Valuation Date - Equity Derivatives Provision

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2002 ISDA Equity Derivatives Definitions
A Jolly Contrarian owner’s manual™

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Section 6.2 in a Nutshell

Use at your own risk, campers!
6.2. “Valuation Date” means (for Option Transactions) each Exercise Date and (for Forward Transactions and Equity Swap Transactions) each date so specified in the Confirmation (and, where that is not a Scheduled Trading Day, the following Scheduled Trading Day), subject to the disruption provisions in Section 6.6.

Full text of Section 6.2

Section 6.2. Valuation Date. “Valuation Date” means, in respect of an Option Transaction, each Exercise Date and, in respect of a Forward Transaction or an Equity Swap Transaction, each date specified as such or otherwise determined as provided in the related Confirmation (or, if such date is not a Scheduled Trading Day, the next following Scheduled Trading Day), in each case, subject to the provisions of Section 6.6 below.

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Content and comparisons

Article 6. Valuation

Section 6.1. Valuation Time
Section 6.2. Valuation Date
Section 6.3. General Terms Relating to Market Disruption Events

6.3(a) Market Disruption Event
6.3(b) Trading Disruption
6.3(c) Exchange Disruption
6.3(d) Early Closure

Section 6.4. Disrupted Day
Section 6.5. Scheduled Valuation Date
Section 6.6. Consequences of Disrupted Days
Section 6.7. Averaging

6.7(a). Averaging Date
6.7(b). Settlement Price and Final Price
6.7(c). Averaging Date Disruption
6.7(d). Adjustments of the Exchange-traded Contract
6.7(e). Adjustments to Indices (Averaging)

Section 6.8. Futures Price Valuation

6.8(a) Valuation Date (Futures Price Valuation)
6.8(b) Additional definitions (Futures Price Valuation)
6.8(c) Settlement Price and Final Price (Futures Price Valuation)
6.8(d) Adjustments of the Exchange-traded Contract (Futures Price Valuation)
6.8(e) Non-Commencement or Discontinuance of the Exchange-traded Contract
6.8(f) Corrections of the Official Settlement Price



Final Valuation Date

The Valuation Date concept assumes you have a Transaction that will run to its term. For you cheeky synthetic prime brokerage types who write your Equity Swaps as if they were undated delta-one exposures — which, unless the Master in Charge of Tax is looking, they are — your master confirmation will need to create an extra, bonus, final Valuation Date as of the Optional Early Termination Date, otherwise on closing out a position you might find yourselves harking back to a Valuation Date that happened in that happier, gentler time that was two or three weeks ago.

The Calculation Period that didn’t bark in the night-time

Where, oh where, are the Calculation Periods 2002 ISDA Equity Derivatives Definitions? Ok so this is a bit of a trick question. There are noCalculation Periods” — that is instead defined in the 2006 ISDA Definitions. In the 2002 ISDA Equity Derivatives Definitions, the periods for Equity calculations are handled by the “Valuation Date” concept.

That in turn determines the “Cash Settlement Payment Date” (for cash-settled Equity Swap Transactions) and “Settlement Date” (for physically settled ones).

You may see a Calculation Period on the Floating leg of an equity swap though - that will be a reference to the 2006 ISDA Definitions.

Bullet swaps

Some times you will trade “bullet swaps” which do not have a Valuation Date. Being the tortured language of ISDA’s crack drafting squad™, there is no straightforward concept in the definitions of a swap which has no Valuation Dates other than the Termination Date, so expect wildly ungainly language in confirms to express that fairly simple idea.


General discussion

Synthetic prime brokerage

The Valuation Date comes in handy if you are restriking your Transactions periodically, as you are likely to be doing if you are providing synthetic prime brokerage — being as it is, an undated delta-one exposure to equities delivered through an equity derivative.

Your prime broker will not want to run indeterminate exposures to shares, even if it is collateralised daily, so restriking the transactions periodically can zero out whatever the residual risk is in the paranoid eyes of your financial controllers.

Now interim Valuation Dates — which are glorified estimates of the present value of an ongoing position — and the final Valuation Date — which is the price at which you definitively close out your position and go “off risk” — have rather different consequences. US Tax attorneys, as obsessed as they are with avoiding the suggestion that a swap counterparty is controlling its broker’s hedge, will seek to avoid any suggestion that the final, scheduled valuation arises from anything quite so mucky as the price at which the broker closes out its hedge. So, there, expect references to VWAP.

The same tax attorney will not be so bothered how you come up with your prices on other Valuation Dates, seeing as on that theory of the game, the counterparty is not going on or off risk.

In the synthetic prime brokerage world, where Transactions are callable at will, that scheduled Termination Date is a fairly arbitrary figure plucked out of the air at some point in the distant future, as much as anything else because “Termination Date” is a mandatory field in your PB’s booking system. Also, to quiet the black horses of despair playing through the wild paddocks of your financial controller’s tortured psychology. It won’t, of course, but you can always try.

Curiously, tax attorneys are less exercised about the method by which a Broker values the transaction for an optional early termination, even though that is the usual method by which a client terminates a synthetic equity swap, which is broadly an undated transaction terminable at the client’s whim.


See also

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