Lawyers are warning that traders will have to be educated in the intricacies of the proposed equity derivatives definitions as depending on which clauses they choose the price could differ and the firm could be left unhedged. The proposed International Swaps and Derivatives Association's 2002 definitions are expected to replace the 1996 definitions later this year and are far more precise than their predecessor, meaning that there is less room for confusion but more room for trader error.
"One hopes that institutions are starting to roll out information," said Karl Rogers, director and head of legal counsel for trading and derivatives at Dresdner Kleinwort Wasserstein. In addition, there is potential that pricing for each trade could be affected depending on which elections are made for corporate finance events, such as mergers, or tender offers.
The education process can start immediately as the definitions are almost complete. Richard Metcalf, co-head of ISDA's European office in London, said the equity derivatives definitions committee, which last met Sept. 20, has dealt with all the substantive issues and expects to have another draft ready in the next few weeks.