document.”

But on what planet would an Equity Amount Payer want to be liable for a dividend declared but not ultimately paid by the Issuer? And why? That would be to do something equity derivatives are designed not to do.

House view: S.N.A.F.U.

The JC concludes this is simply a howler in the 2002 ISDA Equity Derivatives Definitions which ISDA hastily tried to cover up with that clawback malarkey. In any case, to be safe, reference the Paid Amount, with an amendment to cover ex dates occurring on or before the trade date, and dividend payment dates occurring after the trade date.[2] In any case, consensus amongst market professionals we have consulted is that Paid Amount does, as its drafting suggests, depend on the Issuer ponying up, so no need for that clawback language. That is where you want to be.

  1. ↑ This is a JC bastardisation of typically grim ISDA textical contortion, needless to say.
  2. ↑ Good news! The JC has had a go for you. See Paid Amount for more.
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