Template:Dividends on index transactions: Difference between revisions
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==={{eqderivprov|Dividend}}s on {{eqderivprov|Index}} {{eqderivprov|Transaction}}s? ''No'', sir.=== | ==={{eqderivprov|Dividend}}s on {{eqderivprov|Index}} {{eqderivprov|Transaction}}s? ''No'', sir.=== | ||
We shouldn’t really ''need'' to say it, but we will: You don’t get | We shouldn’t really ''need'' to say it, but we will: You don’t — well, cough, ''shouldn’t'' — get [[dividend]] payments on an {{eqderivprov|Index Transaction}}. The {{eqderivprov|Index}} calculation methodology will either replicate the effect of dividend reinvestment on {{eqderivprov|Index}} constituents, by proportionately re-weighting constituents when they pay dividends — in which case you will get the effect of those dividends just through “price return” of the {{eqderivprov|Index}} level — or it ''won’t'', in which case you ''won’t'' get the effect of those dividends, BECAUSE YOU BOUGHT A DERIVATIVE OF AN INDEX THAT DOESN'T REPLICATE THE EFFECT OF ANY DIVIDENDS.<ref>The S&P 500 index, for example, does not factor in any [[dividend]] payments. Apparently.</ref> | ||
Either way, the dividend provisions of the {{eqdefs}} aren’t — well, cough, ''shouldn’t be'' — relevant to {{eqderivprov|Index}} and {{eqderivprov|Index Basket Swap Transaction}}s. So they don’t really countenance the idea of an {{eqderivprov|Index}} paying through dividends. While, in the Russian-doll [[definitions|defined terms]] schema confected by {{icds}} an {{eqderivprov|Index Swap Transaction}} is a kind of {{eqderivprov|Equity Swap Transaction}}, and therefore can have a {{eqderivprov|Type of Return}} applied to it, when you dive down the rabbit hole, through the {{eqderivprov|Total Return}} star-gate, along the {{eqderivprov|Re-investment of Dividends}} axis and into the {{eqderivprov|Dividend Amount}} portal, you hit the hard black nothingness of dark energy: A {{eqderivprov|Dividend Amount}} is defined, of course, by reference to a {{eqderivprov|Share}}’s {{eqderivprov|Record Amount}}, {{eqderivprov|Ex Amount}} or {{eqderivprov|Paid Amount}}, and not that of an {{eqderivprov|Index}}, for the compellingly straightforward reason that [[Index - Equity Derivatives Provision|Indices]] are abstract numbers. They don’t ''pay'' dividends. | |||
Now {{icds}} made a half-hearted swipe — actually, it a was more like a full-blooded, half-hour long drubbing — in one of the Pan-Asia [[MCA]]s to build in [[manufactured dividend]]s to Japanese index products, but it is fiendishly complicated, not to mention wrong-headed, and no-one uses it as far as we know.</ref> | |||
''However''. | |||
There is a fairly common market practice, for indices that don’t re-weight to replicate dividend reinvestment, for [[Dealer|dealers]] to pay out dividends on Index constituents. This is because a common means of hedging Indices is by buying the underlying physical stocks, so the dealer is getting the cashflows in and can pay them out. This is hard to reconcile with the drafting of the {{eqdefs}}, unless either (i) you deem “{{eqderivprov|Share}}s” to ''mean'' constituents of the {{eqderivprov|Index}}, or (ii) you treat it as a dynamic custom {{eqderivprov|Share Basket Swap Transaction}}. Your front office guys won’t like that, but do you know what? Just leave it. This is one beautiful place where the lawyers do one thing, the business does another, and the respective groups neither know nor care that there is a gaping chasm between them. | |||
And speaking of chasms, you [[Abyss|know what I’m going to say now]], don’t you? | |||
Revision as of 16:26, 11 June 2020
Dividends on Index Transactions? No, sir.
We shouldn’t really need to say it, but we will: You don’t — well, cough, shouldn’t — get dividend payments on an Index Transaction. The Index calculation methodology will either replicate the effect of dividend reinvestment on Index constituents, by proportionately re-weighting constituents when they pay dividends — in which case you will get the effect of those dividends just through “price return” of the Index level — or it won’t, in which case you won’t get the effect of those dividends, BECAUSE YOU BOUGHT A DERIVATIVE OF AN INDEX THAT DOESN'T REPLICATE THE EFFECT OF ANY DIVIDENDS.[1]
Either way, the dividend provisions of the 2002 ISDA Equity Derivatives Definitions aren’t — well, cough, shouldn’t be — relevant to Index and Index Basket Swap Transactions. So they don’t really countenance the idea of an Index paying through dividends. While, in the Russian-doll defined terms schema confected by ISDA’s crack drafting squad™ an Index Swap Transaction is a kind of Equity Swap Transaction, and therefore can have a Type of Return applied to it, when you dive down the rabbit hole, through the Total Return star-gate, along the Re-investment of Dividends axis and into the Dividend Amount portal, you hit the hard black nothingness of dark energy: A Dividend Amount is defined, of course, by reference to a Share’s Record Amount, Ex Amount or Paid Amount, and not that of an Index, for the compellingly straightforward reason that Indices are abstract numbers. They don’t pay dividends.
Now ISDA’s crack drafting squad™ made a half-hearted swipe — actually, it a was more like a full-blooded, half-hour long drubbing — in one of the Pan-Asia MCAs to build in manufactured dividends to Japanese index products, but it is fiendishly complicated, not to mention wrong-headed, and no-one uses it as far as we know.</ref>
However.
There is a fairly common market practice, for indices that don’t re-weight to replicate dividend reinvestment, for dealers to pay out dividends on Index constituents. This is because a common means of hedging Indices is by buying the underlying physical stocks, so the dealer is getting the cashflows in and can pay them out. This is hard to reconcile with the drafting of the 2002 ISDA Equity Derivatives Definitions, unless either (i) you deem “Shares” to mean constituents of the Index, or (ii) you treat it as a dynamic custom Share Basket Swap Transaction. Your front office guys won’t like that, but do you know what? Just leave it. This is one beautiful place where the lawyers do one thing, the business does another, and the respective groups neither know nor care that there is a gaping chasm between them.
And speaking of chasms, you know what I’m going to say now, don’t you?