Template:M summ Equity Derivatives 12.6
If these particular Extraordinary Events (Nationalization, Insolvency and Delisting) occur, the parties may elect to terminate (if they choose Negotiated Close-out), or the transaction will automatically terminate (if Cancellation and Payment (Extraordinary Events) or Partial Cancellation and Payment (Extraordinary Events) are selected).
- Cancellation and Payment means that on one of these Extraordinary Events occurring, the trade is terminated immediately and valued by the Calculation Agent or the Determining Party (important to check who this is!). This gives certainty and would be important in the case of a delta-1 derivative exposure with no defined termination (or where the defined termination is extremely long-dated).
- Negotiated Close-out requires the parties to agree on the termination value, with a fall back to the trade continuing until the scheduled termination date, whereupon it would be valued by the Calculation Agent in good faith (and ignoring the Additional Disruption Event that otherwise would surely be alleged). Note that the trade will terminate, but not until scheduled termination, and in the absence of mutual agreement both parties are committed to the term, which may not make a great deal of sense where the underlyer has been subject to Insolvency, Nationalization or a similarly drastic Extraordinary Event.
Note that a Delisting covers full cessation of trading but not a suspension of trading, even if indefinite. But in that case a Hedging Disruption or - at a pinch - Increased Cost of Hedging ought to get you home.
Hostile governmental action
Now imagine that rather than Nationalizing, a national government announced some draconian law preventing corporations in its jurisdiction from accessing the international capital markets even through depositary receipt programmes — you know, something crazy like that.[1] So say, ooh: the DRs must be converted into underlying shares within a stipulated period, failing which ten days after the new law is published. The share
- An underlying local issuer